The main legal point established in the judgment is that notional interest on interest-free security deposits cannot be considered for determining the fair rent of a property for taxation purposes. The fair rent should be determined based on various factors and extraneous circumstances that may inflate or deflate the rent.

A.K. Sikri, J.

1. Vide common orders dated August 16, 2010 passed in ITA No. 803 of 2007, ITA No. 499 of 2008 and ITA No. 1113 of 2008, reference was made to the Full Bench. Since the issue involved in other appeals was also identical to these three appeals, the Division Bench referred those appeals also to the Full Bench to be heard along with these appeals. This is how all these appeals came up for hearing. During the arguments of these appeals, it was also agreed that the lead case where the reference would be answered is ITA No. 499 of 2008. It was also conceded by the counsel for all the parties that answer to the referred question would lead to the decision on merits in the appeals itself and, therefore, we not only answer the reference, but the appeals be also finally decided by this Court. With these preliminary and introductory remarks, we take up the facts which appear in ITA No. 499 of 2008 and the nature of reference made by the Division Bench vide orders dated August 16, 2010. Since learned Counsel for the parties were also unanimous that the facts as recorded in the orders dated August 16, 2010 are correctly reproduced for answering this reference, it would be convenient for us to reproduce those facts, without any fear of contradiction:

1. The Assessee had filed the return for the Assessment Year 2001-02 declaring an income of Rs. 2,52,510/-. While framing the assessment under Section 143(1) of the Income Tax Act (hereinafter referred to as "the Act"), the Assessing Officer (AO) found that the Assessee had let out property bearing No. 267, Masjid Moth, Uday Park, New Delhi. The total rent received for the part period was Rs. 6.95 lakhs. In fact, monthly rent agreed between the Assessee (landlord) and the tenant was Rs. 90,000/-. However, the Assessee had also taken security deposit of Rs. 8.58 Crores, which was interest free, i.e. the tenant had given the aforesaid security deposit on which no interest was payable by the Assessee/landlord to the tenant. In the subsequent Assessment Year, another property, viz., 87, Adhichini, New Delhi was also rented out to the same tenant and interest fee security money of 2.20 Crores was taken in respect of this tenancy. In this manner, total security deposit became available to the Assessee at Rs. 10.78 Crores. The AO came to the conclusion that interest on interest free security deposit was an important fact for consideration while determining the fair rent within the meaning of Section 23(1)(a) of the Act. He, therefore, added a sum of Rs. 30.41 lakhs as notional interest, which would have been earned by the Assessee on the aforesaid security deposit kept with the Assessee by the tenant and included the same in the income of the Assessee for the purpose of taxation.

2. The Assessee filed an appeal there against before the CIT (Appeals). CIT (A) allowed the appeal and deleted the aforesaid addition. It was now the turn of Revenue to challenge the order of the CIT (A), which thereby preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as "the Tribunal"). However, that appeal of the Revenue has been dismissed by the Tribunal vide its impugned order dated 15.12.2006. Not satisfied with this outcome, the Revenue has preferred the instant appeal under Section 260A of the Act raising the following question of law:

Whether the I.T.A.T. was correct in law in holding that notional interest on the interest free security deposits is not rent liable to be included in the income from house property under the Income Tax Act, 1961?

The same substantial question of law also arose in the subsequent assessment years 2002-03 and 2003-04.

3. Section 22 of the Act deals with income from house property and states that annual value of the property of the description specified therein shall be chargeable under the head of "income from house property". Section 23 of the Act provides the manner in which annual value of any property is to be determined for the purposes