ANAND AUTOMOBILES, MUMBAI V. ADDL CIT CIR 23(2), MUMBAI

ITA 4535/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56311 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 02-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P K B MENON; MRS USHA NAIR
• Assessee Lawyers: SANTOSH PARAB
• Keywords: Business income; Opportunity of being heard; Earning of tax free income; Notional interest; Capital receipt

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A MUMBAI BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER & SHRI R.S.PADVEKAR, JUDICIAL MEMBER. I.T.A.NO.4535 & 4536/MUM/2010 A.YRS. 2006-07 & 2007-08 ANAND AUTOMOBILES, C/O. B.K.KHARE & CO., C.AS., 706/708, SHARDA CHAMBERS, NEW MARINE LINES, MUMBAI 400 020 PAN: AADFA 9171 D VS. ADDL. C.I.T., CIRCLE 23(2), MUMBAI. AND I.T.A.NO.5012 & 5013/MUM/2010 A.YRS. 2006-07 & 2007-08 ADDL. C.I.T., CIR. 23(2), MUMBAI. VS. ANAND AUTOMOBILES, MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SANTOSH PARAB. REVENUE BY : MRS. USHA NAIR & SHRI P.K.B.MENON DATE OF HEARING: 23-12-2011. DATE OF PRONOUNCEMENT: 30-12-2011. O R D E R PER T.R.SOOD, AM: THESE ARE CROSS APPEALS AND THE MAJOR ISSUES INVOL VED IN DISPUTE IN THE APPEALS FILED BY THE ASSESSEE AS WEL L AS THE REVENUE ARE SAME. THEREFORE, THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2. IN I.T.A.NO.4535/M/10 ASSESSEE HAS RAISED TWO GR OUNDS ON THE COMMON DISPUTES WHICH READ AS UNDER: ITA NOS.4545,4536 & 5012 & 5013 OF 2010 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT (A) ERRED IN ARRIVING AT THE FAIR RENT U/S.23(L)(A) OF THE INCOME TAX ACT, 1961, BY APPLYING THE NOTIONAL RATE OF 8.5% IN THE CONTEXT OF FALLING INTEREST RATES ON THE TOTAL MARK ET VALUE WHICH WAS COMPUTED @ RS.24,150/- PER SQ. RNT. FOR THE AREA TO TALING TO 8722 SQ. MTS. FOR THE YEAR 2000(COMPRISING OF BUILT-UP AREA OF 4361 SQ. MTS. PLUS OPEN SPACE AREA OF 4361 SQ. MTS.). THE LEARNED CIT (A) ERRED IN VALUING THE SAID PROPE RTY BY APPLYING THE RATE BY ADOPTING A 1000 HIKE IN THE MARKET VALUE PE R YEAR FOR THE RELEVANT ASSESSMENT YEAR ON THE SAID BASE VALUE OF RS.24,150/- PER SQ. MT. IN YEAR 2000 WHICH IS APPLICABLE TO NEW CON STRUCTIONS AND IS TOTALLY ARBITRARY. HE OUGHT TO HAVE APPRECIATED TH AT IN VIEW OF THE NATURE OF THE PROPERTY, IT DOES NOT HAVE ANY VALUE IN THE OPEN MARKET SINCE IT IS NOT POSSIBLE TO FIND A WILLING BUYER FO R THE SAME DUE TO THE CONDITION OF THE PROPERTY, DEFECTIVE TITLE AND REST RICTIONS/LIMITATIONS ON TRANSFER. 