M/s Sobha Interiors Pvt. Ltd., Bangalore V. DCIT, Bangalore

ITA 1607/BANG/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9240 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-11-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-10-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 12-12-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: KAMALADHAR
• Assessee Lawyers: V SRINIVASAN
• Keywords: Business expenditure; Notional interest; Commercial expediency
• Section: 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ITA NOS.1607 & 1692/BANG/2012 ASSESSMENT YEARS : 2007-08 & 2009-10 M/S. SOBHA INTERIORS PVT. LTD., E-106, SUNRISE CHAMBERS, # 22, ULSOOR ROAD, BANGALORE 560 022. PAN: AAECS 6275L VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. ITO, WARD 12(2), BANGALORE. APPELLANT RESPONDENT ITA NO.1630/BANG/2012 ASSESSMENT YEAR : 2007-08 M/S. SOBHA GLAZING & METAL WORKS PVT. LTD., # 10, BOMMASANDRA JIGANI LINK ROAD, BOMMASANDRA INDL. AREA, ANEKAL TALUK, BANGALORE 562 158. PAN: AAACR 8801M VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(3), BANGALORE. APPELLANT RESPONDENT APPELLANTS BY : SHRI V. SRINIVASAN, CA RESPONDENT BY : SHRI KAMALADHAR, STANDING COUNSEL DATE OF HEARING : 26.10.2016 DATE OF PRONOUNCEMENT : 23.11.2016 ITA NOS.1607, 1630 & 1692/B/2012 PAGE 2 OF 17 O R D E R PER SUNIL KUMAR YADAV, JUDICIAL MEMBER ALL THESE THREE APPEALS PREFERRED BY THE ASSESSES FOR THE ASSESSMENT YEARS 2007-08 & 2009-10 WERE HEARD TOGET HER AND ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CO NVENIENCE. ITA NOS.1607 & 1692/BANG/2012 THESE APPEALS ARE PREFERRED BY THE ASSESSEE AGAINS T THE RESPECTIVE ORDER OF THE CIT(APPEALS) ON THE COMMON GROUNDS, WH ICH ARE AS UNDER:- [1] THE ORDERS OF THE AUTHORITIES BELOW IN SO FAR AS THEY ARE AGAINST THE APPELLANT ARE OPPOSED TO LAW, EQUITY, W EIGHT OF EVIDENCE, PROBABILITIES, FACTS AND CIRCUMSTANCES OF THE CASE. [2] THE LEARNED CIT[A] IS NOT JUSTIFIED IN UPHOLDI NG THE ALV ADOPTED BY THE LEARNED AO AT RS. 52,16,768/- REJECT ING THE INCOME REPORTED BY THE APPELLANT UNDER THE FACTS AN D IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE. [3] WITHOUT PREJUDICE TO THE RIGHT TO SEEK WAIVER WITH THE HON'BLE CCIT/DG , THE APPELLANT DENIES ITSELF LIABLE TO BE CHARGED TO INTEREST U/S. 234-B AND 234-C OF THE ACT, WHICH UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE AN D THE LEVY DESERVES TO BE CANCELLED. [4] FOR THE ABOVE AND OTHER GROUNDS THAT MAY BE U RGED AT THE TIME OF HEARING OF THE APPEAL, YOUR APPELLANT HUMBL Y PRAYS THAT THE APPEAL MAY BE ALLOWED AND JUSTICE RENDERED AND THE APPELLANT MAY BE AWARDED COSTS IN PROSECUTING THE APPEAL AND ALSO ORDER FOR THE REFUND OF THE INSTITUTION FEES AS PART OF THE C OSTS. ITA NOS.1607, 1630 & 1692/B/2012 PAGE 3 OF 17 2. THE MAIN ISSUE INVOLVED IN THESE APPEALS RELATE TO THE COMPUTATION OF ANNUAL VALUE OF THE PROPERTY LET OUT TO THE ASSE SSEES SISTER CONCERN, M/S. SOBHA DEVELOPERS LTD. THE HOUSE PROPERTY INCL UDING LAND APPURTENANT THERETO WAS LET OUT TO SOBHA DEVELOPERS LTD. VIDE LEASE DEED DATED 1.4.2006 FOR A MARKET RENT OF RS.5 LAKHS PER MONTH. BY SUPPLEMENTARY LEASE DEED ENTERED ON 29.3.2007, THE MONTHLY RENT WAS REFIXED AND REDUCED TO RS.25,000 PER MONTH FROM RS. 5 LAKHS PER MONTH. WHILE REDUCING THE MONTHLY RENT, INTEREST FREE SECU RITY DEPOSIT WAS ALSO NEGOTIATED WHEREBY THE LESSEE WOULD PAY THE ASSESSE E AN INTEREST-FREE DEPOSIT OF RS.25 CRORES. THE ASSESSEE ACCORDINGLY REDUCED THE ANNUAL LETTING VALUE (ALV) OF THE RENTED PROPERTY AT RS.3 LAKHS WHICH WAS NOT ACCEPTED BY THE ASSESSING OFFICER AND HE ASSESSED T HE ALV AT RS.52,16,768 BY ESTIMATING THE MARKET VALUE OF THE SAME AT RS.7/- PER SQ.FT. ON THE BASIS OF LOCAL ENQUIRIES MADE BY HIM. 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT( APPEALS) AND IN SUPPORT OF THE ARRANGEMENT MADE THROUGH SUPPLEMENTA RY LEASE DEED, THE ASSESSEE HAS STATED THAT IT HAD TAKEN CERTAIN TRADE ADVANCES FROM SOBHA DEVELOPERS PVT. LTD., ITS SISTER CONCERN, WHICH WER E USED FOR THE CONSTRUCTION OF ITS FACTORY SHED. SINCE THE ASSESS EE WAS NOT IN A POSITION TO RETURN THESE ADVANCES AFTER THE SALE OF ITS ASSE TS & LIABILITIES, THESE ADVANCES WERE CONVERTED INTO INTEREST FREE SECURITY DEPOSIT AND ON ACCOUNT OF THESE SECURITY DEPOSITS, RENT WAS REDUCED FROM R S.5 LAKHS PER MONTH TO RS.25,000 PER MONTH WITH EFFECT FROM THE DATE OF EX ECUTION OF THE ITA NOS.1607, 1630 & 1692/B/2012 PAGE 4 OF 17 SUPPLEMENTARY LEASE DEED I.E., 29.3.2007. IT WAS A LSO CONTENDED THAT THE AO DOES NOT HAVE THE POWER TO ENHANCE THE ALV ON TH E BASIS OF HIGHER DEPOSIT IN VIEW OF THE DECISION OF THE CALCUTTA HIG H COURT IN THE CASE OF SATYA & COMPANY, 75 TAXMAN 183. 4. WHILE DISALLOWING THE CLAIM OF ASSESSEE, THE AO OBSERVED THAT IN THE INTERIM PERIOD OF ONE YEAR I.E., FROM 1.4.2006 TO 2 9.3.2007, NO PAYMENT OF RENT APPEARS TO HAVE ACTUALLY MADE TO THE ASSESSEE BY THE LESSEE, M/S. SOBHA DEVELOPERS LTD. AND AS ON 1.4.2006, THE SO-CA LLED TRADE LIABILITY OF RS.25 CRORES SHOULD BE APPEARING IN THE BALANCE SHE ET OF THE ASSESSEE, FOR THE SAME TO BE CONVERTED INTO INTEREST FREE ADVANCE OF RENT. HOWEVER, THIS ITEM DOES NOT SEEM TO APPEAR IN THE LOANS & ADVANCE S GROUPING OF THE APPELLANT AS ON 31.3.2006 I.E., ON THE DAY BEFORE T HE SALE. THE AO ACCORDINGLY ISSUED SHOW CAUSE NOTICE TO THE ASSESSE E DETAILING THE FIGURES OF LIABILITIES AS PER THE SALE DEED WHICH DO NOT MA TCH THE FIGURES IN THE APPELLANTS BALANCE SHEET. 5. THE CIT(APPEALS) HAS EXAMINED BOTH THE ASPECTS I .E., WITH REGARD TO BARE POSITION OF LAW FOR DETERMINATION OF ALV UNDER THE INCOME-TAX ACT AND, SECONDLY, IMPLICATION OF BUSINESS EXPEDIENCY AND AD VANTAGE WHICH IS SOUGHT TO BE HARNESSED FROM THE ARRANGEMENT WITH RE FERENCE TO AN ADVERSE EFFECT UPON THE REVENUE. HE ALSO EXAMINED THE CONT ENTIONS OF THE ASSESSEE THAT ON ACCOUNT OF COMMERCIAL EXPEDIENCIES THE RENT WAS REDUCED FROM RS.5 LAKHS TO RS.25,000 PER MONTH. TH E CIT(A) HAS ITA NOS.1607, 1630 & 1692/B/2012 PAGE 5 OF 17 EXAMINED THE LEGAL POSITION FOR DETERMINATION OF AL V IN THE LIGHT OF COMMERCIAL EXPEDIENCIES AND HAS COME TO THE CONCLUS ION THAT THE AO HAS RIGHTLY WORKED OUT THE ALV IN THE LIGHT OF FIRST LE ASE DEED IN WHICH THE RENT WAS FIXED AT RS.5 LAKHS PER MONTH. THE RELEVANT OB SERVATIONS OF THE CIT(APPEALS) IS EXTRACTED HEREUNDER FOR THE SAKE OF REFERENCE:- 4.12. ON A CONSIDERATION OF THE SUBMISSIONS, I F IND THEREIN SEVERAL GLARING DISCREPANCIES. FIRSTLY, THE ADVANCES FROM CUSTOMERS REPRESENT TRADE ADVANCES AND HENCE THEY A RE GROUPED UNDER 'CURRENT LIABILITIES' IN SCHEDULE-9 OF THE BA LANCE SHEET. THE APPELLANT'S CLAIM THAT THESE WERE USED FOR BUIL DING THE FACTORY IS NEITHER BORNE OUT BY THE NATURE OF THE ENTRY IN THE ACCOUNTS, AND NEITHER BY EVIDENCE AT THE TIME OF ASSESSMENT OR AP PELLATE HEARINGS. INFACT, IT IS CLEAR THAT THE APPELLANT HA S BEEN A REGULAR SUPPLIER OF INTERIOR MATERIALS TO M/S SDL OVER SEVE RAL YEARS, AND HENCE THE ENTRY IN RESPECT OF CURRENT LIABILITIES C ANNOT PER SE BE SAID TO RELATE TO A LOAN GIVEN OUT FOR CONSTRUCTION ACTIVITIES. SECONDLY, BY A MERE CHANGE OF ACCOUNTING APPELLATIO N FROM ADVANCES FROM CUSTOMERS, THE APPELLANT HAS CLAIMED TO HAVE TRANSFERRED THIS CURRENT LIABILITY AS A RENT ADVANC E, WHICH MOVES IT FROM THE GROUPING ITSELF TO LOAN LIABILITIES. I FIN D NO MENTION OF THIS SUDDEN SHIFT OF LIABILITIES FROM ADVANCES TO L OANS IN THE NOTES ON ACCOUNT OR THE DIRECTOR'S REPORT, INSPITE OF THE MAGNITUDE OF THE AMOUNT AND ITS LONG-TERM IMPLICATI ON ON THE APPELLANT'S RENTAL INCOMES. THIRDLY, THE AO HAS NOT ED THAT NO PROPERTY TAX DOCUMENTS WERE PRODUCED IN SPITE OF BE ING GIVEN SEVERAL OPPORTUNITIES, WHICH ALSO SPEAKS ITS OWN ST ORY. LASTLY, THE AO HAS MENTIONED AT PARA 5 OF HIS ASSESSMENT ORDER THAT THE APPELLANT'S ARRANGEMENT WAS MADE IN THE CONTEXT OF THE IMPENDING PUBLIC ISSUE IN THE CASE OF THE PARENT CO MPANY, AND THE RS. 25 CRORES IN THE BALANCE SHEET OF THE APPELLANT ON 31.3.2007 CANNOT REPRESENT A RENT DEPOSIT AS CLAIMED. I FIND THIS ARGUMENT OF THE AO TO BE PERSUASIVE AND BASED ON A REASONABLE I NTERPRETATION OF THE FACTS AND CIRCUMSTANCES OF THE TRANSACTION. 4.13. IN THE CIRCUMSTANCES, I FIND NO REASON TO A CCEPT THIS KIND OF ARTIFICIAL ACCOUNTING JUGGLERY INDULGED IN BY TH E APPELLANT MERELY TO JUSTIFY THE CHARGING OF A LOWER RENTAL AF TER ALREADY ITA NOS.1607, 1630 & 1692/B/2012 PAGE 6 OF 17 HAVING ENTERED INTO AN AGREEMENT EARLIER TO CHARGE A MUCH HIGHER RATE (IN-FACT, TWENTY TIMES HIGHER THAN THE REDUCED RATE ADOPTED LATER). THE CIRCUMSTANCES OF THIS CLAIM DO NOT CARR Y CREDIBILITY IN VIEW OF THE MANIPULATIVE NATURE OF THE TRANSACTION WHICH IS CLAIMED TO HAVE BEEN ENTERED INTO ON GROUNDS OF COM MERCIAL EXPEDIENCY. I HAVE ALREADY MENTIONED ABOVE THAT THE RE WAS AN IMPENDING PUBLIC ISSUE IN THE CASE OF M/S SDL AT TH E TIME, AND THE SO-CALLED 'COMMERCIAL EXPEDIENCY' APPEARS TO HA VE BEEN CONNECTED TO THAT IN THE FORM OF SOME KIND OF WINDO W-DRESSING EXERCISE. 4.14. IN CONNECTION WITH THE ABOVE DISCUSSION ON COMMERCIAL EXPEDIENCY, I ALSO OBSERVE THAT THE JUSTIFICATION O F THE APPELLANT TOWARDS REDUCTION OF RENT IS FOUND TO BE BASED ON A CONVENIENT ARRANGEMENT WHEREBY, FROM A TAXATION POINT OF VIEW, THE PARENT BODY (SDL) RECEIVES NO INTEREST INCOME ON THE LOAN ADVANCED OF RS. 25 CRORES (RECKONED AT RS. 3.00 CRORES @ 12% FO R THE FIRST YEAR ITSELF) AND AT THE SAME TIME, THE APPELLANT DO ES NOT RECEIVE ANY RENTAL INCOME TO THE EXTENT OF THE DIFFERENTIAL VALUE OF RS. 57 LAKHS FROM M/S SOL WITH THE RENT BEING REDUCED FROM RS. 60 LAKHS PER ANNUM TO RS. 3,00,000/-. IF THE ARRANGEME NT HAD INCLUDED PAYMENT OF INTEREST @ 12% (THE NOTIONAL RA TE ADOPTED BY THE APPELLANT IN HIS NOTES ON ARGUMENTS) BY THE APP ELLANT TO THE PRINCIPAL AND ALSO FULL PAYMENT OF THE AGREED RENT, M/S SDL WOULD STILL HAVE HAD TO ACCOUNT FOR A NET INCOME OF RS. 2,40,00,000/- [RS. 3,00,00,000 (-) RS. 60,00,000 BE ING THE PAYMENT OF RENT CLAIMED AS BUSINESS EXPENSES]. AT T HE SAME TIME, THE APPELLANT WOULD HAVE CLOCKED UP A HO USE PROPERTY INCOME OF RS 42,00,000/- (RS 60 LAKHS LESS 30% FOR REPAIRS) SINCE THE INTEREST PAYMENT WOULD NOT BE COVERED AS A DEDU CTION U/S 24 IN THE ABSENCE OF THE SO-CALLED 'LOAN' APPEARING IN ITS BOOKS PRIOR TO 1.4.2006 AT ALL; AND IN ANY CASE THE SO-CALLED T RADE ADVANCES CANNOT AUTOMATICALLY BE TERMED A LOAN GIVEN FOR CON STRUCTION OF THE BUILDINGS, WHICH WERE ALREADY VERY MUCH IN EXIS TENCE AT THE TIME OF THE LEASE DEE D COMING INTO FORCE, AND NEVER HAVING BEEN SHOWN AS SUCH IN THE APPELLANT'S ACCOUNTS EARLIER T O 31.3.2007 . 4.15. IT IS OBVIOUS TO ME THEREFORE, THAT THE CAU SE OF REVENUE HAS BEEN COMPLETELY SUBVERTED WITHIN THIS ARRANGEMENT E NTERED INTO BY THE APPELLANT, AND THE SO-CALLED 'COMMERCIAL EXP EDIENCY' CLAIMED BY IT IS ACTUALLY JUST A CASE OF AGGRESSIVE TAX AVOIDANCE. IT IS SIGNIFICANT TO NOTE THAT THOUGH THE SO-CALLED 'L OAN' OF RS.25 CRORES IS CLAIMED TO HAVE EXISTED IN THE FORM OF AD VANCES TOWARDS ITA NOS.1607, 1630 & 1692/B/2012 PAGE 7 OF 17 LAND AND BUILDINGS, THIS ASPECT WAS NOT CONSIDERED RELEVANT ENOUGH FOR A FULL YEAR FROM 3.4.2006 TILL 3L.3.2007 IN FIXATION OF THE RENTAL RATE FOR THE PROPERTIES OF THE APPELLANT . FOR APPARENTLY INEXPLICABLE REASONS FROM AN ACCOUNTING POINT OF VI EW, THE SUPPLEMENTARY RENTAL AGREEMENT WAS SUDDENLY ENTERED INTO AFTER A YEAR, AND THE JUSTIFICATION GIVEN FOR THE SAME OF ' COMMERCIAL EXPEDIENCY' ON ACCOUNT OF THE SO-CALLED LOAN WAS NO W ADVANCED. I HAVE ALREADY MENTIONED ABOVE THAT THE APPELLANT H AS FAILED TO ADEQUATELY CLARIFY THE ENTRIES WITH REGAR D TO THE EXISTENCE OF THIS LOAN IN THE BALANCE SHEET AS ON 3 1.3.2006 IN COURSE OF THE APPELLATE HEARINGS. THE EXPLANATIONS OFFERED ONLY REFLECT A RATHER DESPERATE ATTEMPT TO JUGGLE FIGURE S IN THE BALANCE SHEET FROM ONE HEAD TO ANOTHER, MAKING LIGHT OF EST ABLISHED ACCOUNTANCY PRINCIPLES WHEREBY CURRENT TRADE LIABIL ITIES HAVE BEEN MADE TO CHANGE THEIR CHARACTER OVERNIGHT TO LO ANS SIMPLY BY MEANS OF A JOURNAL ENTRY. 4.16. IN THIS CONNECTION, I NOTE THAT IT IS MADE C LEAR BY THE LD. SUPREME COURT IN THE MCDOWELL CASE (154 ITR 148) TH AT WHERE A TRANSACTION WAS FOUND TO BE COLORABLE, THE AO WOULD BE WITHIN HIS RIGHTS TO TREAT IT AS A SHAM ONE WHEN IT IS SEE N THAT APART FROM THE SATISFACTION OF LEGAL FORMALITY AND DOCUMENTATI ON, THERE EXISTED AN ANGLE OF LACK OF CREDIBILITY AND THE FLA VOR OF AN INTENTION TOWARDS TAX EVASION. THOUGH THE APPELLANT HAS CHALLENGED THE DECISION OF THE AO IN BRINGING THE F MV OF THE PROPERTY TO TAX ON THE GROUND THAT THE LAW DOES NOT EMPOWER HIM TO DO SO, IT IS PATENTLY CLEAR THAT THE APPELLANT H AS ENTERED INTO A SHAM TRANSACTION AND BEEN UNABLE TO DEFEND IT AT TH E APPELLATE STAGE INSPITE OF BEING GIVEN SUFFICIENT OPPORTUNITY ON SEVERAL OCCASIONS. IN THE CIRCUMSTANCES, I AM NOT CONVINCED WITH THE ARGUMENTS OF THE APPELLANT, AND HIS CLAIMS REMAIN U NSUBSTANTIATED EVEN AT THE APPELLATE STAGE. 4.17. WITH RESPECT TO THE APPELLANT'S CLAIM THAT E VEN IF THE ALV WAS TO BE REVISED UPWARDS, ONLY THE MUNICIPAL VALUE OF RS. 1.60 PER SQ FT WAS TO BE ADOPTED AS AGAINST THE RS.7 TAK EN BY THE AO, I FIND THE CLAIM IS NOT MADE WITH ANY FACTUAL BASIS. THE AO HAS ADOPTED THE RATE OF RS. 7 ON THE BASIS OF LOCAL ENQ UIRIES AND REFERENCE TO A COMPARABLE CASE IN THE LOCALITY, SIN CE HE FOUND NO CONSISTENCY IN THE APPELLANT'S APPROACH, AS DETAILE D AT PARA 3.4(K) OF THE ASSESSMENT ORDER. THE COMPARABLE CASES OF MT R FOOD PRODUCTS AND MTR FOODS LTD. WERE TAKEN BY THE AO SI NCE THE TYPE AND CONSTITUTION OF THE LEASED PROPERTIES WERE SIMILAR TO THE ITA NOS.1607, 1630 & 1692/B/2012 PAGE 8 OF 17 APPELLANT'S CASE. ON THE OTHER HAND, THE APPELLANT IN THE COURSE OF THE APPEAL COULD NOT ADDUCE ANY SPECIFIC REASON WHY THE COMPARISON IS INVALID. APART FROM STATING THAT THE TWO CASES MAY NOT BE COMPARABLE, NO SPECIFIC ITEMS OF DIFFERENCE ARE POINTED OUT. AS SUCH, I DO NOT FIND THE ARGUMENT RAISED BY THE APPELLANT IN THIS MATTER TO BE SUFFICIENT. THE APPELLANT'S ALTER NATIVE ARGUMENT THAT THE AO WAS BOUND TO ACCEPT THE ALV AT RS. 1.60 AS PER THE MUNICIPAL VALUE IS WITHOUT BASIS, AS HELD BY THE LD . SUPREME COURT IN THE CASE OF MRS. SHEILA KAUSHISH VS CIT 13 1 ITR 435(SC) WHEREIN THE LD. COURT HELD THAT STANDARD RE NTS FIXED BY AUTHORITIES OR THE RENT CONTROL ACT NEED NOT BE BIN DING WHILE DETERMINING ANNUAL VALUE WHERE THE ACTUAL RENT IS F OUND TO BE FAR HIGHER. IN THE PRESENT CASE, IT IS THE APPELLANT IT SELF THAT HAD SIGNED A LEASE DEED FIXING THE RENT AT RS. 5 LAKHS PER MON TH, WHICH WAS SUDDENLY AND INEXPLICABLY REDUCED TO RS. 25000 PER MONTH CITING REASONS WHICH HAVE ALREADY BEEN FOUND TO BE COMPLET ELY UNSUBSTANTIATED AND EVEN SHAM ONES. HENCE, THE APPE LLANT DOES NOT IN THE CASE COMMAND THE CREDIBILITY OR BONA-FID ES REQUIRED TO INTERPRET THE SUPREME COURT'S JUDGMENT REFERRED TO ABOVE TO ITS ADVANTAGE. THE GROUND RAISED IS ACCORDINGLY DISMISS ED. 6. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND REITERATED ITS CONTENTIONS AS RAISED BEFORE THE CIT (APPEALS). IT WAS FURTHER CONTENDED THAT ASSESSEE HAS CONSTRUCTED A BUILDING MEASURING 1,29,538 SQ.FT. ON A LAND MEASURING ABOUT 7,84,107 SQ.FT. TH E SAID PLOT WAS GIVEN ON LEASE TO ASSESSEES SISTER CONCERN, M/S. SOBHA DEVE LOPERS PVT. LTD. [SDPL] FOR A MONTHLY RENTAL OF RS.25,000 PER MONTH AGAINST AN INTEREST-FREE SECURITY DEPOSIT OF RS.25 CRORES. IT WAS FURTHER C ONTENDED THAT ASSESSEE HAS AVAILED THE FINANCIAL ASSISTANCE FROM ITS SISTE R CONCERN, SDPL IN ORDER TO ;PURCHASE THE LAND AND CONSTRUCTION THEREON IN T HE FORM OF INTEREST FREE TRADE ADVANCES. WHEN THE ASSESSEE WAS NOT IN A POS ITION TO RETURN THE ADVANCES TAKEN FROM ITS SISTER CONCERN, IT HAD LET OUT THE CONSTRUCTED ITA NOS.1607, 1630 & 1692/B/2012 PAGE 9 OF 17 BUILDING FOR A PERIOD OF 25 YEARS AT A MONTHLY RENT OF RS.25,000 PER MONTH. THE OUTSTANDING AMOUNT WAS CONVERTED INTO INTEREST FREE SECURITY DEPOSIT WITH THE ASSESSEE. THE AO HAS ESTIMATED THE ALV OF THE PROPERTY U/S. 23(1)(A) OF THE ACT AT RS.54,88,798 CALCULATED AT R S.7/- PER SQ.FT., BEING THE RENT AS PER LEASE DEED BETWEEN M/S. MTR DISTRIBUTOR S AND MTR FOODS LTD. IT WAS FURTHER CONTENDED THAT WHILE DETERMINING THE ALV, INTEREST FREE SECURITY DEPOSIT TAKEN BY THE ASSESSEE CANNOT BE TA KEN INTO ACCOUNT AS THE SAME AMOUNT IS TO BE REFUNDED ON VACATION OF THE PR OPERTY. ONLY THE RENT FIXED BETWEEN THE PARTIES CAN BE CONSIDERED WHILE F IXING THE ALV. THEREFORE, THE AO HAS WRONGLY ADOPTED THE ALV AT RS .7/- PER SQ.FT. OF THE LET OUT PROPERTY. IT WAS FURTHER CONTENDED THAT AL V HAS TO BE COMPUTED IN THE LIGHT OF RATES PRESCRIBED BY THE MUNICIPAL AUTH ORITIES AND THE MUNICIPAL AUTHORITIES HAVE PRESCRIBED THE RATES FOR THE IMPUG NED PROPERTY AT RS.1.60 PER SQ.FT., THEREFORE FOR COMPUTING THE ALV THE RAT E AT RS.1.60 PER SQ.FT. SHOULD BE ADOPTED. IN SUPPORT OF THE CONTENTIONS, HE HAS PLACED RELIANCE UPON THE ORDER OF THE TRIBUNAL OF THIS BENCH IN THE CASE OF DCIT V. RAJIV CHANDRASHEKAR IN ITA NO.1440/BANG/2013 AND ITO V. S URGE ENTERPRISES LTD., ITA NO.1593/MUM/2010 . 7. THE LD. DR, ON THE OTHER HAND, HAS CONTENDED THA T THE ASSESSEE HAS INITIALLY LET OUT THE PROPERTY IN QUESTION FOR RS.5 LAKHS PER MONTH THROUGH LEASE DEED DATED 1.4.2006 WHICH WAS LATER ON REDUCE D TO RS.25,000 PER MONTH AGAINST THE INTEREST FREE SECURITY DEPOSIT OF RS.25 CRORES. THE ALV OF THE PROPERTY IS TO BE COMPUTED AS PER THE PROVIS IONS OF SECTION 23(1)(A) ITA NOS.1607, 1630 & 1692/B/2012 PAGE 10 OF 17 & (B) OF THE ACT. AS PER SECTION 23(1)(A), THE ANN UAL VALUE OF ANY PROPERTY SHALL BE DEEMED TO BE THE SUM FOR WHICH THE PROPERT Y MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. WHEREAS AS PER SECTION 23(1)(B), WHERE 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 SHALL BE THE ANNUAL LETTI NG VALUE. THEREFORE, WHILE COMPUTING THE ALV AS PER SECTION 23(1)(B), ACTUAL R ENT RECEIVED OR RECEIVABLE IS TO BE TAKEN INTO ACCOUNT. UNDISPUTE DLY, THE PROPERTY WAS LET OUT FOR A SUM OF RS.5 LAKHS PER MONTH TO ITS SISTER CONCERN, SDPL, THROUGH LEASE DEED DATED 1.4.2006, BUT LATER ON THROUGH SUP PLEMENTARY LEASE DEED DATED 29.3.2007, THE RENT WAS REDUCED FROM RS.5 LAK HS TO RS.25,000 PER MONTH. MERELY BY REDUCTION OF RENT, THE ALV ORIGI NALLY COMPUTED CANNOT BE REDUCED WITHOUT LOOKING INTO THE FACTUM OF RECEIPT OF INTEREST FREE DEPOSIT OF RS.25 CRORES. 8. THE LD. DR FURTHER CONTENDED THAT THE DECISIONS REFERRED TO BY THE ASSESSEE ARE NOT APPLICABLE. THE FACTS IN THOSE CA SES ARE THAT THE PROPERTY WAS NOT LET OUT AND ALV WAS COMPUTED AS PER PROVISI ONS OF SECTION 23(1)(A) OF THE ACT. WHEN THE PROPERTY IS LET OUT, THE ALV IS TO BE COMPUTED AS PER SECTION 23(1)(B) OF THE ACT. THE LD. DR PL ACED HEAVY RELIANCE UPON THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT V. K. STREETLITE ELECTRIC CORPORATION, 336 ITR 348 (P& H) IN WHICH IT HAS BEEN CATEGORICALLY HELD THAT INTEREST FREE SECURITY DEPO SIT TAKEN BY THE ASSESSEE HUGELY DISPROPORTIONATE TO MONTHLY RENT CHARGED IS A DEVICE TO CIRCUMVENT ITA NOS.1607, 1630 & 1692/B/2012 PAGE 11 OF 17 LIABILITY TO INCOME TAX. THEREFORE, NOTIONAL INTER EST ON SECURITY DEPOSIT IS TO BE TREATED AS INCOME FROM HOUSE PROPERTY. COPY OF THE JUDGMENT IS PLACED ON RECORD. THE LD. DR FURTHER CONTENDED THAT THE I SSUE IS SQUARELY COVERED BY THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH CO URT. 9. WE HAVE CAREFULLY EXAMINED THE ORDERS OF AUTHORI TIES BELOW AND THE ISSUE IN DISPUTE IN THE LIGHT OF RIVAL SUBMISSIONS AND WE FIND THAT UNDISPUTEDLY THE PROPERTY IN QUESTION WAS LET OUT T O ITS SISTER CONCERN VIDE LEASE DEED DATED 1.4.2006 FOR A MONTHLY RENT OF RS. 5 LAKHS. AT THAT TIME, NO INTEREST FREE SECURITY DEPOSIT WAS GIVEN OR CRED ITED TO THE ASSESSEES ACCOUNT. BY SUPPLEMENTARY LEASE DEED DATED 29.3.20 07, THE TERMS OF THE LEASE WERE MODIFIED AND MONTHLY RENT WAS REDUCED TO RS.25,000 PER MONTH FROM RS.5 LAKHS PER MONTH. AT THAT TIME, INTEREST- FREE SECURITY DEPOSIT WAS ALSO NEGOTIATED AND AS PER THE REVISED TERMS OF LEA SE DEED, THE LESSEE WOULD PAY THE APPELLANT AN INTEREST-FREE SECURITY D EPOSIT OF RS.25 CRORES. MEANING THEREBY THAT ON RECEIPT OF SUBSTANTIAL AMOU NT OF RS.25 CRORES, MONTHLY RENT WAS REDUCED FROM RS.5 LAKHS TO RS.25,0 00 PER MONTH. THEREFORE, THE NOTIONAL RENT EARNED ON THIS RS.25 C RORES CANNOT BE IGNORED AT THE TIME OF COMPUTING THE ALV OF THE PROPERTY. 10. WE HAVE ALSO CAREFULLY EXAMINED THE JUDGMENTS R EFERRED TO BY THE ASSESSEE AND WE FIND THAT IN THOSE JUDGMENTS, ALV W AS COMPUTED AS PER THE PROVISIONS OF SECTION 23(1)(A) OF THE ACT. SEC TION 23(1)(A) OF THE ACT WOULD APPLY WHERE THE PROPERTY WAS NOT LET OUT AND THE AO HAS WORKED OUT ITA NOS.1607, 1630 & 1692/B/2012 PAGE 12 OF 17 THE ALV OF THE PROPERTY WHICH SHALL BE DEEMED TO BE THE SUM FOR WHICH THE PROPERTY SHALL BE REASONABLY BE EXPECTED TO LET FRO M YEAR TO YEAR. BUT, WHERE THE PROPERTY HAS BEEN LET OUT, THE ALV SHALL BE DEEMED TO BE THE ACTUAL RENT RECEIVED OR RECEIVABLE BY THE OWNER IN RESPECT THEREOF IS IN EXCESS OF THE SUM REFERRED TO IN CLAUSE (A), THE AM OUNT SO RECEIVED OR RECEIVABLE. UNDISPUTEDLY, THE AMOUNT RECEIVED OR R ECEIVABLE IS CERTAINLY HIGHER THAN THE ANNUAL RENT AS CONTENDED BY THE ASS ESSEE ON THE BASIS OF MUNICIPAL VALUE AS PER THE PROVISIONS OF SECTION 23 (1)(A) OF THE ACT. THE RENT WAS REDUCED FROM RS.5 LAKHS TO RS.25,000 PER M ONTH ON ACCOUNT OF INTEREST FREE SECURITY DEPOSIT OF RS.25 CRORES. NO W THE QUESTION ARISES WHETHER THE PROPORTIONATE RECEIPT OF INTEREST-FREE SECURITY DEPOSIT CAN BE TAKEN INTO ACCOUNT WHILE COMPUTING THE ALV OR THE A LV IS TO BE COMPUTED ON THE BASIS OF ACTUAL RENT RECEIVED, IGNORING THE OTHER SURROUNDING FACTS AND CIRCUMSTANCES. ACCORDING TO US, WHILE COMPUTIN G THE ALV ALL SURROUNDING FACTORS SHOULD BE LOOKED INTO AND MORE PARTICULARLY THE INTEREST-FREE SECURITY DEPOSIT RECEIVED BY THE ASSE SSEE WHILE LETTING OUT THE PROPERTY SHOULD BE TAKEN INTO ACCOUNT. IN MOST OF THE CASES, SUBSTANTIAL AMOUNT OF INTEREST-FREE SECURITY DEPOSIT IS BEING T AKEN AND ANNUAL RENT IS FIXED ON THE LOWER SIDE IN ORDER TO AVOID THE TAX I MPLICATION. THIS ASPECT WAS EXAMINED BY THE HONBLE PUNJAB & HARYANA HIGH C OURT IN THE CASE OF CIT V. K. STREETLITE ELECTRIC CORPORATION, 336 ITR 348 (P&H) AND THEIR LORDSHIPS HAVE CATEGORICALLY HELD THAT INTEREST-FRE E SECURITY DEPOSIT TAKEN BY THE ASSESSEE HUGELY DISPROPORTIONATE TO MONTHLY RENT CHARGED IS A ITA NOS.1607, 1630 & 1692/B/2012 PAGE 13 OF 17 DEVICE TO CIRCUMVENT LIABILITY TO INCOME-TAX. THER EFORE, NOTIONAL INTEREST ON SECURITY DEPOSIT IS TO BE TREATED AS INCOME FROM HO USE PROPERTY. THE RELEVANT OBSERVATIONS OF THE HONBLE HIGH COURT ALO NG WITH THE FACTS OF THE CASE ARE EXTRACTED HEREUNDER FOR THE SAKE OF REFERE NCE:- THE ASSESSEE EARNED RENTAL INCOME FROM LETTING FAC ILITIES OF FACTORY, LAND, BUILDING AND OFFICES. THE ASSESSEE HAD TAKEN INTEREST-FREE SECURITY OF RS. 35 LAKHS FROM TWO PARTIES TO WHOM T HE ASSETS WERE LEASED OUT, BUT THE ASSESSEE SHOWED A VERY LOW RENT AL INCOME OF RS. 1.50 LAKHS AS ANNUAL LETTING VALUE IN RESPECT OF TH OSE PROPERTIES. THERE WAS NO PROVISION IN THE AGREEMENT FOR INCREAS E IN RENT FROM YEAR TO YEAR. THE ASSESSING OFFICER DETERMINED THE ANNUAL VALUE AT RS. 7,80,000 BY ADDING NOTIONAL INTEREST OF RS. 6,3 0,000 CALCULATED AT THE RATE OF 18 PER CENT. PER ANNUM ON RS. 35 LAK HS TAKEN AS SECURITY DEPOSIT, TO THE VALUE OF RS. 1.50 LAKHS SH OWN BY THE ASSESSEE. THE COMMISSIONER (APPEALS) DELETED THE NO TIONAL INTEREST OF RS. 6,30,000. THE TRIBUNAL AFFIRMED THE ORDER OF THE COMMISSIONER (APPEALS). ON FURTHER APPEAL: HELD, ALLOWING THE APPEAL, THAT UNDER THE LEASE DEE DS AND ON A CONJOINT READING OF ALL THE DOCUMENTS AND AN ANALYS IS OF THE FACTUAL ASPECTS, THE SECURITY DEPOSIT OF RS. 35 LAKHS WHICH AMOUNTED TO 140 TIMES THE MONTHLY RENT WAS DISPROPORTIONATE TO THE ACTUAL CONTRACTUAL RENT OF RS. 25,000 PER MONTH, I.E., TOTAL RS. 12,50 0 PER MONTH FOR LAND AND BUILDING, ETC. AND RS. 12,500 PER MONTH FO R FURNITURE, FIXTURES, PLANT AND MACHINERY, ETC. IT HAD NO RATIO NALE WITH THE AGREED RENT AND THE ASSESSEE HAD ADOPTED A DEVICE T O CIRCUMVENT ITS LIABILITY TO TAX. FURTHER, THE RENT DEED DID NOT CO NTAIN ANY PROVISION FOR INCREASE OF RENT FROM YEAR TO YEAR. MOREOVER, T HE SECURITY DEPOSIT OF RS. 35 LAKHS WHERE THE VALUE OF THE PROPERTY LET OUT WAS RS. 17.62 LAKHS, PLANT AND MACHINERY OF RS.L. 69 LAKHS AND FU RNITURE OF RS. 48,673 COULD NOT BE HELD TO BE JUSTIFIED AS A GENUI NE TRANSACTION. THEREFORE THE SECURITY DEPOSIT WAS A SHAM DEVICE TO AVOID TAX AND HAD NO REAL BASIS WITH THE ACTUAL RENT THAT WAS REC EIVED BY THE ASSESSEE. ACCORDING TO SECTION 23(1)(B) OF THE INCO ME-TAX ACT, 1961WHERE THE PROPERTY WAS ACTUALLY LET OUT, THE AC TUAL AMOUNT OF RENT RECEIVED OR RECEIVABLE WOULD FORM PART OF THE INCOME FROM HOUSE PROPERTY. ORDINARILY, THE NOTIONAL INTEREST T HAT MAY ACCRUE ON THE SECURITY DEPOSIT WOULD NOT FORM PART OF INCOME FROM HOUSE ITA NOS.1607, 1630 & 1692/B/2012 PAGE 14 OF 17 PROPERTY. HOWEVER, WHERE PAYMENT OF THE SECURITY DE POSIT WAS TO CIRCUMVENT LIABILITY TO TAX ON THE REAL RENT, IT WO ULD FALL WITHIN THE AMBIT OF INCOME FROM HOUSE PROPERTY. THEREFORE THE INTEREST ON THE SECURITY DEPOSIT AMOUNT OF RS.35 LAKHS WOULD BE TRE ATED AS INCOME OF THE ASSESSEE. INTEREST AT THE RATE OF 9 PER CEN T PER ANNUM ON THE SECURITY AMOUNT OF RS.35 LAKHS WOULD BE JUST TO MEE T THE ENDS OF JUSTICE AND IT WOULD BE TREATED AS TAXABLE INCOME O F THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY RELATIN G TO THE LAND AND BUILDING. 11. IN THE LIGHT OF THE AFORESAID JUDGMENT OF THE H ONBLE PUNJAB & HARYANA HIGH COURT, WE ARE OF THE CONSIDERED VIEW T HAT RECEIPT OF RS.25 CRORES AS INTEREST-FREE SECURITY DEPOSIT CANNOT BE IGNORED WHILE COMPUTING THE ALV. THEREFORE THE AO HAS RIGHTLY ADOPTED THE ALV WHICH WAS EVEN LESSER TO THE MONTHLY RENT OF RS.5 LAKHS PER MONTH INITIALLY AGREED UPON BY THE PARTIES. THUS, WE FIND NO INFIRMITY IN THE ORD ER OF CIT(APPEALS) AND WE CONFIRM THE SAME. 12. SO FAR AS GROUND NO.3 RELATING TO INTEREST U/S. 234B AND 234C IS CONCERNED, WE FIND IT IS CONSEQUENTIAL IN NATURE AN D NEEDS NO INDEPENDENT ADJUDICATION. ACCORDINGLY, THE APPEALS OF THE ASSE SSEE STAND DISMISSED. ITA NO.1630/BANG/2012 13. THIS APPEAL IS PREFERRED BY THE ASSESSEE INTER ALIA ON THE FOLLOWING GROUNDS:- [1] THE ORDERS OF THE AUTHORITIES BELOW IN SO FAR AS THEY ARE AGAINST THE APPELLANT ARE OPPOSED TO LAW, EQUITY, W EIGHT OF EVIDENCE, PROBABILITIES, FACTS AND CIRCUMSTANCES OF THE CASE. ITA NOS.1607, 1630 & 1692/B/2012 PAGE 15 OF 17 [2] THE LEARNED CIT[A] IS NOT JUSTIFIED IN UPHOLDI NG THE ALV ADOPTED BY THE LEARNED AO AT RS. 21,81,669/- REJECT ING THE INCOME REPORTED BY THE APPELLANT UNDER THE FACTS AN D IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE. [3] WITHOUT PREJUDICE TO THE RIGHT TO SEEK WAIVER WITH THE HON'BLE CCIT/DG, THE APPELLANT DENIES ITSELF LIABLE TO BE CHARGED TO INTEREST U/S 234-B AND 234-C OF THE ACT, WHICH U NDER THE FACTS AND IN THE CIRCUMSTANCES OF THE APPELLANT'S CASE AN D THE LEVY DESERVES TO BE CANCELLED. [4] FOR THE ABOVE AND OTHER GROUNDS THAT MAY BE UR GED AT THE TIME OF HEARING OF THE APPEAL, YOUR APPELLANT HUMBL Y PRAYS THAT THE APPEAL MAY BE ALLOWED AND JUSTICE RENDERED AND THE APPELLANT MAY BE AWARDED COSTS IN PROSECUTING THE APPEAL AND ALSO ORDER FOR THE REFUND OF THE INSTITUTION FEES AS PART OF THE C OSTS. 14. THE MAIN ISSUE INVOLVED IN THIS APPEAL IS DETER MINATION OF ALV OF THE PROPERTY LET OUT TO THE ASSESSEES SISTER CONCERN. 15. THE FACTS BORNE OUT FROM THE RECORD ARE THAT DU RING THE F.Y. 2006-07, THE ASSESSEE ON 3.4.2006 SOLD ALL ITS ASSETS AND LI ABILITIES, EXCEPT LAND AND BUILDINGS TO M/S. SOBHA DEVELOPERS PVT. LTD. [SDPL] FOR AN AMOUNT OF RS.13,20,82,084. TWO DAYS BEFORE THE DATE OF SALE I.E., ON 1.4.2006 LEASE DEED WAS ENTERED INTO WHEREBY THE ASSESSEE LEASED O UT ITS LAND AND BUILDINGS TO SDPL FOR A MONTHLY RENT OF RS.5 LAKHS. SUPPLEMENTARY LEASE DEED WAS ENTERED INTO ON 30.3.2007 WHEREBY THE TERM S OF LEASE WERE RENEGOTIATED AND MONTHLY RENT REDUCED TO RS.25,000 PER MONTH FROM RS.5 LAKHS PER MONTH. IN THIS CASE, INTEREST-FREE SECUR ITY DEPOSIT WAS ALSO NEGOTIATED WHEREBY THE LESSEE WOULD PAY THE ASSESSE E A DEPOSIT OF RS.11 CRORES. THE ASSESSEE HAS COMPUTED THE ALV AS PER R EDUCED RENT OF ITA NOS.1607, 1630 & 1692/B/2012 PAGE 16 OF 17 RS.25,000 PER MONTH @ RS.3 LAKHS, BUT IT WAS NOT AC CEPTED BY THE AO AND HE ASSESSED IT AT RS.24,12,039 ON THE ESTIMATED FAI R MARKET VALUE OF THE SAME AT RS.7/- PER SQ.FT. ON THE BASIS OF LOCAL ENQ UIRIES MADE BY HIM. 16. IN THIS CASE ALSO, IT WAS CONTENDED THAT THE AS SESSEE WAS FINANCIALLY HELPED BY ITS SISTER CONCERN, SDPL, AND ONCE THE AS SESSEE WAS NOT ABLE TO RETURN THE AMOUNT, THE LIABILITY WAS CONVERTED INTO INTEREST-FREE SECURITY DEPOSIT. THE FACTS OF THIS CASE ARE ALMOST SIMILAR TO THE EARLIER CASE AND SIMILAR ARGUMENTS WERE ALSO RAISED BEFORE US. UNDE R SIMILAR SET OF FACTS, WE HAVE EXAMINED THE ISSUE OF DETERMINATION OF ALV AND WE HAVE HELD IN THE FOREGOING APPEALS THAT INTEREST-FREE SECURITY D EPOSIT IS TO BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE ALV. IN THE INST ANT CASE ALSO, THE ASSESSEE HAS RECEIVED INTEREST-FREE SECURITY DEPOSI T OF RS.11 CRORES WHICH CERTAINLY CANNOT BE IGNORED WHILE COMPUTING THE ALV . THEREFORE, FOLLOWING THE REASONS AND THE VIEW TAKEN IN THE FOREGOING APP EALS, WE HOLD THAT CIT(APPEALS) HAS PROPERLY ADJUDICATED THE ISSUE IN THE LIGHT OF GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND WE FIND NO INFIRM ITY THEREIN. ACCORDINGLY, WE CONFIRM THE SAME. 17. THE OTHER ISSUE RELATES TO CHARGING OF INTEREST U/S. 234B & 234C OF THE ACT. SINCE IT IS CONSEQUENTIAL IN NATURE, IT DOES NOT REQUIRE ANY INDEPENDENT ADJUDICATION. 18. THUS, THE APPEAL OF THE ASSESSEE STANDS DISMISS ED. ITA NOS.1607, 1630 & 1692/B/2012 PAGE 17 OF 17 19. IN THE RESULT, ALL THE THREE APPEALS OF THE ASS ESSEE STAND DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF NOVEMBER, 2016. SD/- SD/- ( S. JAYARAMAN ) (SUNIL KUMAR YA DAV ) ACCOUNTANT MEMBER JUDIC IAL MEMBER BANGALORE, DATED, THE 23 RD NOVEMBER, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.