Zen Matrix Pvt. Ltd, Ahmedabab V. The DCIT, circle-4(1)(2), Ahmedabad

CO 191/AHD/2019

AI Insights

The case involves the Income Tax Department's appeal against the CIT(A)'s decision which partially favored the assessee, Zen Matrix P Ltd., concerning the assessment of deemed rental income and related interest deductions for the Assessment Year 2016-17. The primary legal issues revolved around the classification of properties as fixed assets or stock-in-trade and the consequent tax implications under sections 22, 23, and 24 of the Income Tax Act, 1961. The Tribunal examined whether the properties should be taxed under the head 'Income from House Property' and whether the interest expenses claimed were justifiably related to the business activities of the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133594 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 8 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-03-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 05-03-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 25-12-2019
• Other Referred Cases: Neha Builders, Shanti Exports P.Ltd., Torrent Cable Ltd. Vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Earning of tax free income; Deemed to accrue or arise in india; Competent authority
• Section: 14A; 115JB; 37(1); 22; 23(1)

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘C’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.1386/Ahd/2019 WITH Cross Objection No.191/Ahd/2019 Assessment Year :2016-17 DCIT, Cir.4(1)(2) Ahmedabad. Vs Zen Matrix P Ltd. 8 th Floor, The Chambers Opp: Gurudwara S.G. Highway Ahmedabad. PAN : AAACA 1406 C (Applicant) (Responent) Assesseeby : Shri S.N. Soparkar, Sr.Advocate& Shri Parin Shah, AR Revenue by : Shri A.P. Singh, CIT स ु नवाई क तार ख/D a t e o f H e a r i n g : 0 6 / 0 3 / 2 0 2 3 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 0 6 / 0 3 / 2 0 2 3 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER These are Revenue’s appeal and the assessee’s Cross-Objection against order passed by the Ld.Commissioner of Income- Tax(Appeals)-8, Ahmedabad (hereinafter referred to as “ld.CIT(A)”) dated 13.6.2019 under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2016-17. 2. We have heard both the parties. ITA No.1386/Ahd/2019 with CO 2 3. The issues arising before us are in the backdrop of business carried out by the assessee-company. The assessee is in the business of real-estate developer/lending properties/investment in real-estate/sale of purchase of real estate property. As per object clause of the Memorandum of Association of the company, objects of the assessee-company are primarily to carry on business as infrastructure developers ofall classes and kinds of construction activities and carrying on business of purchase/sale of property or acquiring/leasingout any property on rent. The object clause as per the Memorandum of the company reproduced at page no.3 of the CIT(A)’s order as under: “/. To carry on the business of as infrastructure developers, contractors, builders and to carry on all classes and kinds of construction activities including earthen dams, massonery dams, canal earth work, lining, structures, road work, buildings bridges, godowns, workshops, commercial complex, : residential' colonies and industrial estate and industrial construction and to construct, execute, carry out, improve, work, develop, administer or control of works and conveniences of all kinds including ports, docks, harbour, piers, wharves, canals, dams, reservoirs, embankments, irrigation, reclamation, improvement, sewage, drainage, sanitary, factory sheds, hotels, warehouses, markets, malls, special economic zones and to execute turnkey projects including structural design, supervision and construction of such projects and to carry on business of manufacturing and trading of ready mix and other cement based products. 2. To carry on business to purchase or acquire any property on lease or rent and sell or dispose off or to lease or give on rent any property and to act as estate agent / broker agent/ consultant on brokerage or commission basis. 4. In the light of objects of the assessee-company, it had purchased several properties which were classified in its financial statement into two categories; “inventories” and “fixed assets”. The assessee had returned business income on the transaction of purchase and sale of the property and rental income under the head “income from house property”on property rented out or leased. The issues which arose in assessment framed were as follows: ITA No.1386/Ahd/2019 with CO 3 i) The AO noted that with respect to some properties classified as “fixed assets” and inventories , the assessee had not returned rental income on the same, though, it was required to return deemed rental income as per section 23 of the Act. Therefore, addition was made of Rs.1,59,30,256/- on account of deemed rental income of properties as per section 23 of the Act. The same was computed at the rate of 8% of the investment made in properties and standard deduction at the rate of 30% was allowed against the same. ii) Interest expenditure incurred for acquiring property as per section 24 of the Act was disallowed by the AO both relating to that actually claimed by the assessee amounting to Rs.1,47,03,909/- as also relating to claim of interest expenditure against the deemed rental income on property held as fixed assets by the assessee as computed by the AO, thus effecting a disallowance of interest expenditure of Rs.1,47,03,909/- claimed by the assessee under section 24 while computing its income from house property. iii) With respect totheproperties held as fixed assets, the AO noted that no depreciation was claimed on the same, he therefore inferred that they were not put to use for the purpose of business of the assessee. Further taking note of the fact that the assessee had incurred huge interest expenses of Rs.6,79,98,117/- out of which Rs.1,47,03,908/- was attributed to earning rental income and noting that the inventory of the assessee in the property was Rs.7,36,92,328/- while borrowings on which interest had been claimed by the assessee was ITA No.1386/Ahd/2019 with CO 4 Rs.54,97,47,328/-, the AO held the borrowing had been utilized for making investment in fixed assets, which were not used for the purpose of business of the assessee, and therefore, to that extent the assessee’s claim of interest expenditure needed to be disallowed as not incurred for the purpose of business of the assessee as per section 37(1) of the Act. Accordingly, the disallowance of interest expenses in relation to this fixed assets amounting to Rs.4,83,25,510/- was made by the AO. Since the entire interest expenses were disallowed u/s.36(1)(iii) of the Act, the disallowance of interest expenses u/s.24 of the Act against deemed rental income was not made separately. 