1 HE LEARNED CIT (A) ALSO ERRED IN TREATING 4361 SQ . MTS. AS LAND APPURTENANT TO THE SAID BUILDING AND APPLYING THE S AME FLAT RATE AS AFORESAID WHICH IS APPLICABLE TO THE BUILT-UP AREA. FURTHER THE LEARNED CIT (A) ERRED IN CALCULATING TH E FAIR RENT U/S.23(1)(A) OF THE INCOME TAX ACT, 1961, WITH REFE RENCE TO THE MARKET VALUE OF THE SAID PROPERTY INSTEAD OF THE VALUE OF THE INVESTMENT MADE BY THE APPELLANT IN THE SAID PROPERTY AS PER T HE MUMBAI ITAT DECISION IN THE CASE OF CHEM MECH (P) LTD. REPORTED IN 83 LTD 427. IN ANY EVENT, THE ANNUAL VALUE OUGHT NOT TO HAVE EX CEEDED THE VALUE FIXED BY THE MUNICIPALITY FOR PAYING RATES AND TAXE S, ETC. OR THE RENT RECEIVED BY THE ASSESSEE WHICHEVER IS NI ORE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A), FURTHER ERRED IN DIRECTING THE ASS ESSING OFFICER TO ASSESS THE BALANCE RENT RECEIVED AFTER DEDUCTING FR OM THE TOTAL RENT RECEIVED THE PROPORTIONATE RENT RECEIVED FOR 8722 S Q. MTS., UNDER THE HEAD INCOME FROM OTHER SOURCES. SIMILAR GROUNDS HAVE BEEN RAISED IN I.T.A.NO.4536/M /10. 3. THE REVENUE HAS RAISED THE COMMON DISPUTE BY WAY OF THE FOLLOWING COMMON GROUNDS IN BOTH THE YEARS: 1. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND I N LAW, THE ID. CIT(A) ERRED IN DIRECTING TO TAX THE SUB LEASE RENT AS INCOME FROM HOUSE PROPERTY BY TAKING RATE OF RETURN AT 8.5% ON MARKET VALUE AND ARRIVED AT BY ADDING 10% PER YEAR ON THE MARKET VAL UE FOR AX. 2005- 06 AND THE RENT FROM BALANCE LAND OF 14.557 SQ. MTR S. OUT OF TOTAL AREA OF 23,229 SQ.MTRS. AS INCOME FROM OTHER SOURCES. 2. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING THE MUNICIPAL TAXES PAID O N THE SUB LEASE PROPERTY EVEN THOUGH THE ASSESSEE HAS NOT PROVIDED DETAILS NOR PROVED THE ADMISSIBILITY OF THIS EXPENSES 3. ON THE FACTS AND CIRCUMSTANCE OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED IN DELETING NOTIONAL INTEREST @ 10% ON INTEREST FREE DEPOSIT AS THE RENT CHARGES WAS VERY LOW. ITA NOS.4545,4536 & 5012 & 5013 OF 2010 3 4. BRIEF FACTS OF THE CASE ARE THAT DURING THE COUR SE OF ASSESSMENT PROCEEDINGS, AO NOTICED THAT ASSESSEE HAS SHOWN CER TAIN INCOME UNDER THE HEAD COMPENSATION WHICH WAS, IN FACT, I N THE NATURE OF RENTAL INCOME IN RESPECT OF THE PROPERTY SITUATED A T SHRI AUROBINDO MARG, NEW DELHI. THE PROPERTY WAS LET OUT TO THE AS SOCIATE COMPANY. IT WAS FURTHER NOTICED THAT ASSESSEE HAS ALSO SHOWN SECURITY DEPOSIT AMOUNTING TO RS.50.43 CRORES IN A.Y 2006-07 AND RS. 49.60 CRORES IN A.Y 2007-08. THIS WAS SHOWN AS A LIABILITY UNDER CU RRENT LIABILITY. THE AO FURTHER NOTED THAT THESE AMOUNTS HAVE BEEN INVES TED BY THE ASSESSEE COMPANY IN INVESTMENT OF SHARES INCOME FRO M WHICH IS COMING AS DIVIDEND WHICH IS EXEMPT FROM TAX. FURTHE R, SOME AMOUNT HAS BEEN UTILISED FOR GIVING LOANS AND ADVANCES MOS TLY TO THE SISTER CONCERN. THEREFORE, A QUERY WAS RAISED AS TO WHY IN TEREST ON SUCH DEPOSITS SHOULD NOT BE TREATED AS RENT. IN RESPONSE , IT WAS SUBMITTED THAT ASSESSEE HAS LET OUT THIS PROPERTY OVER A PERI OD OF DECADE AND THIS SITUATION HAS BEEN ACCEPTED BY THE DEPARTMENT. IN R ESPECT OF SECURITY IT WAS STATED THAT NO INTEREST CAN BE ADDED NOTIONA LLY ON THE BASIS OF DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CA SE OF J.K.INVESTERS (BOM) LTD. AND SATYA CO. LTD. [75 TAXMAN 193]. HOWE VER, AO OBSERVED THAT THE SECURITY DEPOSIT RECEIPTS WERE IN VESTED IN SHARES OF FAMILY CONCERNS WHERE THE ASSESSEE HAS SUBSTANTIAL INTEREST AND THE SECURITIES HAVE BEEN RECEIVED FROM THE SISTER CONCE RN AND THIS WAS A COLLUSIVE TRANSACTION. SINCE INVESTMENT OF THE SECU RITIES IN SHARES WOULD ITA NOS.4545,4536 & 5012 & 5013 OF 2010 4 RESULT IN INTEREST EXEMPT INCOME, THEREFORE, INTERE ST ON SECURITIES HAS TO BE TAKEN NOTIONALLY. ACCORDINGLY, AO CALCULATED 10% NOTIONAL INTEREST AND ADDED THE SAME TO THE RENTAL INCOME AN D ALSO ALLOWED DEDUCTION U/S.24. 5. ON APPEAL, LD. CIT(A) WHILE HOLDING THAT PORTION OF INCOME RELATED TO THE HOUSE PROPERTY IS TO BE ASSESSED AS INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY, HOWEVER, HE FURT HER HELD THAT THE PORTION RELATED TO THE LAND LEASED OUT SHOULD NOT B E INCLUDED UNDER THIS HEAD. THE LD. CIT(A) CALCULATED THE TOTAL AREA LEAS ED OUT AT 8722 SQ.MTS. AND AFTER APPLYING THE COMMERCIAL RATE OF R S.24150 PER SQ.MT. TO THE LEASED OUT PORTION, WORKED OUT THE VALUE OF THE PROPERTY APPLYING THE RATE OF 8.5% ON SUCH CAPITAL VALUE. D URING THE YEAR HE FURTHER INCREASED THIS VALUE BY 10% AND DIRECTED TH E AO TO ASSESS THE ANNUAL LETTING VALUE ACCORDINGLY. THESE OBSERVATION S ARE MAINLY BASED ON HIS PREDECESSORS ORDER. 6. BEFORE US, LD. COUNSEL OF THE ASSESSEE FAIRLY AD MITTED THAT THIS ISSUE HAS BEEN RESTORED BACK BY THE TRIBUNAL IN THE EARLIER YEAR BY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH CO URT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [323 ITR 38]. 7. ON THE OTHER HAND, LD. DR SUPPORTED THE ORDER O F THE AO. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT WHEN THE ISSUE TRAVELLED TO THE TRIBUNAL FOR THE A. YRS. 1999-2000 AND 2001-02 IT WAS ADMITTED THAT INCOME HAS TO BE ASSES SED AS INCOME FROM HOUSE PROPERTY. SO FAR AS THIS ISSUE IS CONCER NED, THERE IS NO ITA NOS.4545,4536 & 5012 & 5013 OF 2010 5 CHANGE IN THE YEARS UNDER APPEAL AND ACCORDINGLY WE HOLD THAT INCOME HAS TO BE ASSESSED AS INCOME FROM HOUSE PROPERTY. T