KALIMATI INVESTMENT COMPANY LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 2552/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62380 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-05-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 02-05-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 01-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PRADIP KUMAR SINGH
• Assessee Lawyers: R R VORA
• Keywords: Opportunity of being heard; Earning of tax free income; Wholly owned subsidiary; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH A,MUMBAI BEFORE SHRI R.S. SYAL (AM) & SHRI S.S. GODARA (JM) I.T.A.NO.2706/MUM/2010 : A.Y. 2004-05 I.T.A.NO.4508/MUM/2010 : A.Y. 2005-06 I.T.A.NO.2552/MUM/2011 : A.Y. 2007-08 I.T.A.NO.2553/MUM/2011 : A.Y. 2006-07 M/S. KALIMATI INVESTMENT CO.LTD., BOMBAY HOUSE, 24, HOMI MODY STREET, FORT, MUMBAI-400 001. PAN: AAACK4330N VS. INCOME-TAX OFFICER-2(2)(2), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-400 020. APPELLANT RESPONDENT APPELLANT BY SHRI R.R. VORA. RESPONDENT BY SHRI PRADIP KUMAR SINGH. DATE OF HEARING 02-05-2012 DATE OF PRONOUNCEMENT 09-05-2012 O R D E R PER R.S. SYAL, AM : THESE FOUR APPEALS BY THE ASSESSEE RELATE TO ASSES SMENT YEARS 2004-05 TO 2007-08. SINCE SOME COMMON ISSUES ARE RAISED IN THE SE APPEALS, WE ARE THEREFORE PROCEEDING TO DISPOSE THEM OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 2 A.Y. 2004-05: 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DETERMINATION OF ANNUAL LETTING VALUE (ALV) AT RS.18 LAKHS. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS AN INVESTMENT COMPANY REGISTERED AS NON FINANCE BANKING COMPANY. IT IS A WHOLLY OWNED SUBSIDIARY OF TATA STEEL LTD. IN THE RETURN FILED, IT SHOWED `INCOME FROM HOUSE PROPERTY IN RESPECT OF A FLAT IT OWNED IN DELHI W HICH WAS RENTED OUT TO M/S. TATA STEEL LTD. SINCE 1989. THE ASSESSEE WAS PAID L EASE RENT OF RS.60,000/- P.M. IN ADDITION TO AN INTEREST FREE SECURITY DEPOSIT OF RS.75 LAKHS. THE ASSESSEE HAD SHOWN RENT AT RS.60,000/- P.M. ON THE BASIS OF WHIC H INCOME FROM HOUSE PROPERTY WAS DETERMINED. ON BEING ASKED TO SUBSTANT IATE THE DETERMINATION OF ALV, THE ASSESSEE SUBMITTED AS UNDER : THE EARNINGS ATTRIBUTABLE ON RENTING THE SAID PR EMISES ARE : RENT RECEIVED 60,000 INTEREST ON DEPOSIT @ 9% P.A. 56,250 MAINTENANCE & OTHER CHARGES 11,667 BORNE BY TENANT MUNICIPAL TAXES 25,110 -DO- TOTAL AMOUNT P.M. 1,53,027 THE ONGOING MARKET RENT OF SIMILAR PROPERTY IS R S.1,50,000/- PER MONTH. ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 3 4. THE AO, ON THE BASIS OF ASSESSEES ADMISSIO N THAT THE ON GOING MARKET RENT OF SIMILAR PROPERTY WAS AT RS.1,50,000/- P.M., DETE RMINED THE ALV AT RS.18 LAKHS (RS.1,50,000 X 12). AFTER ALLOWING STATUTORY DEDUCTION OF 30%, HE COMPUTED INCOME FROM HOUSE PROPERTY AT RS.12,60,000 /-. THE ASSESSEE, VIDE ITS LETTER DATED 06-01-2010, SUBMITTED BEFORE THE LD. CIT(A) THAT THE ACTUAL RENT RECEIVED WAS RS.7,20,000/- AND THE SAME AMOUNT SHOULD BE TAKEN. IN THE ALTERNATIVE, IT WAS SUGGESTED THAT FROM THE ALV DET ERMINED BY THE AO AT RS.1,50,000/- P.M., THE NOTIONAL INTEREST ON DEPOSI T AMOUNTING TO RS.56,250/- SHOULD BE REDUCED FOR DETERMINING ALV AT RS.11,25,0 00/-. ANOTHER OPTION WAS ALSO SUGGESTED THAT THE VALUE DETERMINED BY THE NE W DELHI MUNICIPAL COMMITTEE AT RS.11,13,700/- SHOULD BE ADOPTED. THE LD. CIT(A) REMAINED UNCONVINCED WITH THE ASSESSEES SUBMISSIONS AND UPH ELD THE ACTION OF THE AO. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. WE ARE NOT INCLINED TO ACCEPT THE SUBMISSIO NS MADE BY THE ASSESSEE BEFORE THE AO FOR ATTRIBUTING OTHER INCOMES TO THE RENTAL INCOME. IT IS SO FOR THE REASON THAT THESE HAVE NO RELATION WITH THE DETERMI NATION OF INCOME FROM HOUSE PROPERTY INASMUCH AS THE AMOUNT OF MAINTENANCE & OT HER CHARGES ALONG WITH MUNICIPAL TAXES WERE BORNE BY THE TENANT AND NOT BY THE ASSESSEE. FURTHER, THE RECEIPT OF INTEREST ON DEPOSIT IS AN INCOME INDEPEN DENT OF HOUSE PROPERTY INCOME. TO CONTEND THAT THESE ITEMS BE CONSIDERED A S EARNINGS ATTRIBUTABLE TO THE RENTING OF THE PREMISES IS NOT ACCEPTABLE. HOWEVER WE FIND SOME FORCE IN THE ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 4 CONTENTION PUT FORTH THAT THE NOTIONAL RENT ON THE AMOUNT OF SECURITY DEPOSIT CANNOT BE INCLUDED IN THE ALV. THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT VS. J.K. INVESTORS (BOMBAY) LTD. (2 001) 248 ITR 723 (BOM) HAS HELD THAT NO ADDITION CAN BE MADE TO ALV FOR NOTION AL INTEREST ON THE INTEREST FREE DEPOSIT U/S. 23(1)(B). THE FULL BENCH OF THE H ONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA (2011) 333 ITR 38 (DEL) (SB) HAS HELD THAT NO ADDITION TO ALV CAN BE MADE TOWARDS NOTIONAL INT EREST ON INTEREST FREE DEPOSIT RECEIVED BY THE LANDLORD U/S.23(1)(A). IN T HAT VIEW OF THE MATTER, EVEN IF WE ACCEPT THE AOS CONTENTION THAT SIMILAR PROPERT Y FETCHED RENT OF RS.1,50,000/- P.M. AS INCLUSIVE OF NOTIONAL INTERES T ON SECURITY DEPOSIT AS WAS CONTENDED BY THE ASSESSEE , THEN SUCH AMOUNT OF NOTIONAL INTEREST WOULD REQUIRE REDUCTION TO THE TUNE OF RS.56,250/-. IF THIS AMOUNT IS EXCLUDED FROM THE AMOUNT OF RS.1,50,000/-, WHAT REMAINS IS RS.11,25, 000/- I.E. RS.93,750 (RS.1,50,000 RS.56,250 X 12). IT IS FURTHER NOTED THAT THE NEW DELHI MUNICIPAL COMMITTEE HAS DETERMINED THE RATEABLE VALUE OF THIS PROPERTY AT RS.11,13,700/-, EVIDENCE OF WHICH IS AVAILABLE ON PAGE 67 OF THE PA PER BOOK. IT WILL BE SEEN INFRA THAT THE AO IN THE NEXT YEAR ACCEPTED THIS RATEABLE VALUE AS ALV OF THE PROPERTY. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F M.V. SONAWALLA VS. CIT (1989) 177 ITR 246 (BOM) HAS HELD THAT INCOME FROM HOUSE PROPERTY SHOULD BE COMPUTED ON THE BASIS OF MUNICIPAL RATEABLE VALUE. IN VIEW OF THIS JUDGMENT, IT BECOMES APPARENT THAT THE RATEABLE VALUE OF THE PRO PERTY IN THE INSTANT CASE BE CONSIDERED FOR DETERMINING THE ALV OF THE PROPERTY, AS HAS BEEN ACCEPTED BY THE ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 5 AO HIMSELF IN THE SUCCEEDING YEAR. THE FURTHER CON TENTION RAISED BY THE ASSESSEE THAT DEDUCTION SHOULD BE ALLOWED TOWARDS M UNICIPAL TAXES IS NOT ACCEPTABLE IN VIEW OF THE REASON THAT SUCH TAXES WE RE PAID BY THE TENANT AND NOT THE ASSESSEE. WE, THEREFORE, MODIFY THE IMPUGNED OR DER TO THIS EXTENT. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR T HIS YEAR IS PARTLY ALLOWED. A.Y. 2005-06: 7. THE FIRST ISSUE IN THIS APPEAL IS SIMILAR TO THE ONE DECIDED FOR ASSESSMENT YEAR 2004-05 BEING THE DETERMINATION OF ALV. INTERE STINGLY, THE AO ADOPTED MUNICIPAL VALUE AS ALV AT RS.11,13,700/- FOR COMPU TING THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. NO RELIEF WA S ALLOWED IN THE FIRST APPEAL. 8. HAVING REGARD TO THE FACTS OF THE CASE, WE FIND THAT FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2004-05 WE HAVE HELD THAT THE ALV OF THE PROPERTY BE TAKEN AT RS.11,13,700/- WITHOUT DEDUCTION OF ANY MUNICIPAL TAXES WHICH WERE BORNE BY THE TENANT AND NOT THE ASSESSEE. IN THIS V IEW OF THE MATTER, THE IMPUGNED ORDER IS UPHELD AND THE GROUND RAISED BY T HE ASSESSEE IS DISMISSED. 9. THE OTHER GROUND OF THE ASSESSEE IN THIS APPEAL IS AGAINST DENIAL OF DEDUCTION TOWARDS EDUCATION CESS. THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 6 DEBITED EDUCATION CESS @ 2% AMOUNTING TO RS.5,83,68 4/- IN THE DEBIT SIDE OF THE PROFIT & LOSS ACCOUNT AND CLAIMED DEDUCTION FOR THE SAME. THE AO REFUSED TO ALLOW DEDUCTION FOR THE SAID SUM ON THE GROUND THAT EDUCATION CESS IS PART OF TAX AND SINCE THE AMOUNT OF INCOME-TAX IS NOT ALL OWABLE U/S.40(A)(II), THE SAME CANNOT BE ALLOWED AS DEDUCTION. NO RELIEF WAS ALLO WED IN THE FIRST APPEAL. 10. HAVING HEARD THE RIVAL SUBMISSIONS ON THIS POIN T AND CONSIDERED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT SEC. 40(A )(II) CLEARLY PROHIBITS DEDUCTION IN RESPECT OF ANY SUM PAID ON ACCOUNT OF ANY RATE OR TAX LEVIED O N THE PROFITS OR GAINS OF ANY BUSINESS OR PROFESSION OR ASSESSED AT A PROPORTION OF, OR OTHERWISE ON THE BASIS OF, ANY SUCH PROFITS OR GAINS . SUB-SECTION (11) OF SECTION 2 OF FINANCE (NO.2) ACT, 2004, WHICH HAS REFERENCE TO ED UCATIONAL CESS, IS REPRODUCED BELOW : (11). THE AMOUNT OF INCOME-TAX AS SPECIFIED IN SU B- SECTIONS (4) TO (10) AND AS INCREASED BY A SURCHARG E FOR PURPOSES OF THE UNION CALCULATED IN THE MANNER PROV IDED THEREIN, SHALL BE FURTHER INCREASED BY AN ADDITIONA L SURCHARGE FOR PURPOSES OF THE UNION, TO BE CALLED T HE EDUCATIONAL CESS ON INCOME-TAX, SO AS TO FULFILL THE COMMITMENT OF THE GOVERNMENT TO PROVIDE AND FINANCE UNIVERSALIZED QUALITY BASIC EDUCATION, CALCULATED A T THE RATE OF TWO PER CENT OF SUCH INCOME-TAX AND SURCHAR GE. 11. FROM THE ABOVE, IT IS CLEAR THAT EDUCATION CESS IS NOTHING BUT ADDITIONAL SURCHARGE. SINCE SUCH SURCHARGE OR EDUCATION CESS I S PART OF TAX, THE SAME, IN OUR CONSIDERED OPINION, CANNOT BE ALLOWED AS DEDUCTION. SUCH AMOUNT CLEARLY ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 7 CONSTITUTES PART OF TAX WHICH FALLS WITHIN SEC. 40( A)(II). WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS SCORE. 12. IN THE RESULT, THE APPEAL IS DISMISSED. A.Y. 2006-07: 13. THE FIRST GROUND OF THIS APPEAL IS AGAINST THE DETERMINATION OF ALV. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCU MSTANCES OF THIS GROUND ARE SIMILAR TO THOSE FOR ASSESSMENT YEARS 2004-05 AND 2 005-06. IT IS OBSERVED THAT FOR THIS YEAR THE AO AGAIN CHANGED HIS STAND AND DE TERMINED THE ALV AT RS.18 LAKHS. IN VIEW OF THE DISCUSSION MADE ABOVE, WE DI RECT THE AO TO ADOPT THE ALV AT RS.11,13,700/- SUBJECT TO STANDARD STATUTORY DEDUCTION BUT NOT ALLOWING ANY FURTHER DEDUCTION TOWARDS MUNICIPAL TAXES AS CL AIMED BY THE ASSESSEE. THIS GROUND IS PARTLY ALLOWED. 14. THE ONLY OTHER ISSUE RAISED IN THIS APPEAL IS A GAINST CONFIRMATION OF DISALLOWANCE OF RS.7,87,280/- MADE BY THE AO U/S.14 A OF THE ACT. 15. BRIEFLY STATED, THE FACTS OF THIS GROUND ARE TH AT THE ASSESSEE RECEIVED DIVIDEND INCOME EXEMPT U/S. 10(34) TO THE TUNE OF R S.14,31,82,731/- AND LONG- TERM CAPITAL GAINS EXEMPT U/S.10(38) AT RS.15,07,94 ,592/-. NO DISALLOWANCE WAS ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 8 OFFERED U/S. 14A. THE AO GOT CONVINCED WITH THE ASS ESSEES CONTENTION THAT NO INTEREST BEARING FUNDS WERE DEPLOYED BY THE ASSESSE E IN MAKING INVESTMENTS FROM WHICH SUCH EXEMPT INCOME WAS EARNED. HE, THERE FORE, DID NOT MAKE ANY DISALLOWANCE ON ACCOUNT OF INTEREST. HOWEVER, HE WO RKED OUT DISALLOWANCE U/S.14A AT 0.5% OF THE AVERAGE OF INVESTMENTS TOWAR DS OTHER EXPENSES WHICH CAME TO RS.1.01 CRORE. SINCE THE ASSESSEE HAD INCUR RED SUCH EXPENSES ONLY TO THE TUNE OF RS.7,87,280/-, THE AO RESTRICTED THE DISALL OWANCE U/S.14A TO THIS LEVEL OF RS.7,87,280/-. THE LD. CIT(A) DIRECTED THE AO TO WO RK OUT THE DISALLOWANCE U/S.14A IN TERMS OF THE JUDGMENT OF THE HONBLE JUR ISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT (2010 ) 328 ITR 81 (BOM). 16. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE ARE UNABLE TO FIND ANY REASON FOR INTER FERING WITH THE IMPUGNED ORDER ON THIS ISSUE BECAUSE THE LD. CIT(A) HAS DIRECTED T HE AO TO FOLLOW THE MANDATE OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) ON SOME REASONABLE BASI S. WE UPHOLD THE IMPUGNED ORDER BUT CLARIFY THAT IN NO CASE THE DISALLOWANCE TO BE MADE BY THE AO PURSUANT TO THE ORDER OF LD. CIT(A) SHOULD EXCEED THE ORIGIN AL DISALLOWANCE MADE BY HIM. THIS GROUND IS, THEREFORE, DISPOSED OF ACCORDINGLY. 17. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 9 A.Y. 2007-08: 18. THE FIRST GROUND IS AGAINST THE DETERMINATION O F ALV. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE OF EARLIER YEAR INCLUDING ASSESSMENT YEAR 2006-07. HER E ALSO, THE AO TOOK THE ALV AT RS.18 LAKHS. FOR THE REASONS DISCUSSED SUPRA, W E SET ASIDE THE IMPUGNED ORDER UPHOLDING THE VIEW OF THE AO AND DIRECT THE AO TO C OMPUTE THE INCOME FROM HOUSE PROPERTY IN ACCORDANCE WITH OUR DIRECTIONS GI VEN FOR ASSESSMENT YEAR 2006-07 ABOVE. 19. THE ONLY OTHER ISSUE IS AGAINST THE CONFIRMATIO N OF DISALLOWANCE U/S.14A. THE AO MADE DISALLOWANCE AT RS.1.50 CRORE U/S.14A W HICH THE LD. CIT(A) DIRECTED TO BE WORKED OUT AS PER THE MANDATE OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO. LTD. (SUPRA). FOLLOWING THE VIEW TAKEN HEREINABOVE FOR THE IMMEDI ATELY PRECEDING YEAR, WE UPHOLD THE IMPUGNED ORDER ON THIS ISSUE BY MAKING I T CLEAR THAT THE DISALLOWANCE U/S.14A SHOULD BE MADE IN CONFORMITY WITH THE AFORE NOTED JUDGMENT AFTER ALLOWING REASONABLE OPPORTUNITY OF BEING HEARD TO T HE ASSESSEE. 20. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 10 ORDER PRONOUNCED ON THE 09TH DAY OF MAY, 2 012. SD/- SD/- (S.S. GODARA) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 09TH MAY , 2012. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A) CONCERNED. 4 CIT CONCERNED. 5.DR,A BENCH, MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST. REGISTRAR, ITAT, MUMBAI. ITA NOS.2706, 4508/M/2010 & 2552 & 2553/M/2011 KALIMATI INVESTMENT CO.LTD. 11 DETAILS DATE INITIALS DESIGN ATION 1. DRAFT DICTATED ON 2-05-2012 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 3-05-2012 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/A M 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/A M 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER *