THE ACIT CIR 18(2), MUMBAI V. M/S. SANDEEP J. SHAH, MUMBAI

ITA 1382/MUM/2008

• Counselvise Citation: 138219914 RSA 2008
• Duration Of Justice: 3 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 28-03-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 25-02-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SONGATE
• Assessee Lawyers: HARI S RAHEJA
• Keywords: Gross profit estimation; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M. JAGTAP AND SMT. ASHA VIJAYARAGHAV AN, JM I.T.A.NO.1382/MUM/2008 ASSESSMENT YEAR: 2003-04 THE ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 16(2), MATRU MANDIR, TARDEO ROAD, MUMBAI 400 007. VS. SHRI SANDEEP J. SHAH, 51, SADGURU, 5 TH FLOOR,BEHIND DHARAM PALACE, MUMBAI 400 007. PAN: AMPPS 9477 A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI D. SONGATE RESPONDENT BY : SHRI HARI S. RAHEJA O R D E R PER P.M. JAGTAP, AM: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS)-XVI, MUMBAI, DA TED 27.11.2007 FOR THE ASSESSMENT YEAR 2003-04. 2. IN GROUND NO.1 THE REVENUE HAS CHALLENGED THE AC TION OF THE LEARNED CIT(A) IN DELETING THE ADDITION OF RS. 1,05,128/- M ADE BY THE ASSESSING OFFICER TO THE INCOME OF THE ASSESSEE FROM HOUSE PROPERTY ON A CCOUNT OF NOTIONAL INTEREST ON INTEREST FREE DEPOSIT. 3. THE ASSESSEE IN THE PRESENT CASE IS AN INDIVIDUA L, WHO FILED HIS RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 1.12.200 3 DECLARING TOTAL INCOME OF RS. 14,97,265/-. HE IS THE CO-OWNER OF PROPERTY WHICH WAS GIVEN ON RENT TO BANK OF BAHRAIN AND KUWAIT. THE SAID TENANT HAD GIVEN INTE REST FREE SECURITY DEPOSIT. THE INTEREST ATTRIBUTABLE TO THE SAID DEPOSIT WORKED OU T BY APPLYING THE RATE OF 12% AT RS.1,50,184/- WAS ADDED BY THE ASSESSING OFFICER ON NOTIONAL BASIS WHILE DETERMINING THE ALV OF THE PROPERTY AND AFTER ALLOW ING DEDUCTION @ 30% IN RESPECT OF REPAIRS UNDER SECTION 24, A NET ADDITION OF RS. 1,05,128/- WAS MADE BY HIM TO THE TOTAL INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE ITA NO.1382/M/2008 SANDEEP J. SHAH 2 PROPERTY. ON APPEAL, THE SAID ADDITION WAS DELETED BY THE LEARNED CIT(A) OBSERVING THAT THE RENT RECEIVED BY THE ASSESSEE BE ING MORE THAN THE MUNICIPAL RATABLE VALUE OR STANDARD RENT, NO ADDITION ON ACCO UNT OF NOTIONAL INTEREST ON INTEREST FREE DEPOSIT COULD BE MADE WHILE DETERMINI NG THE ALV OF THE PROPERTY. FOR THIS CONCLUSION, THE LEARNED CIT(A), INTER ALIA , RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. J .K. INVESTORS (BOM) LTD. 112 TAXMAN 107(BOM). 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT SI MILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT V. RECLAMATION REALTY INDIA PVT. LTD. AND VIDE ITS ORD ER DATED 26.11.2010, IT WAS HELD BY THE TRIBUNAL THAT WHEN THE RATE ACTUALLY RECEIVE D BY THE ASSESSEE IS MORE THAN THE MUNICIPAL VALUATION OR STANDARD RENT, THE SAME ALONE HAS TO BE TAKEN AS THE ANNUAL VALUE FOR THE PURPOSE OF COMPUTING THE INCOM E OF THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. IT WAS HELD THAT NO FURTHER ADDITION ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE DEPOSIT, ETC. CAN BE MADE IN SUCH CASE. THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THIS REGARD HAS CONTENDED, INTER ALIA, THAT THE THIRD MEMBER DECISION OF THE TRIBUNAL IN THE CA SE OF ITO V. DECCAN TECHNICAL SERVICES PVT. LTD. (126 TTJ 453), TAKING A DIFFEREN T VIEW IN FAVOUR OF THE REVENUE HAS NOT BEEN TAKEN INTO CONSIDERATION BY THE DIVIS ION BENCH OF THE TRIBUNAL WHILE DECIDING THE CASE OF RECLAMATION REALTY INVOLVING SIMILAR ISSUE IN THE ASSESSMENT YEAR 2004-05. IT IS OBSERVED THAT A SIMILAR CONTEN TION WAS SOUGHT TO BE RAISED ON BEHALF OF THE REVENUE IN THE CASE OF RECLAMATION RE ALTY INDIA PVT. LTD., ON THE SIMILAR ISSUE FOR THE ASSESSMENT YEAR 2004-05, BUT THE SAME HAS BEEN REJECTED BY THE COORDINATE BENCH OF THIS TRIBUNAL AND THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE VIDE ITS ORDER DATED 28.01.2011 PASSED IN ITA NO. 3066/MUM/2008 FOR THE FOLLOWING REASONS GIVEN IN PARA NOS. 5 TO 8 OF THE SAID ORDER: ITA NO.1382/M/2008 SANDEEP J. SHAH 3 5. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND A PERUSAL OF THE PAPE RS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITE D, WE HOLD AS FOLLOWS. 6. THE UNDISPUTED FACT IN THIS CASE IS THAT THE ACT UAL RENT RECEIVED BY THE ASSESSEE, IS IN EXCESS OF THE RATABLE VALUE/ANNUAL VALUE DETERMINED BY THE MUNICIPAL CORPORATION. THE ISSUE IS WHETHER THE ANN UAL VALUE/RATABLE VALUE DETERMINED IN MUNICIPAL VALUATION, CAN BE DEEMED TO BE THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. PRABHBAT I BANSALI (SUPRA) HELD AS FOLLOWS : THE ASSESSEE WAS THE OWNER OF ONE-EIGHTH SHARE OF A HOUSE PROPERTY IN BOMBAY WHICH WAS PARTLY IN THE OCCUPATION OF TENANT S AND PARTLY IN THE OCCUPATION OF LICENSEES UNDER A LEAVE AND LICENCE A GREEMENT. THE TENANTS PAID A RENT OF RS.86,036 FOR AN AREA OF 19,787 SQ.F T. OCCUPIED BY THEM WHEREAS THE LICENSEES PAID RS.1,58,511 AS LICENCE F EE FOR AN AREA OF 11,159 SQ.FT. OCCUPIED BY THEM. THE ITO SOUGHT TO T REAT THE ACTUAL AMOUNT RECEIVED AS THE ANNUAL VALUE OF THE BUILDING. THE A SSESSEE CLAIMED THAT THE ANNUAL VALUE OF THE PROPERTY SHOULD BE DETERMINED N OT WITH REFERENCE TO THE ANNUAL RECEIPTS BUT SHOULD BE CALCULATED ON THE BASIS OF THE RENT PAID BY THE TENANTS BUT THIS WAS NOT ACCEPTED BY THE ITO . THE TRIBUNAL DIRECTED THE ITO TO DETERMINE THE PROPERTY INCOME ON THE BAS IS OF ITS ANNUAL VALUE WITH REFERENCE TO THE RATABLE VALUE AS DETERMINED B Y THE MUNICIPAL CORPORATION. ON A REFERENCE : HELD, THAT THE TRIBUNAL WAS JUSTIFIED IN HOLDING TH AT THE AGGREGATE AMOUNT RECEIVABLE FROM THE TENANTS IN OCCUPATION UNDER REG ULAR TENANCY AGREEMENTS AND PARTLY FROM LICENSEES IN OCCUPATION UNDER THE LEAVE AND LICENCE SYSTEM COULD NOT BE TAKEN AS THE ANNUAL VALUE OF THE PROPERTY. THE T RIBUNAL WAS JUSTIFIED IN DIRECTING THE ITO TO DETERMINE THE ANNUAL VALUE OF THE PROPERTY AFRESH WITH REFERENCE TO ITS RATABLE VALUE AS DETERMINED BY THE MUNICIPAL CORPORATION. THIS JUDGMENT WAS FOLLOWED BY THE JURISDICTIONAL HI GH COURT IN THE CASE OF M.V. SONAWALA 177 ITR 246 (BOM.) WHERE AT PARA 5 IT IS H ELD AS FOLLOWS : 5. IN THIS CONTEXT, IT MAY BE DESIRABLE TO REFER TO TH E CALCUTTA HIGH COURTS DECISION IN THE CASE OF CIT VS. PRABHABATI BANSAL (1982) 29 CTR (CAL.) 15: (1983) 141 ITR 419 (CAL.). ONE OF THE QU ESTIONS INVOLVED IN THAT CASE WAS WHETHER THE TRIBUNAL WAS JUSTIFIED IN DIRE CTING THE ITO TO REDETERMINE THE ANNUAL VALUE OF THE PROPERTY UNDER S. 23(1) AFRESH WITH REFERENCE TO ITS RATEABLE VALUE AS DETERMINED BY TH E MUNICIPAL CORPORATION. THE QUESTION WAS ANSWERED IN THE AFFIRMATIVE AND TH E COURT HELD THAT THE INCOME FROM HOUSE PROPERTY HAD TO BE COMPUTED ON TH E BASIS OF THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE LET FROM YEAR TO YEAR OR AND THE ANNUAL MUNICIPAL VALUE. 7. THE WORDING IN SECTION 23(1)(A) HAS NOT CHANGED FROM THE YEAR 1961. THUS, THE PLEA THAT DUE TO SUBSEQUENT AMENDMENTS, T HE JUDGMENTS OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M.V. SONAW ALA IS NOT BINDING, IS DEVOID OF MERIT. WHEN THERE IS A JURISDICTIONAL HIGH COURT J UDGMENT, THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE EARLIER ASSESSMENT YEAR HAS RIGHTLY FOLLOWED THE SAME. THUS UNDER SECTION 23(1)(A), THE ANNUAL VALUE AS DE TERMINED IN MUNICIPAL VALUATION IS TO BE CONSIDERED AS THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET OUT FROM YEAR TO YEAR. AS THE AN NUAL RENTAL VALUE IS LESS THAN THE ACTUAL RENT RECEIVED, SECTION 23(1)(B) COMES INTO O PERATION IN THIS CASE. THUS NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT /RENT RECEIVED, IN ADVANCE, CANNOT BE ADDED TO THE RENT RECEIVED, ON A NOTIONA L BASIS, IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF J.K . INVESTORS (BOMBAY) LTD. (SUPRA) WHICH IS CONFIRMED BY THE HONBLE SUPREME C OURT. IT IS NOBODIES CASE THAT RENT CONTROL REGULATION APPLIES. ITA NO.1382/M/2008 SANDEEP J. SHAH 4 8. IN VIEW OF THE ABOVE DISCUSSION, WE SEE NO REASO N TO DEVIATE FROM THE DECISION OF THE COORDINATE BENCH ON THE VERY SAME I SSUE IN ASSESSEES OWN CASE. WE RESPECTFULLY FOLLOW THE SAME AND DISMISS THIS AP PEAL OF THE REVENUE. 5. RESPECTFULLY FOLLOWING THE ORDERS OF THE TRIBUN AL PASSED IN THE CASE OF RECLAMATION REALTY INDIA PVT. LTD., FOR THE ASSESSM ENT YEARS 2004-05 AND 2006- 07(SUPRA) ON SIMILAR ISSUE, WE UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(A) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY BY ENHANCING THE ANNUAL LETTING VALUE ON ACCOUNT OF NOTIONAL INTEREST ON IN TEREST FREE DEPOSIT. GROUND NO. 1 OF THE REVENUES APPEAL IS ACCORDINGLY DISMISSED. 6. IN GROUND NO. 2, THE REVENUE HAS CHALLENGED THE ACTION OF THE LEARNED CIT(A) IN DELETING THE ADDITION OF RS. 8,55,614/- M ADE BY THE ASSESSING OFFICER ON ACCOUNT OF LOW GROSS PROFIT. 7. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSE E WAS CARRYING ON THE BUSINESS OF TRADING IN SEASONAL APPARELS. ON VERI FICATION OF THE RELEVANT RECORDS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE G ROSS PROFIT OF THE SAID BUSINESS SHOWN BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERAT ION WAS LOWER AT 2.48% AS AGAINST 14.07% AND 11.72% SHOWN IN THE ASSESSMENT Y EARS 2000-01 & 2001-02 RESPECTIVELY. HE, THEREFORE, REQUIRED THE ASSESSEE TO EXPLAIN THE FALL IN G.P. RATE DURING THE YEAR UNDER CONSIDERATION. IN REPLY, THE FOLLOWING EXPLANATION WAS OFFERED BY THE ASSESSEE: 1. DURING THE ACCOUNTING YEAR ENDED 31.3.2003, THE G.P. MARGIN OF SEASONAL APPAREL HAS SUBSTANTIALLY FALLEN. THE REAS ON FOR THE FALL IS UNFAVOURABLE MARKET CONDITIONS AND SEVERE COMPETITI ON. 2. SINCE SEASONAL APPAREL REALIZED THAT THE MARGINS AR E VERY LOW AND IT WILL BE DIFFICULT TO WITHSTAND COMPETITION, SEASONA L APPARELS STOPPED THE EXPORT BUSINESS. 3. IN THE SUBSEQUENT YEARS VIZ. 31.3.2004 AND 31.3.20 05, THE SALES OF SEASONAL APPARELS ARE NIL. 4. EXPORT MARKET IS VERY COMPETITIVE AND SEASONAL APPA RELS HAD TO COMPETE ITS EXPORTS COMMITMENTS FOR THE YEAR 31.3.2 003 AND THUS HAD TO EXPORT GOODS EVEN AT VERY LOW MARGIN. ITA NO.1382/M/2008 SANDEEP J. SHAH 5 8. THE ABOVE EXPLANATION OFFERED BY THE ASSESSEE WA S NOT FOUND SATISFACTORY BY THE ASSESSING OFFICER TO FULLY EXPLAIN THE DRAST IC FALL IN G.P.RATE. AFTER ALLOWING CERTAIN LIVERAGE TO SOME OF THE ADVERSE FACTORS EXP LAINED BY THE ASSESSEE, THE ASSESSING OFFICER DETERMINED THE INCOME OF THE ASSE SSEE BY APPLYING THE G.P. RATE OF 6% WHICH RESULTED IN THE TRADING ADDITION OF RS. 8,55,614/-. 9. ON APPEAL, THE LEARNED CIT(A) DELETED THE SAID A DDITION AFTER HAVING SATISFIED THAT THE FALL IN G.P. RATE IN THE YEAR UN DER CONSIDERATION WAS SATISFACTORILY EXPLAINED BY THE ASSESSING OFFICER. HE ALSO NOTICE D THAT NO MATERIAL DEFECTS WERE POINTED OUT BY THE ASSESSING OFFICER IN THE BOOKS OF ACCOUNT OF THE ASSESSEE AND IN THE ABSENCE OF THE SAME, THE ADDITION MADE BY TH E ASSESSING OFFICER BY APPLYING HIGHER G.P. RATE WAS NOT SUSTAINABLE. 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. A PERUSAL OF THE ORDER PASSED BY THE ASSESSING OFFICER SHOWS THAT NO MATERIAL DEFECT WHATSOEVER WAS POINTE D OUT BY THE ASSESSING OFFICER IN THE BOOKS OF ACCOUNT AND OTHER RECORDS MAINTAINE D BY THE ASSESSEE AND THE BOOK RESULTS SHOWN BY THE ASSESSEE THUS WERE REJECT ED BY HIM WITHOUT REJECTING THE BOOK OF ACCOUNT. IT IS WELL SETTLED THAT FOR RE JECTING THE BOOK RESULTS SHOWN BY THE ASSESSEE AND MAKING THE TRADING ADDITION, IT IS INCUMBENT UPON THE ASSESSING OFFICER TO POINT OUT SPECIFIC AND MATERIAL DEFECTS IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASSESSEE. IN THE PRESENT CASE, T HIS MANDATORY CONDITION WAS NOT SATISFIED BY THE ASSESSING OFFICER AND THIS BEI NG SO, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED CIT(A) HOLDING THAT THE TRADING ADDITION MADE BY THE ASSESSING OFFICER WITHOUT REJECTING THE BOOKS O F ACCOUNT WAS NOT SUSTAINABLE. THE IMPUGNED ORDER OF THE LEARNED CIT(A) ON THIS IS SUE IS, THEREFORE, UPHELD DISMISSING GROUND NO.2 OF THE REVENUES APPEAL. ITA NO.1382/M/2008 SANDEEP J. SHAH 6 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS _27 TH _DAY OF APRIL, 2011. SD. SD. (ASHA VIJAYARAGHAVAN) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED THE _27 TH _APRIL, 2011. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, CITY -XVI, MUMBAI. 4. THE CIT(A)-XVI, MUMBAI 5. THE DR E BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI