IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D,MUMBAI BEFORE SHRI PRAMOD KUMAR (AM) & SMT. ASHA VIJAYARAGHAVAN (JM) I.T.A.NO.342/MUM/2008 (A.Y.2004-05) M/S. RONUK INDUSTRIES P. LTD., 11-A, WORLI SEA FACE, WORLI, MUMBAI-400 025. PAN: AAACR2625P VS. INCOME-TAX OFFICER-7(2)(1), MUMBAI. APPELLANT RESPONDENT I.T.A.NOS.2987 & 4339/MUM/2006 (A.YS. 2002-03 & 2003-04) INCOME-TAX OFFICER-7(2)(1), MUMBAI. VS. M/S. RONUK INDUSTRIES P. LTD., 11-A, WORLI SEA FACE, WORLI, MUMBAI-400 025. PAN: AAACR2625P APPELLANT RESPONDENT ASSESSEE BY SHRI BHUPENDRA SHAH. DEPARTMENT BY SHRI J ITENDRA YADAV. O R D E R PER SMT. ASHA VIJAYARAGHAVAN, JM: I.T.A.NO.342/MUM/08 BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 15-11-2007 IN RELATION TO THE ASSTT. YEAR 2004-05, WHILE I.T.A.NOS.2987/MUM/2006 & 4339/MUM/2006 BY THE REVE NUE ARISE OUT OF THE ORDERS PASSED BY THE CIT(A) ON 24-01-2006 & 13-04-2 006 IN RELATION TO THE ASSTT. YEARS 2002-03 & 2003-04 RESPECTIVELY. SINCE THE ISSUES INVOLVED IN THE ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 2 APPEALS ARE IDENTICAL, WE ARE PROCEEDING TO DISPOSE THEM OF BY A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN MAN UFACTURING AND TRADING OF ELECTROPLATING CHEMICALS, PLANT & EQUIPMENT, ETC . THE ASSESSEE IS THE OWNER OF FACTORY PREMISES SITUATED ON LBS MARG, GHATKOPAR, M UMBAI. THE OFFICE PREMISES HAS BEEN LEASED OUT IN 1999 TO ITS SISTER CONCERN M /S. KARROX TECHNOLOGIES LTD. FROM WHOM NO RENT IS BEING CHARGED. A DEPOSIT OF RS .1,85,75,541/- IS SHOWN IN THE BALANCE-SHEET AS RECEIVED FROM M/S. KARROX TECH NOLOGIES FOR THE USE OF THE SAID PREMISES ON RENTAL BASIS. WHEN THE ASSESSEE WA S ASKED TO SHOW CAUSE AS TO WHY FAIR RENT SHOULD NOT BE ADDED TO THE TOTAL INC OME IN RESPECT OF THE PROPERTY LEASED OUT, IT WAS SUBMITTED THAT IN ORDER TO OBTA IN FUND FOR THE DAY TO DAY WORKING, THE COMPANY ENTERED INTO LEAVE & LICENCE A GREEMENT WITH ITS ASSOCIATE CONCERN M/S. KARROX TECHNOLOGIES LTD. AND ALLOWED THEM TO USE THE AFOREMENTIONED OFFICE PREMISES AND OBTAINED INTERES T FREE DEPOSIT OF RS.1.75 CRORES, WHICH WAS INCREASED TO RS.1,85,75,541/- DUR ING THE YEAR 2004-05, AND THE ASSESSEE DID NOT CHARGE ANY RENT IN VIEW OF THE FACT THAT IT WAS PREVENTED BY THE BANKS TO SELL, TRANSFER, MORTGAGE ETC. AS THE S AME WAS HYPOTHECATED TO THESE BANKS. THE AO HELD THAT BY NOT CHARGING RENT THE AS SESSEE FRAUDULENTLY USED THE COLOURABLE DEVICE OF SECURITY DEPOSIT. THE AO FOUND THAT THE BUILT-UP AREA IS 30,000 SSQ.FT. AND DETAILS OF STANDARD RENT IN THE VICINITY OF THE PREMISES WAS ALSO CALLED FOR BY THE DIST. VALUATION OFFICER FOR ASST. YEAR 2002-03. AS PER THEIR REPORT, AFTER TAKING INTO ACCOUNT THE OUTGOINGS AND OTHER DUES, THE ANNUAL VALUE OF THE PROPERTY WOULD FETCH ONLY RS.28,003/- PER S Q. FT. THEREFORE, THE AO MENTIONED THAT IN VIEW OF THE VALUATION REPORT AND ALSO CONSIDERING APPRECIATION OF THE MARKET RENT, AN AMOUNT OF RS.31.5 IS CONSIDE RED AS FAIR RENT WHICH THE PROPERTY WOULD HAVE FETCHED. SINCE THE TOTAL LET O UT AREA WAS 30,000 SQ. FT., AN AMOUNT OF RS.1,13,40,000/- IS CONSIDERED AS ANNUAL RENT RECEIVED FROM THE ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 3 PROPERTY IN ADDITION TO ADDITION OF 10% OF INTEREST FREE SECURITY RECEIVED BY THE ASSESSEE. THEREFORE, THE TOTAL ANNUAL LETTING VALUE OF THE PROPERTY WAS DETERMINED AT RS.1,31,90,000/- FOR THE ASSTT. YEAR 2004-05. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE CIT(A) AND RAISED THE GROUND THAT THE AO ERRED IN MAKING TOTAL ADDITI ON OF RS.1,31,90,000/- WHILE COMPUTING INCOME FROM HOUSE PROPERTY. THE CIT(A) CO NFIRMED THAT THE AO WAS RIGHT IN ADOPTING RS.1,31,90,000/- AS ANNUAL LETTIN G VALUE OF THE PROPERTY FOR THE ASSTT. YEAR 2004-05 AND DISMISSED THE APPEAL. AS AG AINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. THE ISSUE WITH RESPECT TO ADDITIO N ON ACCOUNT OF INCOME FROM HOUSE PROPERTY ARISES IN ALL THE THREE YEARS, NAMEL Y, 2004-05, 2003-04 AND 2002-03. 4. WITH RESPECT TO THE ASSTT. YEAR 2002-03, WHERE IN IDENTICAL ISSUE AS IN 2004-05 IS INVOLVED, THE CIT(A) HELD AS FOLLOWS : ON E FACTS AND CIRCUMSTANCES OF THE CASE, I FIND T HAT THE DEBT RECOVERY TRIBUNAL HAS PREVENTED THE APPELLANT FROM TAKING ANY RENT ON THE PROPERTY SINCE IT WAS MORTGA GED TO VARIOUS BANKS, IN THE CIRCUMSTANCES, THE SISTER CON CERNS WERE ALLOWED USE OF THE PROPERTY IN LIEU OF THE WHI CH THE APPELLANT HAD TAKEN INTEREST FREE SECURITY DEPOSIT. IT HAS BEEN CONSISTENTLY HELD BY THE JUDICIAL AUTHORITIES THAT WHERE INCOME FROM HOUSE PROPERTY IS TO BE COMPUTED IT HAS TO BE CALCULATED WITH REFERENCE TO ITS ANNUAL RATEABLE VA LUE ONLY. FOLLOWING DECISIONS SUPPORT THE CONTENTION OF THE A PPELLANT : I. CIT VS. A.R. ALAGAPPAN 164 ITR 690 II. CIT VS. C.J. GEORGE 92 ITR 137 III. CIT VS. PRABHABTI BHANUSHALI 141 ITR 419 IV. CIT VS. PODDEN BROS PVT. LTD. 240 ITR 925 V. CIT VS. HEMRAJ MABHIR PRASAD LTD. 140 CTR 569 VI. CIT VS. SATYA CO.LTD. 199 CTR 105. FURTHER, THE ASSESSING OFFICER IS NOT JUSTIFIED IN NOT ACCEPTING THE COMPUTATION OF INCOME FROM HOUSE PROPERTY ON T HE BASIS OF RATEABLE VALUE ON THE GROUND THAT FIRSTLY MUNICIPAL TAXES WERE PAID BY KARROX TECHNOLOGIES LTD. AND SEC ONDLY THE RATES PERTAIN TO THE YEAR 1961 AND 1962 RESPECT IVELY. THE FIXATION OF NEW BILL WITH MUNICIPAL AUTHORITIES IN THE BILL PERTAINS TO FIRST YEAR OF MUNICIPAL ASSESSMENT. ALT HOUGH THE MUNICIPAL TAXES IN THE INSTANCE WERE PAID BY KARROX TECHNOLOGIES, THEY WERE SUBSEQUENTLY RECOVERED FROM THE ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 4 APPELLANT. THE ASSESSING OFFICER IS ACCORDINGLY DIR ECTED TO DELETE THE ADDITION MADE. AS REGARDS THE ADDITION OF RS.16,43,659/- BEING 10% OF THE INTEREST REE DEPOSIT OF RS.1,64,36,590/- WHILE CALC ULATING THE INCOME FROM HOUSE PROPERTY IS ALSO UNJUSTIFIED IN THE LIGHT OF THE DECISION OF THE BOMBAY HIGH COURT IN T HE CASE OF J.K. INVESTORS LTD. 248 ITR 723, ON WHICH IT WAS HE LD THAT NOTIONAL INTEREST ON INTEREST FREE DEPOSIT RECEIVED FROM LESSEE WOULD NOT FORM PART OF THE ACTUAL RENT U/S. 23(1)(B) OF THE INCOME-TAX ACT. THE ASSESSING OFFICER IS, TH EREFORE, DIRECTED TO DELETE THE SAID ADDITION. THE CIT(A) HAS PASSED IDENTICAL ORDER FOR THE ASSTT . YEAR 2003-04 ALSO. AGGRIEVED, THE DEPARTMENT HAS COME UP IN APPEAL BEF ORE US AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING TH AT THE COMPUTATION OF INCOME FROM HOUSE PROPERTY IS TO BE MADE ON THE BASIS OF ANNUAL RATEABLE VALUE AS PER MUNICIPAL RECORD. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING TH AT THE INTEREST OF RS.18,00,000/- ON INTEREST FREE DEPOSIT RECEIVED FROM LESSEE WOULD NOT FORM PART OF THE ACTUAL RENT U/S.23(1)(B)S OF THE INCOME-TAX ACT . 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING T HE DISALLOWANCE OF RS.1,77,772/- IN RESPECT OF PROPERT Y TAXES PAID BY KARROX TECHNOLOGIES. 5. NOW, COMING TO THE COMMON ISSUE WITH RESPECT TO THE DETERMINATION OF ANNUAL LETTING VALUE FOR THE PURPOSE OF COMPUTATION OF INCOME FROM HOUSE PROPERTY, THE ISSUE IS WELL SETTLED BY THE DECISION OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TIVOLI INVESTMENT & TRA DING CO. LTD. VS. ACIT (ITA NOS. 3269/MUM/93 & 3009/BOM/94) WHEREIN IT HAS BEEN HELD AS FOLLOWS : 29. FROM THE DECISION OF THE HON.FULL BENCH OF THE HON. DELHI HIGH COURT, IT IS CLEAR THAT FOR DETERMINATION OF THE FAIR RENT, THE AO HAS TO TAK E INTO ACCOUNT VARIOUS FACTORS INCLUDING STANDARD REN T. IF THE STANDARD RENT IS NOT FIXED THEN THE PROCEDU RE ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 5 PROVIDED UNDER THE RENT CONTROL ACT FOR FIXATION OF STANDARD RENT HAS TO BE TAKEN INTO CONSIDERATION. WE MAY MENTION THAT MUNICIPAL VALUE OR STANDARD RENT ITSELF IS NOT SOLE BINDING FACTORS ON THE AO BUT THESE ARE ONLY GUIDING FACTOR FOR DETERMINING THE REASONABLE EXPECTED RENT TO BE FETCHED BY HE PROPERTY AS CONTEMPLATED U/S 23 (1)(A). IF IN THE GIVEN CASE, THE AO FINDS THAT THE MUNICIPAL VALUE I S NOT BASED ON RELEVANT MATERIAL FOR DETERMINING FAI R RENT IN THE MARKET AND THERE IS A SUFFICIENT MATERI AL ON RECORD FOR TAKING DIFFERENT VALUATION THEN THE A O CAN DETERMINE THE FAIR RENT BY INFLATING OR DEFLEC TING THE MUNICIPAL VALUE OR STANDARD RENT AS THE CASE MAY BE BY TAKING INTO ACCOUNT THE RELEVANT MATERIA L IN THIS REGARD. AS OBSERVED BY THE HON. DELHI HIGH COURT IF THE RATABLE VALUE IS CORRECTLY DETERMINED UNDER THE MUNICIPAL LAW THE SAME CAN BE TAKEN AS ANNUAL LETTING VALUE U/S 23(1)(A) OF THE ACT. HOWEVER, THE RATABLE VALUE IS NOT A BINDING ON TH E AO IF THE AO CAN SHOW THAT THE RATABLE VALUE UNDE R MUNICIPAL LAW DOES NOT REPRESENT THE CORRECT FAIR RENT. IF THE AO FINDS THAT THE ACTUAL RENT RECEIV ED IS LESS THAN THE FAIR MARKET RENT/MARKET RENT BECAUSE OF THE REASON THAT THE ASSESSEE HAS RECEIVED ABNORMALLY HIGH INTEREST FREE SECURITY DEPOSITS AND BECAUSE OF THAT REASON ACTUAL RENT RECEIVED IS LE SS THAN THE RENT WHICH THE PROPERTY MIGHT FETCH HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF. HOWEVER, THE NOTIONAL INTEREST ON INTEREST FREE SECURITY CANNOT BE TAKEN AS DETERMINATIVE FACTOR TO ARRIVE AT FAIR RENT. IF THE AO FINDS THAT THE RATA BLE VALUE UNDER THE MUNICIPAL LAW DOES NOT REPRESENT CORRECT FAIR RENT AND THEN HE MAY DETERMINE THE SAME ON THE BASIS OF MATERIAL/EVIDENCE PLACED ON RECORD. THE HON. FULL BENCH OF THE DELHI HIGH COURT HAS OBSERVED IN PARAGRAPHS 21 OF THE DECISION THAT TO DETERMINE THE REASONABLE/FAIR RENT EXTRANEOUS CIRCUMSTANCES MAY INFLECT OR DEFLECT THE FAIR RENT WHICH CAN BE TAKEN INTO CONSIDERATION BY THE AO. SINCE, THE REASONABLE RENT U/S 23(1)(A) HAS NOT BEEN DETERMINED. THE MUNICIPAL VALUE OR STANDARD RENT WAS ALSO NOT BEFORE THE AO AS WELL AS CIT(A). AND IT IS ALSO NOT CLEAR FROM THE RECOR D AS UNDER WHICH CLAUSE, THE AO HAS MADE THIS ADDITION. ACCORDINGLY WE RESTORE THE ISSUE TO RECO RD OF THE AO AND DIRECT THE AO TO DETERMINE THE SUM FOR WHICH THE PROPERTY MIGHTY REASONABLY EXPECTED TO LET FROM YEAR TO YEAR U/S 23(1)(A) AFTER CONSIDERING ALL RELEVANT FACTORS AS DISCUSSED ABOV E AND THEREAFTER COMPARED THE SAME WITH THE ANNUAL RENT RECEIVED OR RECEIVABLE BY THE ASSESSEE U/S 23(1)(B) AND THEN DECIDE THE ISSUE AS PER LAW. ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 6 THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF T HE CO-ORDINATE BENCH, WE SET ASIDE THE ISSUE TO THE FILE OF AO TO DETERMINE THE ANNUAL LETTING VALUE IN THE LIGHT OF THE DIRECTIONS GIVEN IN TIVOLI INVESTMENT & TRADING CO. P. LTD. (SUPRA). FURTHER, THE AO SHALL ALSO VERIFY WHETHER THE PROPE RTY IS COVERED BY THE RENT CONTROL ACT AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 6. WITH RESPECT TO ASSTT. YEAR 2002-03, THE DEPARTM ENT HAS RAISED THE FOLLOWING TWO MORE GROUNDS : 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING T HE DISALLOWANCE OF RS.7,14,114/- IN RESPECT OF REPAIRS PAID BY KARROX TECHNOLOGIES. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING T HE DISALLOWANCE OF INTEREST OF RS.3,86,544/-. 7. WITH RESPECT TO GROUND NO. 4, WE FIND THAT THE R EPAIR EXPENSES WERE PAID BY M/S. KARROX TECHNOLOGIES BUT THE SAME WERE REIMBURSED BY THE ASSESSEE AND, THEREFORE, THE AO WAS NOT RIGHT I N DISALLOWING THE EXPENDITURE ON REPAIRS ON THE GROUND THAT THEY WERE PAID BY M/S. KARROX TECHNOLOGIES. WE, THEREFORE, CONFIRM THE ORDER AND DISMISS THE GROUND OF APPEAL. 8. GROUND NO.5 RELATES TO DISALLOWANCE OF INTEREST OF RS.3,86,544/-. IT WAS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE THAT INTEREST FREE ADVANCES WERE GIVEN BY THE ASSESSEE OUT OF ITS OWN FUNDS ABOUT 1 2 TO 15 YEARS BACK AND MOST OF THEM WERE NOT RECOVERABLE. FURTHER, IT WAS POINTED OUT THAT THERE WAS NO DISALLOWANCE ON THIS ACCOUNT IN ANY ONE OF THE E ARLIER YEARS. ALSO IT WAS ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 7 SUBMITTED THAT THE AO FAILED TO APPRECIATE THAT THE ASSESSEES CASE WAS BEFORE THE DEBT RECOVERY TRIBUNAL. 9. WE HAVE PERUSED THE RECORD AND FIND THAT ONE TI ME SETTLEMENT WAS ARRIVED AT BEFORE THE DRT AND AS PER THE SETTLEMENT PAYMENT TERMS, THE ASSESSEE WAS REQUIRED TO PAY RS.1,13,00,000/- TO ST ATE BANK OF INDIA AND RS.28,77,000/- TO CANARA BANK IN 4 INSTALMENTS. ON THE SAID INSTALMENT, THE COMPANY PAID INTEREST OF RS.8,66,888/- TO STATE BAN K OF INDIA AND RS.2,70,000/- TO CANARA BANK. AS REGARDS BALANCE IN TEREST OF RS.1,90,663/-, THE SAME WAS PAID IN RESPECT OF TOD FACILITY GRANTE D BY VYSA BANK. THEREFORE, IT IS TO BE HELD HAT THERE IS NO NEXUS OF GRANTING INTEREST FREE SECURITY LOAN ABOUT 10-12 YEARS BACK AND THE PAYMENT OF TOD DURIN G THE YEAR. THE DISALLOWANCE OF INTEREST IS, THEREFORE, NOT BEING S USTAINED. WE, THEREFORE, DISMISS THE DEPARTMENTAL APPEAL ON THIS GROUND. 10. ONE MORE ISSUE FOR ASSTT. YEAR 2002-03 IS DISAL LOWANCE IN RESPECT OF PROPERTY TAX PAID BY M/S. KARROX TECHNOLOGIES. WE F IND THAT THE PROPERTY TAX PAID BY M/S. KARROX TECHNOLOGIES WAS REIMBURSED BY THE ASSESSEE AND THEREFORE SHOWN AS EXPENDITURE IN THE BOOKS OF THE ASSESSEE COMPANY. THEREFORE, THE DISALLOWANCE CANNOT BE SUSTAINED AND WE CONFIRM THE ORDER OF CIT(A) AND DISMISS THIS GROUND OF APPEAL BY THE DEP ARTMENT. 11. IN THE RESULT, ALL APPEALS ARE ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED ON THE 24H DAY OF JUNE, 2011. SD/- SD/- (PRAMOD KUMAR) (S MT. ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 24TH JUNE , 2011. ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 8 NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A) CONCERNED. 4 CIT CONCERNED. 5.DR,D BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA NOS.342-2987-4339/MUM/08/06 RONUK INDUSTRIES LTD. 9 DETAILS DATE INITIALS DESIGNA TION 1. DRAFT DICTATED ON 10-06-11 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 14-06-11 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/ AM 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