TRENT LTD, MUMBAI V. ACIT 2(3), MUMBAI

ITA 1163/MUM/2011

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2539 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 06-08-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 08-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Keywords: Depreciation; Fair market value; Tax effect; Revenue expenditure
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.1163/M/2011 ASSESSMENT YEAR: 2006-07 M/S. TRENT LTD., BOMBAY HOUSE, 2 ND FLOOR, 24, HOMY MODY STREET, FORT, MUMBAI 400 001 PAN: AAACL 1838J VS. ADDITIONAL CIT, RANGE 2(3), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RE SPONDENT) ITA NO.1727/M/2011 ASSESSMENT YEAR: 2006-07 DCIT-2(3), R.NO.555, AAYAKAR BHAVAN, MUMBAI VS. M/S. TRENT LTD., BOMBAY HOUSE, 2 ND FLOOR, 24, HOMI MODY STREET, FORT, MUMBAI 400 001 PAN: AAACL 1838J (APPELLANT) (RE SPONDENT) PRESENT FOR: ASSESSEE BY : SHRI NITESH JOSHI, A.R. REVENUE BY : SHRI V. JUSTIN, D.R. DATE OF HEARING : 25.06.2018 DATE OF PRONOUNCEMENT : 27.08.2018 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE ABOVE TITLED APPEALS ONE BY THE ASSESSEE AND T HE OTHER BY THE REVENUE HAVE BEEN PREFERRED AGAINST TH E ORDER DATED 06.12.2010 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] R ELEVANT TO ASSESSMENT YEAR 2006-07. ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 2 ITA NO.1163/M/2011 (ASSESSEES APPEAL) 2. THE VARIOUS GROUNDS RAISED BY THE ASSESSEE ARE A S UNDER: THE APPELLANT SUBMITS THAT EACH OF THE FOLLOWING G ROUNDS OF APPEAL IS INDEPENDENT OF AND WITHOUT PREJUDICE TO O NE ANOTHER: 1) A)THE COMMISSIONER OF INCOME TAX (APPEALS) [CIT( A)] ERRED IN CONFIRMING THE DISALLOWANCE MADE BY ASSESSING OF FICER (AO) FOR DEPRECIATION CLAIM OF RS.5,00,000/- ON INTANGIB LE ASSETS - NON- COMPETE FEES OF RS.20,00 , 000/- PAID DURING FINANCIAL YEAR 2005-06 UNDER THE NON- COMPETE AGREEMENT. B)ALTERNATIVELY AND WITHOUT PREJUDICE TO THE ABOVE, THE CIT(A) ERRED IN DISALLOWING U/S 37(1) NON-COMPETE FEES OF RS.20,00, 000/- PAID DURING FINANCIAL YEAR 2005-06, AS NOT BEING EXPENDITURE LA ID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF APPELLAN T'S BUSINESS. 2) THE CIT(A) ERRED IN RESTORING DISALLOWANCE MADE BY AO U/S 14A R.W.R 8D OF RS.22,89,595/- INCURRED TOWARDS DIRECT INTEREST EXP ENDITURE AND RS.86,52,415/- TOWARDS ADMINISTRATIVE EXPENDITURE B ACK TO THE FILE OF AO FOR HIS FRESH ADJUDICATION AND NOT ACCEPTING THE DISALL OWANCE OFFERED BY THE APPELLANT U/S 14A OF RS.37,29,108/- (BEING RS.14,39 ,513/- TOWARDS ADMINISTRATIVE EXPENSES AND RS.22,89,595/- TOWARDS INTEREST EXPENSES). 3) THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE MADE BY AO TOWARDS THE AMOUNT AMORTIZED IN RESPECT OF THE APPELLANT'S EMPLOYEES' STOCK OPTION SCHEME (ESOP) OF RS.64,75,000/- UNDER SECTIO N 37(1) OF THE ACT. 4) A) THE CIT(A) ERRED IN NOT DECIDING ANNUAL LETTI NG VALUE OF THE PREMISES AT TAJ BUILDING AS PER MUNICIPAL VALUATION U/S 23(1 )(A). B) THE CIT(A) ERRED IN REJECTING APPELLANT'S CONTEN TION THAT FAIR MARKET RENT OF THE PREMISES AT TAJ BUILDING SHOULD BE COMP ARED WITH THE TOTAL SUM RECEIVED FROM LETTING OF PREMISES ALONG WITH FU RNITURE HIRE CHARGES. THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER, AMEND, SUBSTITUTE AND/OR VARY ANY OF THE ABOVE GROUNDS OF APPEAL BEFORE OR DURING THE CO URSE OF HEARING OF THE APPEAL. 3. THE ISSUE RAISED IN GROUND NO.1A IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF RS.5 LAKHS BY LD. CIT (A) AS MADE BY THE AO TOWARDS DEPRECIATION CLAIMED ON INTA NGIBLE ASSETS ON NON COMPETE FEE OF RS.20 LAKHS PAID DURIN G THE FINANCIAL YEAR 2005-06. ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 3 4. THE FACTS IN BRIEF ARE THAT THE AO DURING THE CO URSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT ASSESSEE HAS C LAIMED DEPRECIATION OF RS.5 LAKHS @ 25% ON THE AMOUNT OF N ON COMPETE FEES PAID TO SHRI NATRAJ RAMAIAH AND MRS. H EMLATHA RAMAIAH SEPARATELY OF RS.10,00,000/- EACH FOR NOT CA RRYING OUT ANY BUSINESS DIRECTLY OR INDIRECTLY OR MANAGING OR ADVISING AS PARTNER OR ASSOCIATE OR SHAREHOLDER OR DIRECTOR OR SET UP THE BUSINESS BEING CARRIED OUT PRESENTLY BY THE FIRM I. E. OF RETAILING AND PUBLICATION OF BOOKS AND MAGAZINES ET C. THE ASSESSEE DURING THE YEAR ACQUIRED SHARE TO THE TUN E OF 78% IN THE FIRM KNOWN AS LANDMARK FOR A CONSIDERATION O F RS.91.51 CR COMPRISING 3.90 CR IN THE FORM OF CAPITAL AND 87.6 1 CR FOR ACQUIRING THE RIGHTS. THE FIRM LANDMARK WAS RECONS TITUTED WITH THE PARTNERS SHRI NATRAJ RAMAIAH AND MRS. HEML ATHA RAMAIAH CONTINUING IN THE SAID PARTNERSHIP EVE AFTE R THE RECONSTITUTION VIDE RECONSTITUTION DEED DATED 30.08.2 005 AND THE PAYMENT OF NON COMPETE FEE WAS DULY EVIDENCED B Y THE NON COMPETE AGREEMENT DATED 30.08.2005. ACCORDING T O THE AO THE SAID TRANSACTION WAS ENTERED INTO BY THE ASS ESSEE WITH THE TWO PARTNERS OF LANDMARK WITH THE INTENT TO AV OID THE CAPITAL GAIN AND THUS THE TRANSACTION WAS ENTERED I NTO BY WAY OF NON COMPETE FEE. ACCORDING TO THE AO THERE WAS NO NEED TO PAY THE NON COMPETE FEE IN VIEW OF THE FACT THAT INTEREST IN THE PARTNERSHIP M/S. LANDMARK WHO WERE CARRYING ON THE BUSINESS OF RETAILING AND PUBLICATION OF BOOKS AND MAGAZINES WAS ALREADY ACQUIRED BY THE ASSESSEE TO THE EXTENT OF 78% AND THUS DISALLOWED THE DEPRECIATION CLAIMED. THE LD. A.R. ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 4 VEHEMENTLY SUBMITTED BEFORE AO THAT THE ASSESSEE AC QUIRED 78% OF THE INTEREST IN THE PARTNERSHIP M/S. LANDMAR K WHICH WAS CARRYING ON THE BUSINESS OF RETAILING OF PUBLIC ATION OF BOOKS AND MAGAZINES AND THE ASSESSEE PAID RS.10 LAKH S EACH TO SHRI NATRAJ RAMAIAH AND MRS. HEMLATHA RAMAIAH AS NON COMPETE FEE VIDE SEPARATE AGREEMENTS DATED 30.08.200 5 FOR NOT CARRYING ON ANY SIMILAR BUSINESS FOR A PERIOD O F FIVE YEARS FROM THE DETAILED AGREEMENT. 5. THE LD. A.R. SUBMITTED THAT THIS IS A COMMERCIAL RIGHT AND WILL FALL UNDER THE AMBIT OF INTANGIBLE ASSETS AND REASONED THAT THE ASSESSEE RIGHTLY CLAIMED THE DEPRECIATION @ 25%. THE LD. A.R. SUBMITTED THAT THE BELIEF OF THE AO IS F ALLACIOUS AND WRONG FOR THE REASON THAT THE AO DISALLOWED THE DEPRECIATION MERELY ON A WRONG NOTION THAT THE ASSE SSEE HAS 78% OF THE INTEREST IN THE PARTNERSHIP IN M/S. LANDM ARK AND THEREFORE THERE WAS NO NEED TO PAY THE NON COMPETE FEE TO THE EXISTING PARTNERS IN THE PARTNERSHIP FIRM. THE LD. A.R. FURTHER ARGUED THAT THE LD. CIT(A) HAS ERRONEOUSLY C ONFIRMED THE ORDER OF THE AO ON THE SAME BELIEF THAT THERE W AS NO NEED TO PAY THE NON COMPETE FEE TO THE EXISTING PARTNERS . WHEREAS AS A MATTER OF FACT, THE ASSESSEE HAS PAID NON COMPE TE FEE TO THE CONTINUING PARTNER IN ORDER TO PROTECT ITS INTE REST TO THE TUNE OF 78% IN THE BUSINESS OF M/S. LANDMARK WHICH I S A VALUABLE COMMERCIAL RIGHT. THE LD. A.R. ALSO RELIED ON THREE DECISIONS NAMELY; 1. PRINCIPAL CIT VS ZYDUS WELLNESS LTD [2017] 81 T AXMANN.COM 159 (GUJARAT HIGH COURT) ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 5 2. CIT VS INGERSOLL RAND INTERNATIONAL IND. LTD. [ 2014] 48 TAXMANN.COM 349 (KARNATAKA HIGH COURT) 3. DCIT VS BUNGE INDIA (P.) LTD. [2016] 70 TAXMANN .COM 323 (MUMBAI TRIBUNAL) AND SUBMITTED THAT THE ORDER OF LD. CIT(A) SHOULD B E REVERSED AND THE AO SHOULD BE DIRECTED TO ALLOW THE DEPRECIA TION @ 25%. ALTERNATIVELY, THE LD. A.R. SUBMITTED THAT NON C OMPETE FEE IS ALLOWABLE UNDER SECTION 37(1) OF THE ACT AS EXPENDITURE BEING WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPO SE OF BUSINESS OF THE ASSESSEE AND THE SAME SHOULD BE ALL OWED IN TOTO BY RELYING ON THE DECISION OF THE DELHI HIGH C OURT IN THE CASE OF EICHER LTD. VS. CIT (2012) 173 TAXMAN 251 (DE LHI). 6. THE LD. D.R., ON THE OTHER HAND, RELIED ON THE ORDE R OF AUTHORITIES BELOW AND SUBMITTED THAT THE PAYMENT OF NON COMPETE FEE WAS PAID TO THE EXISTING PARTNERS OF M/ S. LANDMARK AND NOT TO THE RETIRING PARTNERS AND THER EFORE THERE WAS NO QUESTION OF COMPETING WITH THE SAME FIRM. TH E LD. D.R. SUBMITTED THAT THE DECISION RELIED BY THE LD. A .R. IS CERTAINLY APPLICABLE IN THE CASE OF NON COMPETE FEE BUT THE PAYMENT IN THE PRESENT CASE IS NOT A PAYMENT TOWARD S NON COMPETE FEE BUT WAS GIVEN A COLOUR OF NON COMPETE F EE BY ENTERING INTO SEPARATE AGREEMENTS WITH TWO EXISTING PARTNERS PAYING RS.10 LAKH TO EACH PARTNER WHICH WAS NOTHING BUT TO ACQUIRE THE INTEREST IN THE SAID PARTNERSHIP FIRM A ND THEREFORE THIS WAS RIGHTLY DISALLOWED BY THE AO. THE LD. D.R . FURTHER SUBMITTED THAT THE LD. CIT(A) HAS PASSED A VERY REAS ONED ORDER AFTER CONSIDERING THE CONTENTIONS OF THE ASSE SSEE AND THEREFORE THE SAME SHOULD BE AFFIRMED. ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 6 7. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD INCLUDING THE DE CISIONS CITED BY THE LD. A.R. WE FIND THAT IN THE PRESENT C ASE THE ASSESSEE ACQUIRED 78% OF THE INTEREST IN A FIRM KNO WN AS M/S. LANDMARK WHICH WAS ENGAGED IN THE BUSINESS OF RETAI LING AND PUBLISHING THE BOOKS AND MAGAZINES. THE ASSESSEE PA ID RS.10 LAKH EACH TO TWO PARTNERS VIDE TWO SEPARATE AGREEME NTS DATED 30.08.2005 AS NON COMPETE FEE FOR NOT CARRYING ON OR COMPETING WITH THE FIRM FOR 5 YEARS FROM THE DATE OF AGREEMENT. THE ASSESSEE CLAIMS THAT THE SAID PAYMEN T WAS MADE AS NON COMPETE FEE IN ORDER TO PROTECT 78% OF THE BUSINESS INTEREST IN THE FIRM M/S. LANDMARK AND THE REFORE THE REASONING GIVEN BY THE AO THAT PAYMENT TO THE EXIST ING PARTNERS HAS BEEN MADE WITH AN INTENT TO AVOID TAXE S IS WRONG ,MISLEADING AND FALLICIOUS. AFTER GOING THROUGH THE NON COMPETE AGREEMENTS DATED 30.08.2005 AND CONSIDERING THE FACTS THAT ASSESSEE ACQUIRED 78% OF THE INTEREST IN THE PARTNERSHIP FIRM, WE ARE OF THE FIRM VIEW THAT ANY P AYMENT WHICH IS MADE FOR NOT COMPETING WITH THE FIRM FOR T HE PERIOD OF FIVE YEARS IS EVIDENTLY FALLS WITHIN THE AMBIT O F NON COMPETE FEE AS THE PAYMENT WAS MADE TO PROTECT THE BUSINES S INTEREST OF THE ASSESSEE AS THE ASSESSEES COST OF INVESTMEN T IN THE SAID FIRM WAS RS.91.51 CRORES WHICH WAS MADE BY WAY OF CAPITAL CONTRIBUTION TO THE TUNE OF RS.3.9 CRORES A ND RS.87.61 FOR ACQUIRING THE RIGHTS IN THE SAID PARTNERSHIP. I N OUR OPINION, THE FINDING OF THE LD. CIT(A) IS FALLACIOUS AND WRON G AND CAN NOT BE SUSTAINED. IN THIS CASE, THE ASSESSEE HAS MA DE ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 7 PAYMENT OF NON COMPETE FEE AND RIGHTLY TREATED AND CLASSIFIED UNDER INTANGIBLE ASSETS AND CLAIMED DEPRECIATION T HEREON @25%. THE CASE OF THE ASSESSEE IS SUPPORTED BY A S ERIES OF DECISIONS AS REFERRED TO ABOVE. IN THE SAID DECISI ONS IT HAS BEEN HELD THAT THE DEPRECIATION HAS TO BE ALLOWED O N THE NON COMPETE FEE. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE AO TO ALLOW THE DEPRECIATION. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 8. SINCE WE HAVE ALREADY DECIDED THE ISSUE ON THE M AIN PLEA OF THE ASSESSEE, THE ISSUE RAISED IN GROUND NO.1B NEE D NOT TO BE ADJUDICATED. 9. THE ISSUE RAISED IN GROUND NO.2 IS NOT PRESSED A T THE TIME OF HEARING BY THE LD. COUNSEL OF THE ASSESSEE A ND THEREFORE IS DISMISSED AS NOT PRESSED. 10. THE ISSUE RAISED IN THIRD GROUND OF APPEAL IS A GAINST THE CONFIRMATION OF DISALLOWANCE OF RS.64,75,000/- BY LD . CIT(A) AS MADE BY THE AO TOWARDS AMORTIZATION IN RESPECT O F COMPANYS EMPLOYEE STOCK OPTIONS SCHEME (ECOS) UNDE R SECTION 37(1) OF THE ACT. 11. THE FACTS IN BRIEF ARE THAT THE AO DURING THE C OURSE OF SCRUTINY PROCEEDINGS OBSERVED THAT ASSESSEE HAS AMO RTIZED RS.0.64 CRORE IN THE P & L ACCOUNT OUT OF THE STOCK OPTIONS OF 45,850 GRANTED UNDER THE EMPLOYEE STOCK OPTIONS SCHE ME (ECOS) TO SENIOR MANAGER AND SELECTED OFFICERS OF T HE COMPANY THE TOTAL COST OF WHICH WAS RS.3.96 CRORES. THE ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 8 ASSESSEE HAS APPENDED NOTE IN THE ANNUAL REPORT TO THIS EXTENT THAT COMPANY HAS GRANTED STOCK OPTIONS UNDER EMPLOYEE STOCK OPTIONS SCHEME (ECOS), 2005 IN ACCOR DANCE WITH THE SEBIS GUIDELINES AND THE ACCOUNTING VALUE OF OPTIONS IS ACCOUNTED AS DEFERRED EMPLOYEE COMPENSATION AND IS AMORTIZED ON A STRAIGHT LINE BASIS. THE AO DISALLOW ED THE CLAIM OF THE ASSESSEE BY HOLDING THAT THE EXPENDITU RE IN RESPECT OF ECOS IS OF CAPITAL IN NATURE. 12. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) DIS MISSED THE APPEAL OF THE ASSESSEE BY OBSERVING AND HOLDING AS UNDER: 8.3 I HAVE CONSIDERED THE FACTS OF THE ISSUE AND T HE SUBMISSIONS MADE BY THE AR BUT DO NOT FIND MERIT IN THEM. THE ESOP BENEFIT IS AVAILABLE TO THE EMPLOYEES SINCE THE VALUE AT WHICH THE SHARES ARE OFFERED IS MUCH LOWER THAN THE MARKET PRICE OF THOSE SHARES AT THAT TIME. HOWEVER, THIS DOES NOT INVOLVE ANY ACTUAL EXPENDITURE ON THE PART OF THE COMPANY G IVING SUCH BENEFIT TO THE EMPLOYEES. IN FACT, SUCH BENEFIT ONLY REPRESENTS TH E OPPORTUNITY COST TO THE COMPANY AND NOT ACTUAL COST. SINCE THER E IS NO PHYSICAL COST INVOLVED IN ALLOWING THE EMPLOYEES THE BENEFIT OF E SOP, THERE IS NO QUESTION OF ALLOWING ANY DEDUCTION TO THE APPELLANT ON THAT ACCOUNT. HENCE, THE DISALLOWANCE MADE BY THE AO IS CONFIRMED ALBEIT ON A DIFFERENT FOOTING. THIS GROUND IS DISMISSED. 13. THE LD. A.R. VEHEMENTLY SUBMITTED BEFORE US THAT ANY EXPENDITURE INCURRED BY THE ASSESSEE ON GRANTING OF EMPLOYEE STOCK OPTIONS SCHEME HAS BEEN AMORTIZED AS PER THE SEBI GUIDELINES AND THE SAME IS A REVENUE EXPENDITURE AN D WAS RIGHTLY CLAIMED BY THE ASSESSEE. THEREFORE, THE ORDE R OF LD. CIT(A) UPHOLDING SAID DISALLOWANCE IS FALLACIOUS AN D AGAINST THE LEGAL PROPOSITIONS AS LAID DOWN BY THE VARIOUS JUDICIAL FORUMS. THE LD. A.R. RELIED ON A SERIES OF DECISIONS IN DEFENCE OF HIS ARGUMENTS NAMELY; 1. PVP VENTURES LTD V. CIT [2012] 23 TAXMANN.COM 286 (MADRAS- ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 9 HIGH COURT) 2. NEW DELHI TELEVISION LTD. V. CIT [2017] 398 ITR 57 (DELHI HIGH COURT) 3. BIOCON LTD. V. DOT [2013] 35 TAXMANN.COM 335 (B ANGALORE TRIBUNAL) (SB) 4. M/S ACCENTURE SERVICES PVT. LTD. V. DCIT [2010] ITA/ 4540/MUM/08 (MUMBAI TRIBUNAL) 14. THE LD. D.R., ON THE OTHER HAND, RELIED ON THE ORD ER OF AUTHORITIES BELOW. 15. HAVING HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND CONSIDERING THE FACTS ON RECORD, WE FIND THAT IN THIS CASE THE ASSESSEE HAS AMORTIZED THE EXPENSES IN CONNECTI ON WITH EMPLOYEE STOCK OPTIONS SCHEME AS PER SEBI GUIDELINE S AND CLAIMED THE SAME AS REVENUE EXPENDITURE WHICH ACCOR DING TO THE AO WAS NOT CORRECT AND HE DISALLOWED THE SAME B Y HOLDING THAT SAME IS OF CAPITAL IN NATURE WHICH WAS ALSO AF FIRMED BY THE CIT(A). WE ARE NOT IN AGREEMENT WITH THE CONCLU SION DRAWN BY THE LD. CIT(A) ON THIS ISSUE THAT THE AMORT IZATION OF EXPENDITURE CLAIMED BY THE ASSESSEE IS NOT ADMISSIB LE AS REVENUE IN NATURE AND THE ISSUE IS SETTLED BY THE V ARIOUS JUDICIAL FORUMS. THE CASE OF THE ASSESSEE IS SUPPO RTED BY A SERIES OF DECISIONS REFERRED TO ABOVE BY THE LD. A.R . WE HAVE PERUSED ALL THESE DECISIONS AND FOUND THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY RATIO LAID DOWN IN THESE DECISIONS. IN VIEW OF THESE FACTS AND RATIO LAID D OWN BY THE VARIOUS JUDICIAL FORUMS, WE SET ASIDE THE ORDER OF L D. CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE. ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 10 16. THE ISSUE RAISED IN 4 TH GROUND OF APPEAL IS AGAINST THE ORDER OF LD. CIT(A) IN DECIDING THE ANNUAL LETTING V ALUE OF THE PREMISES KNOWN AS TAJ BUILDING AS PER SECTION 23(1) (A) OF THE ACT AND ALSO ERRED IN REJECTING THE ASSESSEES CONT ENTION THAT FAIR MARKET RENT OF THE BUILDING SHOULD BE COMPARED WITH THE TOTAL SUM RECEIVED FROM LETTING OF PREMISES ALONG W ITH FURNITURE HIRE CHARGES. 17. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAS EN TERED INTO A LEAVE AND LICENSE AGREEMENT WITH M/S. FREIGHT SYSTEM S (I) PVT. LTD. FOR A LICENSE FEES AMOUNTING TO RS.94,392/- P ER MONTH WORKING OUT TO RS.11,32,704/- PER ANNUM. SIMULTANEOUSLY, THE ASSESSEE ALSO ENTERED INTO A HI RE AGREEMENT OF EVEN DATE WITH THE SAID COMPANY FOR MO NTHLY HIRE CHARGES OF RS.3,06,774/- (I.E. RS.36,81,288/- PE R ANNUM) FOR USE OF FURNITURE, FIXTURE AND OTHER ARTICLES AT TACHED, INSTALLED/LYING IN THE SAID PREMISES. THE ASSESSEE OFFERED BOTH THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPER TY. HOWEVER, THE AO TREATED THE LEASE RENT AS INCOME FRO M HOUSE PROPERTY WHEREAS THE INCOME FROM HIRE CHARGES OF FU RNITURE AND FIXTURES WAS TREATED AS INCOME FROM OTHER SOURC ES. WHILE ASSESSING THE INCOME FROM LICENSE FEE, THE AO REJEC TED THE ALV OF RS.11,32,704/- AND DETERMINED THE FAIR RENT ON THE BASIS OF COMPARABLE CASES AT RS.35,50,000/-. THE LD . CIT(A) AFFIRMED THE ORDER OF AO SO FAR AS THE ESTIMATION O F ALV IS CONCERNED, HOWEVER, ALLOWED THE HIRE CHARGES OF FUR NITURE AND FIXTURES TO BE TREATED AS PART OF THE RENTAL INCOME OF THE ASSESSEE BY OBSERVING AND HOLDING AS UNDER: ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 11 9.4 HOWEVER, THERE IS NO MERIT IN THE CONTENTION O F THE AR THAT THE FAIR VALUE PLACED BY THE AO IN RESPECT OF THE LEASED PRE MISES IS INCORRECT. THE PROVISIONS OF SECTION 23 CLEARLY PROVIDE THAT T HE ALV OF THE PROPERTY HAS TO BE CONSIDERED TO BE THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLE BE EXCEPTED TO LET FROM YEAR TO YEAR OR THE ACTUAL REN T RECEIVED; WHICHEVER IS HIGHER. IN THE PRESENT CASE, THE FAIR MARKET VALUE HAS BEEN ESTABLISHED BY THE AO TO BE MUCH HIGHER THAN THE ACTUAL RENT RECEI VED. IT IS NOT THE CASE OF THE APPELLANT THAT THE LEASE IN QUESTION WAS SUB JECT TO THE RENT CONTROL ACT AND THEREFORE THE STANDARD RENT WAS TO BE CONSIDERED. IN SUCH A SCENARIO, AS PER THE LEGAL POSITION OBTAININ G, THE AO WAS EXPECTED TO ARRIVE AT REASONABLE RENT EXPECTED FROM THE SAID PROPERTY. THE CONTENTION OF THE AR THAT THE AO WAS LEGALLY BOUND TO CONSIDER THE RATEABLE VALUE FIXED BY MUNICIPAL AUTHORITIES AS TH E BASIS FOR WORKING OUT THE ALV IS MISPLACED SINCE THE MUNICIPAL VALUAT ION WAS ONLY ONE OF THE CRITERIA AVAILABLE WITH THE AO TO DETERMINE THE REASONABLE RENT EXPECTED FROM THE SAID PROPERTY. THE AO HAS RIGHTLY PLACED RELIANCE ON A NUMBER OF JUDICIAL PRONOUNCEMENTS IN HIS ORDER TO S UPPORT THAT THE ADOPTION OF MUNICIPAL RATEABLE VALUE WAS NOT BINDIN G ON HIM. FURTHER, THERE IS NO MERIT IN THE AR'S CONTENTION THAT THE C OMPARISON BY THE AO WITH THE BENCHMARKED PROPERTY WAS INAPPROPRIATE. I N FACT, THE AO HAS BEEN VERY FAIR TO HAVE PUT A PREMIUM OF ONLY 20% ON THE RESIDENTIAL ROPER1Y, WITH WHICH THE IMPUGNED PROPERTY WAS COMPA RED, TO EVALUATE THE POTENTIAL RENTAL OF THE COMMERCIAL PROPERTY IN QUESTION. THE IMPUGNED COMMERCIAL PROPERTY, AS RIGHTLY OBSERVED B Y THE AO IS IN A POSH AREA AND THE AO HAS BEEN VERY REASONABLE IN ES TIMATING THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. HENCE, THE ACTION OF THE AO IN ESTIMATING THE ALV OF THIS PROPERTY AT RS.35,50,000/- IS UPHELD. THIS LIMB OF THE GROUN D IS DISMISSED. 18. THE LD. A.R. SUBMITTED BEFORE THE BENCH THAT THE A O HAS WRONGLY TREATED TAJ BUILDING AS TAJ HOTEL BY REFER RING TO THE OBSERVATIONS OF AO IN PARA 5.6 A4 AT PAGE NO.4 OF THE ASSESSMENT ORDER. THE LD. A.R. FURTHER REFERRED TO PA RA 5.6 A6 WHEREIN THE AO COMPARED THE TAJ BUILDING WHICH I S LOCATED AT FORT, MUMBAI WITH ANOTHER BUILDING OWNED BY THE CENTRAL GOVERNMENT USED FOR OFFICERS RESIDENCES KNOWN AS B ELVEDERE WHICH IS BREACH CANDY AND THUS POINTED OUT THAT THE WHOLE EXERCISE OF THE AO TO FIND OUT THE FAIR MARKET RENT WAS FALLACIOUS AND FULL OF ANOMALIES AS TWO BUILDINGS A RE AT TWO DIFFERENT LOCATIONS AND THEREFORE CAN NOT BE COMPAR ED. THE ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 12 LD. A.R. FURTHER POINTED OUT THAT THE AGREEMENT FOR T HE LEAVE AND LICENSE FEE AS WELL AS THE HIRE CHARGES OF FURN ITURE AND FIXTURE THOUGH ENTERED INTO VIDE TWO SEPARATE AGREE MENTS BUT EVEN DATED AND WERE RENTED TO THE SAME PARTY M/S. F REIGHT SYSTEMS (I) PVT. LTD. AND THEREFORE THE COMPOSITE REN T SHOULD BE CONSIDERED. THE LD. A.R. CONTENDED THAT THE COMP OSITE RENT OF THE PROPERTY COMES TO RS.94/- PER SQ. FT. WHER EAS THE ALV DETERMINED BY THE AO WAS RS. 72/- PER SQ. FT. AND THEREFORE THE ANNUAL LETTING VALUE AS DETERMINED BY THE AO AT RS.35,50,000/- WAS TOTALLY WRONG AND FALLACIOUS. TH E LD. A.R. SUBMITTED THAT THE ANNUAL LETTING VALUE AS PER THE PROVISION OF SECTION 23(1) SHOULD BE TAKEN AS THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE ACCEPTED TO LET OUT FR OM YEAR TO YEAR U/S 23(1)(A) OF THE ACT OR ANNUAL RENT RECEIV ED U/S 23(1)(B) OF THE ACT. THEREFORE, THE LD. A.R. SUBMIT TED THAT IN THE PRESENT CASE THE RENT RECEIVED SHOULD BE ASSESS ED AS THE ALV AND NOT THE RENT WHICH IS FIXED BY THE AO ON TH E FALLACIOUS COMPARISON WITH THOSE PROPRIETIES WHICH ARE NOT AT ALL COMPARABLE WITH THE BUILDING OF THE ASSESSEE. THE L D. A.R. IN DEFENCE OF HIS ARGUMENT RELIED ON THE FOLLOWING DEC ISIONS: 9. MV. SONAVALA V. CIT [1989] 42 TAXMAN 123 (BOMBAY HIGH COURT) 10. SMT. SMITABEN N. AMBANI V. COMMISSIONER OF WEA LTH [2009]323 ITR_104_ (BOMBAY HIGH COURT) 11. TIP TOP TYPOGRAPHY V. CIT [2014] 48 TAXMANN.CO M 191 (BOMBAY HIGH COURT) THE LD. COUNSEL SUBMITTED THAT THE MUNICIPAL VALUAT ION FOR TAJ BUILDING PREMISES AS SHOWN IN THE PROPERTY TAX BILL IS RS.1,31,300/- WHEREAS THE ACTUAL RENT RECEIVED FOR THE PREMISE IS RS.11,32,704/-. THEREFORE AS AGAINST THE MU NICIPAL ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 13 VALUATION OF RS.1,31,300/- THE ACTUAL RENT RECEIVED FOR THE LEASED PREMISES OF RS.11,32,704/- SHOULD BE TAKEN A S THE ACTUAL RENT IS HIGHER THAN THE MUNICIPAL VALUATION. THE LD. A.R. ALTERNATIVELY SUBMITTED THAT IF THE COMPOSITE O F RENT AND HIRE CHARGES FOR THE FURNITURE AND FIXTURES ARE TAK EN TOGETHER THAT COULD BE TAKEN THE ALV AND IN DEFENCE OF HIS P ROPOSITION THE LD. A.R. RELIED ON THE FOLLOWING DECISIONS: 1. SHAMBHU INVESTMENT (P.) LTD. VS. CIT (2003) 129 TAXMAN 70 (SUPREME COURT) 2. CIT VS. SHAMBHU INVESTMENT (P.) LTD. (2001) 116 TAXMAN 795 (CALCUTTA HIGH COURT) 3. DUDHSAGAR INVESTMENTS (P) LTD. VS. ACIT (2014) 110 DTR 0225 (BOMBAY HIGH COURT) 4. SHIBANI S. BHOWJANI V. DCIT (2017) 166 ITD 488 (MUMBAI TRIBUNAL) 19. THE LD. D.R., ON THE OTHER HAND, RELIED ON THE ORD ER OF AUTHORITIES BELOW AND SUBMITTED BEFORE THE BENCH TH AT THE AO IS FREE TO DETERMINE THE ALV OF THE PREMISES LET OU T BY THE ASSESSEE WHERE THE FAIR RENT IS ENORMOUSLY LOW AS C OMPARED WITH THE MARKET RATE. THE LD. D.R. RELIED ON THE DECIS ION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. TIP TOP TYPOGRAPHY V. CIT [2014] 48 TAXMANN.COM 191 (BOMBAY HIGH COURT) AND ACIT VS. VIRENDRA JAIN IN ITA NO.2116/M/ 2012 A.Y. 2009-10. THE LD. D.R. FINALLY PRAYED BEFORE THE BENC H THAT THE ORDER PASSED BY THE AO IS WELL REASONED BASED O N THE COMPARABLE INSTANCES OF THE FAIR RENT IN THE VICINI TY AND WAS RIGHTLY UPHELD BY THE LD. CIT(A) AND THEREFORE DESER VES TO BE SUSTAINED. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD INCLUDING THE DE CISIONS CITED BY BOTH THE PARTIES. WE FIND THAT IN THE PRES ENT CASE THE ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 14 ASSESSEE HAS LET OUT TAJ BUILDING WHICH IS LOCATED IN D.N. ROAD, FORT, MUMBAI TO M/S. FREIGHT SYSTEMS (I) PVT. LT D. THE ASSESSEE ENTERED INTO TWO AGREEMENTS (I) FOR LEASE OF PREMISES DATED 14.08.2003 AT A MONTHLY RENT OF RS.94 ,392/- AND (II) EVEN DATED QUA HIRE CHARGES OF FURNITURE AND FIXTURES ON A MONTHLY CHARGES OF RS.3,06,774/-. THE ASSESSEE SHOWED BOTH THE INCOMES OF RENT AS WELL AS HIRE CHARGES AS INCOME FROM HOUSE PROPERTY ON THE PREMISE THAT INCOME RECE IVED IS TOWARDS THE PROPERTY AND OTHER EMBEDDED FACILITIES THOUGH BY WAY OF TWO SEPARATE AGREEMENTS. THEREFORE THE SUM I S INSEPARABLE AND HAS TO BE ASSESSED TOGETHER. ACCORD INGLY, THE ASSESSEE SHOWED RS.11,32,704/- BY WAY OF RENTAL AN D RS.36,81,288/- TOWARDS HIRE CHARGES OF FURNITURE AN D FIXTURES AND OTHER ARTICLES ATTACHED/INSOLVENT LYING IN THE SAID PREMISES AS INCOME FROM HOUSE PROPERTY. THE AO DOES NOT AGRE E TO THE TREATMENT OF THE INCOME BY THE ASSESSEE UNDER THE H EAD INCOME FROM HOUSE PROPERTY AND ACCORDINGLY TAKEN ON LY THE RENTALS UNDER THE HEAD HOUSE PROPERTY WHEREAS HIRE CHARGES FROM FURNITURE AND FIXTURES AND OTHER ARTICLES WERE TREATED AS INCOME FROM OTHER SOURCES. FOR THE PURPOSE OF ASSES SING THE INCOME FROM HOUSE PROPERTY, THE AO ESTIMATED THE ALV AT RS.35,50,000/- BY TAKING A COMPARABLE CASE OF A GOV ERNMENT OWNED BUILDING MEANT FOR CENTRAL GOVERNMENT OFFICER S KNOWN AS BELVEDERE NEVERTHELESS THE BUILDING IS LOCATED A T A DIFFERENT LOCATION AND AFTER ASCERTAINING THE RENT OF THE SAI D PROPERTY AT @ RS.60.50 PER SQ. FT. DETERMINED THE MARKET RATE AT R S. 60.50 PLUS 30% OF THE SAID RATE AND THUS ALV WAS FI XED AT RS.72 PER SQ. FT. PER MONTH. THE AO THUS CALCULATED THE ALV ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 15 AT RS.35,50,000/-. THE LD. COUNSEL HAS ALSO POINTED OUT DURING THE COURSE OF HEARING THAT THE BUILDING LEAS ED OUT BY THE ASSESSEE KNOWN AS TAJ BUILDING WAS ERRONEOUSLY MISCONSTRUED BY THE AO AS TAJ HOTEL AND THE WHOLE P ROCESS OF DETERMINATION OF ALV WENT WITH WRONG PARAMETERS AND PRESUMPTIONS. WE FIND MERIT IN THE SUBMISSIONS OF THE LD. A.R. THAT THE BELVEDERE, A GOVERNMENT OWNED BUILDING A T BREACH CANDY IS NOT AT ALL COMPARABLE AS THE TWO AR E LOCATED AT DIFFERENT LOCALITIES IN MUMBAI AND THUS WE ARE I N AGREEMENT WITH THE ARGUMENTS OF THE LD. A.R. THAT THE SAID EST IMATION IS FALLACIOUS AND SUFFER FROM SEVERAL INFIRMITIES. AFT ER PERUSAL OF PROVISIONS OF SECTION 23, WE FIND THAT THE ANNUAL VA LUE OF ANY PROPERTY HAS TO BE DETERMINED AS PER THE PROVISION OF SECTION 23(1)(A) OR 23(1)(B). IN THE PRESENT CASE, THE PROP ERTY IS LET OUT AND THEREFORE THE RENT RECEIVED IS RS.11,32,704 /- AND THE SAME HAS TO BE TREATED AS ALV AS THE MUNICIPAL VALU ATION OF THE SAID PREMISES IS RS.1,31,300/-. THE CASE OF THE A SSESSEE IS SUPPORTED BY THE VARIOUS DECISIONS REFERRED TO A ND RELIED BY THE LD. A.R. OF THE ASSESSEE DURING THE COURSE OF HEAR ING. IN THE CASE OF M.V. SONAVALA VS. CIT (SUPRA) THE HONBL E BOMBAY HIGH COURT HAS UPHELD THE ORDER OF THE TRIBUNAL WHE REIN IT HAS BEEN HELD THAT ANNUAL VALUE OF THE PROPERTY IS TO B E TAKEN AT AN AMOUNT WHICH IS HIGHER OF THE TWO I.E. RENT RECEI VED BY THE ASSESSEE IN RESPECT OF DIFFERENT PROPERTIES AND NOT AT THEIR MUNICIPAL RATEABLE RATE. IN THE PRESENT CASE, THE MU NICIPAL RATE OF VALUATION IS BELOW THE ACTUAL RENT RECEIVED AND THEREFORE THE ACTUAL RENT HAS TO BE TAKEN AS ALV. IN THE CASE OF CIT VS. TIP TOP TYPOGRAPHY (SUPRA) THE HONBLE BO MBAY ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 16 HIGH COURT HAS HELD THAT THE MARKET RATE IN THE LOC ALITY IS AN APPROVED METHOD OF DETERMINING THE FAIR RENTAL VALU E BUT IT IS ONLY WHEN THE AO IS CONVINCED AND SATISFIED THAT TH E CASE BEFORE HIM IS SUSPICIOUS AND DETERMINATION BY THE P ARTIES IS DOUBTFUL THAT HE CAN RESORT TO ENQUIRE ABOUT THE PR EVAILING RATE IN THE LOCALITY. SO THE HONBLE HIGH COURT HAS HELD THAT ONLY IN THE EVENT OF SUSPICION AND SOME MANIPULATIO N, THE AO CAN RESORT TO MAKE ENQUIRIES OR COMPREHENSIVE CASES AND NOT OTHERWISE. WE ARE, THEREFORE, NOT IN AGREEMENT WITH THE CONCLUSION DRAWN BY THE LD. CIT(A) HOLDING THAT THE ALV DETERMINED ON THE BASIS OF SO CALLED COMPARABLE CAS ES WHICH ARE NOT AT ALL COMPARABLE DUE TO THE FACT THAT THER E IS NO COMPARABILITY BETWEEN THE TWO BUILDINGS AT ALL AND THE LOCATIONS AND ALSO IN VIEW OF THE FACT THAT ANNUAL LET OUT VALUE IS MUCH LOWER THAN THE ACTUAL RATE RECEIVED. THE OR DER OF LD. CIT(A) IS SET ASIDE AND AO IS DIRECTED TO ACCEPT TH E RENT AS SHOWN BY THE ASSESSEE FROM THE SAID PROPERTY. GROU ND IS ALLOWED. 21. SINCE WE HAVE DECIDED THE ISSUE OF FINAL LETTIN G VALUE OF THE PROPERTY IN FAVOUR OF THE ASSESSEE THE ISSUE RA ISED IN GROUND NO.4B QUA TREATING THE TOTAL OF ALV SHOULD B E COMPARED WITH THE FAIR MARKET RENTING REQUIRES NO ADJUDICATION. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ITA NO.1727/M/2011 (REVENUES APPEAL) ITA NO.1163/M/2011 & ITA NO.1727/M/2011 M/S. TRENT LTD. 17 23. THE TAX EFFECT IN THIS APPEAL IS NOT EXCEEDING RS.20 LAKHS AND THEREFORE THE SAME IS DISMISSED AS NOT MAINTAIN ABLE IN TERMS OF BOARDS CIRCULAR NO.3/2018 (F.NO.279/MISC.142/2007-ITJ (PT)] DATED 11.07.2018. 24. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.08.2018. SD/- SD/- (C.N. PRASAD) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 27.08.2018. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY /ASSTT. REGISTRAR, ITAT, MUMBAI.