5. Other than the above, the AO also noted that the assesseehad earned tax exempt income in the form of agricultural income amounting to Rs.14.00 lakhs having made investment of Rs.20.76 crores in plots of land and earned the income on the same. He accordingly made disallowance of expenses incurred for the purpose of earning exempt income as per provisions of section 14A of the Act by invoking Rule 8D for computing the same and accordingly disallowed an amount of Rs.50,08,553/- being attributable to interest expenses incurred for the purposeof earning exempt income and Rs.17,56,014/- being administrative expenses incurred by the said purpose. Thus, in all, total disallowance of Rs.67,64,567/- was made u/s 14A of the Act. 6. The disallowance made under section 14A was also adjusted for arriving at the book profits of the assessee, adding the same to the book profits, for the purpose of computing taxes tobe paid as per provision of section 115JB of the Act. ITA No.1386/Ahd/2019 with CO 5 7. The matter was carried in appeal before the ld.CIT(A) who upheld in principle the additionmade on account of deemed rental income by the AO, but at the same time, held that provisions of section 23 were not applicable to the stock-in-trade and accordingly directed deletion of addition made of deemed rental income computed on properties held as inventory by the assessee. 8. As for claim of interest expenses incurred for the purpose of earning rental income as per section 24 of the Act, theld.CIT(A) found that the AO had not appreciated the facts of the case correctly He noted that the AO had found that no interest had been paid for acquiring the properties, but on the other hand, borrowings had been made against the properties kept as security. The assessee produced certain evidences before the Ld.CIT(A) showing that borrowings had been made for acquiring properties. Appreciating the same, the ld.CIT(A) held that as per provision of section 24 of the Act, the assessee is entitled to claim interest expenses incurred on borrowing made for acquiring properties on which rental income was liable to tax and he directed the AO to reconsider the evidences produced by the assessee, and allow interest expense as per law after verifying the same. 9. With regard to disallowance of interest expenses madeunder section 36(1)(iii) of the Act, the ld.CIT(A) noted that the business of the assessee was purchase and sale of properties, and letting out property on land only. All properties thereforehe held had been acquired for the said purpose, whether classified as fixed assets or classified as inventory. He also noted, the assessee itself had admitted that certain properties were not acquired by it for either of such business purposes and the interest expenses incurred in ITA No.1386/Ahd/2019 with CO 6 relation to the same admittedly was Rs.1,27,99,143/-. The ld.CIT(A) held that since the AO had made disallowance of interest pertaining to borrowings utilized for acquiring properties classified as business assets, and these fixed assets had been considered for taxing the deemed rent income thereon as per section 23(a) of the Act, therefore the assessee was entitled to deduction of interest expenses against the same, as per section 24 of the Act, and the disallowance of interest expenses, if any was to be restricted only to the extent of Rs.1,27,99,143/- incurred for acquiring property not used for either of the businesses of the assessee. Since the issue of claim of interest expenses under section 24 of the Act was restored back to the AO, the AO was directed to examine, accordingly, entire claim of interest expensesof the assessee, in relation to income from house property only returned by the assessee, and also in relation to deemed rental income of property held as fixed assets as computed by the Department. 10. In relation to disallowance made under section 14A of the Act of the interest and administrative expenses, the ld.CIT(A) fairly agreed with theAO that it was fit case for making disallowance under section 14A of the Act, but at the same time, he restricted the same to the extent of exempt income earned by the assessee amounting to Rs.14 lakhs. Further, he held that no adjustment on account of disallowance of expenses made under section 14A of the Act was to be made while computing the book profit of the assessee under section 115JB of the Act. 11. As a result of the above, both the assessee and the Revenue have come in appeal before us; with the Revenue filing the appeal against deletion of disallowance of interest expenses under section 36(1)(iii) of the Act, deletion of deemed rental income with respect to ITA No.1386/Ahd/2019 with CO 7 the property held as stock-in-trade/inventory, restriction of disallowance of expenses under section 14A of the Act to the extent of exempt income earned and deletion of adjustment made to the book profits of the assessee on account of disallowance made under section 14A of the Act. The grounds raised by the Revenue are as under: i) That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 3,55,26,367/- made on account of disallowance of interest u/s.36(i)(iii) of the Act. ii) That the Ld. GIT(A) has erred in law and on facts in deleting the addition of Rs 28,85,598/- made on account of deemed rent on stock in trade of Rs. 5,15,28,528/-. iii) That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs 53,64,567/- made u/s. 14A rwr 8D of the Act. iv) That the Ld. CIT(A) has erred in law and on facts in deleting the addition to book profit u/s.115JB of the Act on account of disallowance of Rs. 67,64,567/~ made u/s. 14A of the Act. 12. On the other hand, the assessee has filed cross-objection agitating confirmation of addition made on account of deemed rental income on property held as fixed assets by the assessee, and against direction of the ld.CIT(A) to verify the details of interest expenses for the purpose of claiming the same as per section 24 of the Act and allow income from house property. The grounds raised by the assessee are as under: “1. Ld. CIT (A) erred in law and on facts confirming invocation of Sec. 22 & 23 of the Act by AO to make addition of deemed rental income on the properties held as fixed assets under the head 'Income from House Property' ignoring the fact that the properties were held for real estate development business of the appellant. 2. Ld. CIT (A) erred in law and on facts to confirm application of provisions of sec. 23(a) of the Act by AO without appreciating the contention that deeming provisions would not be applicable to rental income on fixed assets but would be assessed as business income when the appellant was dealing in real estate business. ITA No.1386/Ahd/2019 with CO 8 3. Ld. CIT (A) erred in law and on facts to hold that properties not held as stock in trade but fixed assets were clearly in the nature of investments on which deeming provisions of Sec. 23(a) were applicable. 4. Ld. CIT (A) erred in law and on facts directing AO to verify details of interest expense incurred for acquisition of the properties despite being satisfied and holding that entire loan was taken for business purpose more specifically for the acquisition of properties.” 13. As narrated above, the entire case of the assessee and the issues arising there from begin from properties held as fixed assets being considered for taxing the deemed rental income earned thereon as per provisions of section 23 of the Act, with interest expenses incurred against the income earned by the assessee being denied to the assessee, as per section 24 of the Act and 36(1)(iii) of theAct.In our view it is pertinent first to deal with ground no.1 -3 ofthe CO of the assessee wherein challenge is to the order of theld.CIT(A) confirming the addition made on account of deemed rental income on property held as fixed assets by the assessee. CO No.191/Ahd/2019 : (Assessee) Ground No.1 - 2 1. Ld. CIT (A) erred in law and on facts confirming invocation of Sec. 22 & 23 of the Act by AO to make addition of deemed rental income on the properties held as fixed assets under the head 'Income from House Property' ignoring the fact that the properties were held for real estate development business of the appellant. 2. Ld. CIT (A) erred in law and on facts to confirm application of provisions of sec. 23(a) of the Act by AO without appreciating the contention that deeming provisions would not be applicable to rental income on fixed assets but would be assessed as business income when the appellant was dealing in real estate business. 3. Ld. CIT (A) erred in law and on facts to hold that properties not held as stock in trade but fixed assets were clearly in the nature of investments on which deeming provisions of Sec. 23(a) were applicable. 14. Though the facts relating to the issue have been dealt with briefly by us,as above, it is pertinent to bring out relevant facts relating to the issue in detail. ITA No.1386/Ahd/2019 with CO 9 15. During assessment proceedings, the AO noted from the details filed before him that the assessee had not offered deemed rental income on constructed properties as per the provision of section 22 read with section 23 of the Act on the following properties: i) Property shown as inventory : Rs.5,15,28,528/- ii) Property shown as fixed assets : Rs.23,87,09,477/- 16. The assessee was show-caused as to why deemed rental income should not be computed and brought to tax vis-à-vis aforestated properties. The assessee contended that being in the business of buying and selling of immovable properties, plots, building etc.,these were business assets of the assessee,and hence were outside the purview of provision of section 22 of the Act for the purpose of computing income from house property. The assessee further contended that it had put best efforts to let the property till the same were sold, but could not get suitable tenants for the same, therefore, as per section 23(i) of the Act, annual letting value (ALV) of these was taken as NIL. The AO was not convinced with reply of the assessee, and noted that as per provisions of section 22 all properties consisting of land & building appurtenant thereto of which the assessee is the owner were covered under the purview of section 22 of the Act for determining their ALV to be brought to tax under the head income from house property. He noted that all the conditions as required under section 22 were fulfilled in the case of the properties noted by him being held as inventory and fixed assets, and since the assessee had not returned any ALV of the same, the deemed annual value with respect to these properties had to be determined in accordance with section 22 of the Act. He rejected all the contentions of the assessee dealing with the same at para 6.2 as under: “6.2 The reply of the assessee is duly considered however the same is not found acceptable (except for the plot of land where no deemed rental income is required to be offered) for reasons discussed as under. Section 22 of the Income Tax is as follows: ITA No.1386/Ahd/2019 with CO 10 Section22 22. The annual value of property consisting of any buildings or lands appurtenant thereto which the assessee is the owner, other that such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to Income-Tax, shall be chargeable to income-tax under the head 'Income From House Property (i) The above section clearly specifies 'property consisting of any building or land appurtenant' thereto of which assessee is the owner'. The assessee is owner of the said property and the ownership rests with the assessee only; till the agreement of sale is .executed. ii) The basic features/requirements for chargeability of house property are:- a) Property should consists of any building or land appurtenant thereto. b) Assessee should be the owner and c) The property should not be occupied/used for the purpose of carrying on any business or profession whose profits are chargeable to Income tax. In the case of the assessee all the conditions are satisfied for chargeability of income form house property. The section clearly makes out for property consisting of any building or lands appurtenant thereto of which assessee is owner. Hence, what is important is the ownership of the property of any building or land appurtenant thereto. The assessee has itself stated that no depreciation is claimed on the fixed assets. No depreciation is claimed because the assets are not used for the purpose of business. Therefore the assessee is not using the said property for the purpose of carrying on business or profession. The section does not differentiate what the assessee intends to do with the property. As long as the property is owned by the assessee and not used by it for carrying on the business or profession, the provisions of the section shall apply. iii) As per section 22 of the Act, the annual value of building or land appurtenant thereto has to be taxed under the head 'Income From House Property. The only condition required to tax the property consisting of building is; that the person/entity should be the owner of property and the exception from this taxation is only available when the premises is occupied for business purposes. The assessee has stated that the section 22 of the I.T Act does not apply to it as the assessee is in the business of real estate. It is worthwhile to note that the section 22 of the I.T Act is the charging section for Income from House property. The section does not differentiate whether the property belongs to an individual/firm/company etc. and also does not differentiate the nature of business carried on by the assessee. Any person owning any property which is not used for the purpose of carrying on business shall have to comply with the provisions of this section. Therefore, though the assessee is in real estate business, the properties owned by him as reflected in the schedule to Fixed Assets and inventory held by it are to be charged under the head income from house property as assessee is not carrying any business from the said properties. iv) The assessee has also argued that for the purpose of determining ALVu/s 23(1) of the Act, the sub clause (c) shall be applicable as the company had intended to let the property until it is sold. The above argument of the assessee is also not tenable as the sub - clause (c) of section 23(1) deals with providing of vacancy allowance only when the property is 'actually let out' and not based on the intention of letting out. v) The levy of tax in the case of house property is not premised or dependent on the fact that whether the assessee carries on business as land lord but on the ownership. The incidence of charge is because of the fact of ownership. In the case here, the ownership lies with the assessee company. ITA No.1386/Ahd/2019 with CO 11 yi) The assessee has stated that deeming provisions will not apply to the assessee as it is in the business of real estate. However, this cannot be accepted as there is no reasoning or logic given by assessee to support its stand. Also no provisions of the IT Act provide for non-applicability of notional rent if the assessee is in the business of real estate.” 17. Thereafter, the AO held that for determining the ALV of the property, 8% of investment made in the property is the appropriate rate, and accordingly, determined the ALV of 22 properties of the assessee listed in at page no.13 of the order at Rs.2,27,57,509/-. He thereafter allowed 30% deduction thereon as per provision of section 22 which came to Rs.68,27,253/- and accordingly calculated income from house property at Rs.1,59,30,256/-. 18. The ld.CIT(A) upheld order of the AO, but at the same time held that determination of ALV by the AO at 8% of the investment made by the assessee was very high and without any basis. Taking note of the decision of the ITAT, Ahmedabad Bench in the case of Shanti Exports P.Ltd., ITA No.640/Ahd/2018 wherein the provision relating to the estimation of rent on vacant property as envisaged in the provisions of section 23 of the Act was discussed, the ld.CIT(A) directed the AO to ascertain fair market rent of the properties under consideration on the basis of rent received in the same area in which the present property is situated, and adopt such rent as deemed income from the house property, on the property held as fixed assets. 19. With respect to the property held as stock-in-trade, theld.CIT(A) held that deemed rental income under section 23 cannot be computed on property held as stock in-trade relying upon the judgment of Hon’ble jurisdictional High Court in the case of Neha Builders, (2008) 296 ITR 661 and on the decision of the ld.CIT(A) in the case of assessee itself in the preceding for assessment years Asst.Year 2014-15 and 2015-16. The order of the ld.CIT(A) at para 7.3 to 7.3.2 are as under: “7.3 The income from House property is charged to tax as per the provisions of Part- 0 of Chapter -IV of the Act. As per the provisions of section 22 the Annual value of a property consisting of buildings or lands appurtenant ITA No.1386/Ahd/2019 with CO 12 thereto owned by the assessee except which are occupied for t he purposes of any business or profession are chargeable to tax under the head of income "income from house property" . The provision of section 22 of the Act reads as under: "Income from house property. 22 . The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from houseproperty” The manner of determining the income from house property is prescribed in section 23 of the Act which, reads as under: "[Annual value how determined. 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be— (a) the sum for which the property might reasonably be expected to let from year; or (b). where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c). where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable : Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay . such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him. Explanation.—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall, not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise. (2) Where the property consists of a house or part of a house which— (a) is in the occupation of the owner for the purposes of his own residence; or (b) cannot actually be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such house or part of the house shall be taken to be nil. (3) The provisions of sub-section (2) shall not apply if— ITA No.1386/Ahd/2019 with CO 13 (a) the house or part of the house is actually let during the whole or any part of the previous year; or (b) any other benefit therefrom is derived by the owner. (4) Where the property referred to in sub-section (2) consists of more than [one house] – (a) the provisions of that sub-section shall apply only in respect of [one] of such houses, which the assessee may, at his option, specify in this behalf; (b) the annual value of the house or houses, [other than the house] in respect of the assessee has exercised an option under clause (a), shall bedetermined under sub-section (1) as if such house or houses had been let] [(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to [one year] from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil. Clause 5 of section 23 was inserted by Finance Act, 2017w.e.f. 01.04.2018. 7.3.1 A bare perusal of the provision of section 23(a) would make it clear that even if the property is not actually let out the rental income has to be assessed at a sum for which the property might reasonably expected to be let out. Hence, AO has rightly added the deemed rental value to the total income on the properties which are not held by the appellant for the purpose of its business. The provisions of section 23(a) are clearly applicable to the properties which are not held as stock in trade. They are clearly in the nature of investments. Infact, appellant has also not disputed the facts that the properties are held as Fixed Assets. In view of these facts and legal position the action of AO attributing deemed rental income on these properties is confirmed. However , I find that AO has not given any basis on which 8% of the value of the properties is taken as deemed income from house property u/s,23 of the Act. In this regard it is useful, to refer to the judgment of Hon'ble ITAT Ahmedabad in the case of Shanti Exports Pvt. Ltd. ITA No.640/Ahd/2018 dated 07.01.2019 for guidance wherein the Hon'ble ITAT Ahmedabad have discussed the provisions relating to estimation of rent on vacant properties as envisaged by the provisions of section 23 of the Act. The Hon'ble ITAT held as below: 10.3.- In the instant case, the Revenue alleges that the actual rent received/receivable is less than the reasonable expected rent. Thus the controversy revolves what should be the reasonable expected rent The law to determine the reasonable expected rent provides a certain basis as detailed under: i) Actual rent received or receivable:- Actual rent received/receivable is an important factor in determining the annual value of a property. ITA No.1386/Ahd/2019 with CO 14 ii) Municipal Value:- This is the value as determined by the Municipal authorities for levying Municipal taxes on house property. Municipal authorities normally charge house tax/Municipal taxes on the basis of annual letting value of such house property. iii) Fair rent of the property:- Fair rent is the rent which a similar property can fetch in the same or similar locality if it is let out for a year. The DVO can also find out such value: iv) Standard Rent:- The standard rent is fixed under the Rent Control Act. If the standard rent has been fixed for any property under the Rent Control 7.3.2 In the case at hand AO has not specified any basis of adopting the deemed rental value of the @8% of the value of the property which is not correct and without any authority of law. Accordingly, AO is directed to ascertain the fair market rent of the properties under consideration on the basis of the rentals received by similar properties in the area in which these properties are located as prescribed by Hon'ble ITAT in the case of Shanti Exports (supra) and adopt such rate of rent as deemed income from house property on the properties held as Fixed Assets (except in the case of on property namely Shakti 404- 4th Floor for which AO has taken the deemed rental of Rs.21,00,000/- on the basis of the rental income received by the appellant on the similar property). Ld. AR has brought to my notice that though AO has mentioned all the properties on which deemed rent is added as fixed assets however, AO has also computed the deemed rental income on the stock in trade ofRs.7,36,92,078/-. I find that in the balance sheet the inventories of Rs.7,36,92,078/- are reflected also some of the properties on which the deemed income is attributed were also part of such properties in the A.Y.2015-16 wherein such deemed income was attributed to stock in trade also. AO has also in the impugned assessment order in para 5.1 mentioned the fact that appellant has held properties under the head inventories. Undersigned have in A.Y.2014-15 & 2015-16 in the appellant's case held inter-alia relying upon the judgment of Hon'ble jurisdiction al High Court in the case of Neha Builders (2008) 296 ITR 661 that deemed rental income u/s.23 of the Act cannot be computed on the properties held as stock in trade. For the same reasons AO is directed to verify and if the properties on which deemed rental income is attributed are held by the appellant in stock in trade exclude such properties from the purview of the provisions of section 23 of the Act. The additions made to this extent are deleted.” 20. Before us the ld. Counsel for the assessee reiterated the contentions made before the AO that no deemed rental income was to be computed on the properties held as fixed assets by the assessee inview of the fact that there were held by him in the course of business, and alternatively they were kept vacant during the year. 21. The ld.DR on the other hand, reliedon the order of the AO/ld.CIT(A). ITA No.1386/Ahd/2019 with CO 15 22. Wehave heard both the parties and have gone through orders of the authoritiesbelow. The issue before us relates to treating the property of the assessee held as fixed assets, as being eligible for being subjected to tax under section 22 of the Act, on the deemed rental income earned thereon as per the provisions of said section. 23. We have perused the orders of the authorities below, and having considered the contentions of theld. Counsel for the assessee before us, we see no reason to interfere in orders of the Revenue authorities holding the property held as fixed assets tobe eligible for taxation of deemed rental income from there under section 22 of the Act. On going through order of the AO, we find that he has rightly interpreted the provision of section 22 and applied it to the facts of the present case. The AO has rightly referred to provisionof section 22 as specifying that property consisting of any building or land appurtenant thereto of which the assessee is the owner,other than the property which he occupies for the purpose of any business or profession, to be chargeable to tax under the head income from house property. The AO has noted that all the properties, held as fixed assets by the assessee, who is in the business of real estate, are eligible for taxing their ALV as per section 22 of the Act, since the assessee is not carrying out any business from these properties. The ld.counsel for the assessee has been unable to controvert this finding of the authorities below. Therefore, the arguments of the ld.counsel for the assessee that the properties held by it as fixed assets were for the purpose of business of the assessee, and their ALV was to be excluded for taxation under section 22 of the Act, is rejected as untenable in law. 24. The next contention of the ld.counsel for the assessee that since the properties were vacant throughout the year, the assessee is entitled to vacancy allowance, and accordingly, the ALV of the property would therefore be NIL. The AO, we find, has rejected this contention of the assessee noting that the sub-clause(c) of sub-section (1) of section 23 which deals with providing vacancy allowance allows the same only when ITA No.1386/Ahd/2019 with CO 16 the property is ‘actually let out’ and not based on the intention of letting out. The ld.counsel for the assessee wasunable to controvert this finding of the AO. Inview of the same, this contention of the ld.cousnel for the assessee is also rejected. 25. As a result, we see no reason to interfere in the order of the ld.CIT(A) holding that the property held as fixed assets qualified for the ALV thereon being subjected to tax as income from house property as per the provisions of section 22 of the Act. 26. Ground No.1 to 3 of the assessee’s CO is dismissed. 27. Ground No.4 of the CO of the assessee is against the direction of theld.CIT(A) to verify whether the interest paid by the assessee qualified for deduction against the ALV of the properties in terms of section 24 of the Act while computing the income from house property. 4. Ld. CIT (A) erred in law and on facts directing AO to verify details of interest expense incurred for acquisition of the properties despite being satisfied and holding that entire loan was taken for business purpose more specifically for the acquisition of properties.” 28. The AO had noted, as per the provisions of section 24 of the Act, interest paid on borrowings made for acquiring properties which were liable to tax under section 22 of the Act, qualified for deduction. He further noted that as per details submitted by the assessee, the interest paid by the assessee was not on borrowings made for acquiring properties, but were in fact paid on loan taken against these properties kept as security, and therefore, heheld that the interest paid did not qualify for deduction under section 24 of the Act. Accordingly, the AO denied deduction of any interest under section 24 of the Act to the assessee, which included theinterest actually claimed by the assessee while computing its income from house-property amounting to Rs.1,47,03,903/- and interest deduction claimed by the assessee on deemed rental income computed by theAO on properties held as fixed assets by the assessee. ITA No.1386/Ahd/2019 with CO 17 The ld.CIT(A) however noted that the AO did not give any show cause notice to the assessee while giving a finding of fact that the interest expenses were found to be not in relation to borrowing made for acquiring properties. He accordingly restored the issue to the AO to verify all the facts, and there after allow the assessee’s claim of interest under section24 of the Act in accordance with law. His finding at para 7.6 of the order is as under: “7.6 As per AO appellant was asked to provide the details of loans taken for purchase of the impugned properties however, appellant had provided the details of loan taken against the properties. Appellant in the course of appellate proceedings contended that the entire assets of the appellant are held only in the form of properties and they had provided the details of the funds borrowed for acquisition of the properties however, the table provided by the AO in the notice u/s.142(1) was misunderstood and by mistake the details of loan taken was against the properties were furnished to the AO. Appellant furnished the ledger account copy of the loans obtained from all the properties including the land , buildings, shops, bungalows etc., majority of the properties are financed by the related parties e.g. Zen Tradelink Pvt. Ltd., MukeshMajithia, Nikhil Majithia, Jay Majithia, RashminMajithia. Appellant further submitted that since, all the properties except the vacant land have been subjected to tax either as returned income by the appellant or by way of additions made by the AO, and in view of the fact that appellant has only one line of business i.e. dealing in real estate the entire interest has to be allowed Appellant further contended that though for this query they had given the details of interest against property by mistake but the details of entire interest claimed were furnished to the AO and no part of the interest was found to have been laid out for any other purpose except acquisition of properties. Appellant further submitted that AO has not given any specific show cause notice before treating the interest as not relatable to the properties on which rental income has been returned and assessed to allow the appellant to clear the confusion. I find that in para 5 of the impugned assessment order while disallowing the interest of Rs.4,83,25,510/- also AO has discussed the issue of interest and the same was disallowed for the reason that the fixed assets were not put to use. On that issue undersigned has given a finding that the entire interest excluding the interest on vacant land has to be allowed since the loans have been taken for various properties income thereon have been subjected to tax either as business income or as income under the head house property. It is also observed that appellant has furnished the details of interest paid on loans taken against properties on which appellant has offered income under the head house property and also AO has added deemed income u/s.23 of the Act. Keeping in view the fact that entire loans have been taken for the purpose of business more specifically acquisition of properties, no part of the funds have been found to have diverted for any other purpose as discussed above and the fact that no specific show cause was given to the appellant, appellant is directed to furnish the details of the interest expense incurred towards acquisition of properties on which income under the head "income from house property" is assessed including the income returned under this ITA No.1386/Ahd/2019 with CO 18 head and AO is directed to verify the same if the contention of the appellant is found to be correct allow the interest u/s.24 of the Act. Ground No.3 & 4 of the appeal are accordingly partly allowed subject to the verification by the AO as above.” 29. The ld.counsel for the assessee was unable to point out how it had been demonstrated to the CIT(A) that all interest expenses qualified for deduction under section24 of the Act. In view of the above, we see no merit in the ground no.4 raised by the assessee in its CO seeking allowance of claim of interest expenses u/s 24 of the Act. 30. The ld.CIT(A), we have noted, has been fair enough, in allowing the assessee another opportunity to bring out the facts of its case, and claim allowance of interest expenditure after verifying of the facts by the AO and determining amount allowable as per law. In this view of the matter, ground no.4 of the CO is also dismissed. 31. In effect, the CO of the assessee is dismissed. Now we take up the appeal of the Revenue in ITA No.1386/Ahd/2019. 32. Since in the CO filed by the assessee, we have already upheld the order of theld.CIT(A) that deemed rental income of the properties held as fixed assets had been rightly brought to tax as income from house property under section 24 of the Act, we shall proceed therefrom. 33. We first deal with ground no.2 of the Department’s appeal, which is connected to the aforestated issue, wherein the Revenue is aggrieved by the order of the ld.CIT(A) who deleted the addition made of deemed rental income on account of property held as stock-in-trade. The addition being of Rs.28,85,598/- pertaining to the property held as stock-in-trade of Rs.5,15,28,528/-. i) That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs 28,85,598/- made on account of deemed rent on stock in trade of Rs. 5,15,28,528/-. ITA No.1386/Ahd/2019 with CO 19 34. As noted above, the ld.CIT(A) deleted the addition following decision of the Hon’ble jurisdictional High Court in the case of Neha Builders (supra) holding that property held as stock-in-trade did not qualify for ALV thereto being subject to tax in terms of section 22 of the Act. The ld.DR was unable to distinguish the said case before us. Inview of the same, we see no reason to interfere in the order of the ld.CIT(A) deleting the addition made on account of deemed rental income amounting toRs.28,85,598/- on property held as stock-in-trade by the assessee. Ground no.2 of the Revenue is accordingly dismissed. 35. In ground no.1, the grievance of the Revenue is against deletion of addition of Rs.3,55,26,367/- made on account of disallowance of interest under section 36(1)(iii) of the Act. i) That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 3,55,26,367/- made on account of disallowance of interest u/s.36(i)(iii) of the Act. 36. The AO had made disallowance noting that the assessee had claimed total interest expenditure of Rs.6,79,98,117/- out of which Rs.1,47,03,908/- was claimed as pertaining to interest from properties earned from rental income. The remaining claim of interest of Rs.5,32,94,209/- of the assessee was found to be incurred on borrowing of Rs.54,97,47,328/- , while inventory of the assessee was only to the tune of Rs.7,36,92,078/-. The AO inferred from this data that out of the borrowing of Rs.55 crores, only Rs.7 crores had been used in the business of the assessee, remaining, therefore, he inferred, was for non-business purpose and in relation to the same, therefore, hedisallowed claim of the assessee amounting to Rs.4,83,25,510/-. The ld.CIT(A) noted that the assessee was in the business of realestate and had made investment in property only, which were classified as fixed assets or as stock-in-trade. He noted that the property held as fixed assets had also been brought to tax on deemed rental income earned thereon under section 22 of the Act by the AO. He therefore directed allowanceof the claim of interest against ITA No.1386/Ahd/2019 with CO 20 such properties, as per section 24 of the Act. His finding at page no.14 of the order is as under: “After careful consideration of all the facts, assessment order and the submissions made it is seen that appellant has offered the income under the head business and profession and income from house property. Income under both the heads have flown only from the properties held by the appellant. Further, AO has also added deemed rental income u/s.23 of the Act on the vacant properties held under the head Fixed Assets. Before the AC appellant have furnished complete details of the interest expense incurred. Appellant has in the reply dated 22.10.2018 which has been reproduced by the AO in the impugned assessment order submitted that out of the total interest the interest amounting to Rs.1,27,99,143/- only has been laid out for plots on which no income is assessed (including deemed income assessed by the AO). Appellant furnished all the details and AO has not been able to find any deficiency or any part of interest which is paid on the funds not used for the purpose of business; which is acquisition of properties including plots. AO has disallowed the interest of Rs.4,83,25,510/-mainly because the same is incurred on the properties held as Fixed Assets. Since, the income from such Fixed Assets has been added as per the provisions of section 23 of the Act (Rs.1,59,30,256/-) by the AO appellant is entitled to deduction u/s.24 of the Act towards interest on such properties. Appellant has itself given the working of interest of Rs.1,27,99,143/- pertaining to plots on which no income has been added and such plots continue to be a part of Fixed Assets hence, this sum cannot be allowed and the disallowance to this extent is confirmed. However, since, the properties are held as capital appellant is allowed to capitalise the interest as a part of cost of assets (plots) for which it is incurred. For the balance interest since, the deemed income on the fixed 'assets; has been assessed u/s.23 of the Act appellant is entitled to deduction as per the provisions of section 24 of the Act which is allowed. AO is directed to allow the same. 37. Before us, theld.DR was unable to controvert the finding of the ld.CIT(A) that the property in relation to which the AO had made disallowance of interest expenditure, i.e. thus categorized as fixed assets had been subjected to tax on account of deemed rental income earned thereon as per section 22 of the Act. Moreover, this addition made to the income of the assessee has been confirmed by us in theCO of the assessee which has been dealt with by us in earlier part of the order as above. 38. In view of the same, since the disallowance made by the AO was in relation to property held as fixed assets, and since these very same properties have been subjected to tax on account of deemed rental income under the head “income from house property”, theld.CIT(A) has we hold ITA No.1386/Ahd/2019 with CO 21 rightly held that the assessee is entitled to claim interest expenses against the same, as per section 24 of the Act. The ld.DR was unable to point out any infirmity in the finding of the ld.CIT(A) in this regard, therefore, we see no reason to interfere in the order of theld.CIT(A) deleting the disallowance made under section 36(1)(iii) of the Act. Ground no.1 is dismissed. 39. Ground no.3 & 4 are inter-related, pertaining to the disallowance of expenses made for earning exempt income as per the provisions of section 14A of the Act and adjustment thereto to the book profits of the assessee under section 115JB of the Act. i) That the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs 53,64,567/- made u/s. 14A rwr 8D of the Act. v) That the Ld. CIT(A) has erred in law and on facts in deleting the addition to book profit u/s.115JB of the Act on account of disallowance of Rs. 67,64,567/~ made u/s. 14A of the Act. 40. The assessee had earned exempt agricultural income amounting to Rs.14.00 lakhs during the year, and noting that huge investments made amounting to Rs.20.76 crores had been made in plots of land by the assessee, outof which such income hadbeen earned, the AO computed the income disallowable under section 14A of the Act pertaining to the exempt income earned as under: i) Interest expenditure Rs.50,08,553/- ii) Administrative expenses Rs.17,56,014/- Total disallowance Rs.67,64,567/- 41. The ld.CIT(A) upheld order of the AO to the extent of disallowance under section 14A of the Act was maintainable, but at the same time, restricted it to the extent of exempt income earned by the assessee following the decision of the Hon’ble jurisdictional High Court in the case of Corrtech Energy P.Ltd., (2014) 223 Taxmann 130 (Guj). The finding of theld.CIT(A) at para 8.1 of his order is as under: ITA No.1386/Ahd/2019 with CO 22 “8.1 In the course of appellate proceedings the appellant through Ld. AR contended .that the disallowance u/s. 14A cannot exceed the quantum of exempt income. After careful consideration of the facts of the case, impugned assessment order and the submissions made I find that appellant has not been able to controvert the findings of the AO that part of the interest: is laid out for acquisition of agriculture land. Further, as elaborately discussed in earlier part of this order appellant has substantial interest expense amounting to Rs,6,87,3i,533/- and the entire borrowed funds are utilised for acquisition of various properties including the agriculture lands. Hence, the interest expense is correctly attributed by the AO. As regards the administrative expenses appellant have purchased agriculture land as a part of its core business activity and the common infrastructure of the appellant including the human resource and physical infrastructure is certainly used for earning the exempt income. Hence, AO was fully justified in invoking the provisions of section 14A of the Act.” 42. The ld.DR was unable to point out any infirmity in the order of the ld.CIT(A) vis-à-vis legal proposition followed by it while restricting the disallowance to the extent of exempt income earned. In view thereof, we see no reason to interfere in the order of the ld.CIT(A) restricting the disallowance of expenditure under section 14A of the Act amounting to Rs.124 lakhs. 43. Further, we find that for the purpose of adjustment to made to the book profits of the assessee, on account of disallowance of expenditure under section 14A of the Act, the ld.counsel for the assessee relied upon the decision of the ITAT, Ahmedabad Benchin the case of Torrent Cable Ltd. Vs. ACIT, ITA No.3178/Ahd/2010 for holding that no adjustment of the same can be made to the book profits of the assessee. His findings at para-9 of his order are as under: “9. Ground No. 6 of the appeal pertain to addition of disallowance made u/s. 14A of the Act to the Book Profit computed as per the provisions of section 115JB of the act. As regards the addition of disallowances u/s. 14A in the (Dock profits computed under the provision of section 115JB I find that the issue is squarely covered by the judgment of Hon'ble Ahmedabad ITAT in the case of Torrent Cable Ltd v/s ACIT vide ITA no: 3178/Ahd/2011 dated 02/01/2017 wherein it has been held : "6 We have carefully considered the rival submission on the 'issue involved. The assesses has relied upon the Judgment of Hon'ble Gujarat High Court in the case of Alembic Ltd. (supra), Therelevant operative para of the order of the Hon'ble Gujarat High Court is reproduced hereunder: 8. Taking into consideration the evidence on the record and ; considering the decision of this court in the case of Commissioner of ITA No.1386/Ahd/2019 with CO 23 Income Tax-1 vs. Gujarat State Fertilizers & chemicals Ltd. (supra), we are of the opinion that the issue Nos. (iii) and (iv) required to be answered in the favour of the assessee and against the revenue. In that view of the matter, we answer questions (iii) and (iv) referred to us in favour of the assessee and against the revenue. The appeal of the revenue is dismissed. 7. Seen on the anvil of the aforesaid decision of the Hon'ble Gujarat High Court squarely on the issue, we find merit contention on behalf of the assessee and direct the Ld. Assessing Officer to delete the adjustment made on the account of estimated disallowance determined under section 14A r.w. Rule 8D of the I.T: Rules, 1962 while computing book profit under section 115JB of the Act” Respectfully following the judgment of jurisdictional ITAT it is held that disallowance u/s. 14A as restricted by this order to the extent of exempt income cannot be added in the book profits u/s.115JB. Thus, appeal on the related grounds is allowed.” 44. The ld.DR was unable to distinguish the decision relied upon by the ld.CIT(A) while holding so. In view of the same, we see no reason to interfere in the order of ld.CIT(A) deleting the adjustment made to the book profits of the assessee on account of expenses disallowed under section 14A of the Act. Ground no.3 & 4 of the Revenue are dismissed. Appeal of the Revenue is accordingly dismissed. 45. In the result, the appeal of the Revenue and cross-objection of the assessee are dismissed. Order pronounced in the Court on 6 th March, 2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 06/03/2023 vk*