HE ISSUE REGARDING NOTIONAL INTEREST WAS SET ASIDE TO THE FI LE OF THE AO WITH A DIRECTION TO FOLLOW THE DECISION OF THE HON'BLE DEL HI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [SUPRA]. AS FAR AS THE ISSUE REGARDING ESTIMATE OF RENT AT 8.5% OF THE TOTAL MAR KET VALUE AND FURTHER INCREASE OF 10% IS CONCERNED, THE SAME WAS SET ASIDE TO THE FILE OF THE AO VIDE PARA-13 AS UNDER: 13. WITH REGARD TO THE OTHER ISSUES, WE FIND THAT THE LD. CIT(A), FOLLOWING THE DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF CHEM MECH (P) LTD. 83 LTD 427 HAS CALCULATED THE RENT AT 8.5% OF THE TOTAL MARKET VALUE OF THE PROPERTY. HOWEVER, WE FIND THAT IN THE SAID CASE THE PROPERTY WAS UNDER BOMBAY RENT CONTROL ACT WHER EAS THE IMPUGNED PROPERTY IS AT DELHI WHICH FALLS UNDER THE DELHI RENT CONTROL ACT, THEREFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN APPLYING RATE AT 8.5% OF THE MARKET VALUE OF THE PROPERTY AND WORKED OUT THE ANNUAL LETTING VALUE OF THE PORTION OF THE HOUSE PROPERTY AT 1,79, 04,085/- LESS PROPORTIONATE RENT RECEIVED. SINCE THE RELEVANT MAT ERIAL WITH REGARD TO THE OCCUPIED SPACE AND OPEN SPACE AND THE BASIS OF COMMERCIAL RATE APPLIED BY THE ID. CIT(A) AT 24,150/- ON THE LET OU T PORTION OF THE PROPERTY OF 8722 SQ. MTR. IS NOT AVAILABLE ON RECOR D AND THE SAME WAS NEITHER BEFORE THE A.O. NOR THERE IS ANY FINDING OF THE A.O. IN THIS REGARD AND ALSO THERE IS NO MATERIAL ON RECORD TO S HOW AS TO WHETHER THE ID. CIT(A) HAS PROVIDED ANY OPPORTUNITY TO THE A.O. IN THIS REGARD AS PROVIDED UNDER RULE 46-A OF THE INCOME TAX RULES, 1 962, WE ARE OF THE VIEW THAT IN THE INTEREST OF JUSTICE, THE MATTE R SHOULD GO BACK TO THE FILE OF THE A.O. AND ACCORDINGLY WE SET ASIDE THE O RDERS PASSED BY THE REVENUE AUTHORITIES ON THIS ACCOUNT AND SEND BACK T HE MATTER TO THE FILE OF THE A.O. WHO SHALL DECIDE THE ISSUE AFRESH IN THE LIGHT OF OUR OBSERVATIONS HEREINABOVE AND ACCORDING TO LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THE GROUNDS TAKEN BY THE ASSESSEE AND REVENUE IN THIS REGARD AR E, THEREFORE, PARTLY ALLOWED FOR STATISTICAL PURPOSE SEND BACK THE MATTE R TO THE FILE OF THE A.O. WHO SHALL DECIDE THE ISSUE AFRESH IN THE LIGHT OF OUR OBSERVATIONS HEREINABOVE AND ACCORDING TO LAW AFTER PROVIDING RE ASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE GRO UNDS TAKEN BY THE ASSESSEE AND REVENUE IN THIS REGARD ARE, THEREFORE, PARTLY ALLOWED FOR STATISTICAL PURPOSE. ITA NOS.4545,4536 & 5012 & 5013 OF 2010 6 SINCE THE ISSUES BEFORE US ARE IDENTICAL, WE SET AS IDE THE ORDER OF THE LD. CIT(A) AND REMIT THE SAME TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE SAME ON THE BASIS OF THE OBSERVATIONS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [SUPRA], WHICH ARE AS UNDER: WE APPROVE THE AFORESAID VIEW OF THE DIVISION BENC H OF THIS COURT AND THE OPERATIVE WORDS IN SECTION 23(1)(A) OF THE ACT ARE 'THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR'. THESE WORDS PROVIDE A SPECIFIC DIRECTION TO THE REVENUE FOR DETERMINING THE 'FAIR RENT'. THE ASSESSING OFFICER, HAVING REGARD TO THE AFORESAID PROVISION IS EXPECTED TO MAKE AN INQUIRY AS TO WHAT WOULD BE THE POSSIBLE RENT THAT THE PROPERTY MIGHT FETCH. T HUS, IF HE FINDS THAT THE ACTUAL RENT RECEIVED IS LESS THAN THE 'FAIR/MA RKET RENT' BECAUSE OF THE REASON THAT THE ASSESSEE HAS RECEIVED ABNORMAL LY HIGH INTEREST-FREE SECURITY DEPOSIT AND BECAUSE OF THAT REASON, THE A CTUAL RENT RECEIVED IS LESS THAN THE RENT WHICH THE PROPERTY MIGHT FETCH, HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF . HOWEVER, BY NO STRETCH OF IMAGINATION, THE NOTIONAL INTEREST ON THE INTEREST- FREE SECURITY CAN BE TAKEN AS THE DETERMINATIVE FACTOR TO ARRIVE AT A 'F AIR RENT'. THE PROVISIONS OF SECTION 23(1)(A) DO NOT MANDATE THIS. THE DIVISION BENCH IN ASIAN HOTELS LIMITED [2010] 323 ITR 490 (DELHI), THUS, RIGHTLY OBSERVED THAT IN A TAXING STATUTE IT WOULD BE UNSA FE FOR THE COURT TO GO BEYOND THE LETTER OF THE LAW AND TRY TO READ INTO THE PROVISION MORE THAN WHAT IS ALREADY PROVIDED FOR. WE MAY ALSO REC ORD THAT EVEN THE BOMBAY HIGH COURT IN THE CASE OF CIT V. J. K. INVE STORS (BOMBAY) LTD. [2001] 248 ITR 723 (BOM) CATEGORICALLY REJECT ED THE FORMULA OF ADDITION OF NOTIONAL INTEREST WHILE DETERMINING TH E 'FAIR RENT' IN THE FOLLOWING MANNER (PAGE 727) : 'BEFORE CONCLUDING WE MAY POINT OUT THAT UNDER SECT ION 23(1)(B), THE WORD `RECEIVABLE' DENOTES PAYMENT OF ACTUAL ANNUAL RENT TO THE ASSESSEE. HOWEVER, IF IN A GIVEN YEAR A PORTION OF THE ACTUAL ANNUAL RENT IS IN ARREARS, IT WOULD STILL COME WITHIN SECT ION 23(1)(B) AND IT IS FOR THIS REASON THAT THE WORD `RECEIVABLE' MUST BE READ IN THE CONTEXT OF THE WORD `RECEIVED' IN SECTION 23(1)(B). IN THE LIG HT OF THE ABOVE INTERPRETATION, NOTIONAL INTEREST CANNOT FORM PART OF THE ACTUAL RENT AS CONTEMPLATED BY SECTION 23(1)(B) OF THE ACT. WE ONC E AGAIN REPEAT THAT WHETHER SUCH NOTIONAL INTEREST COULD FORM PART OF T HE FAIR RENT UNDER SECTION 23(1)(A) IS EXPRESSLY LEFT OPEN.' SINCE THE PROVISIONS OF FIXATION OF ANNUAL RENT UND ER THE DELHI MUNICIPAL CORPORATION ACT ARE IN PARI MATERIA WITH SECTION 23 OF THE ACT, WE ARE INCLINED TO ACCEPT THE AFORESAID VIEW OF THE CALCUTTA HIGH COURT IN SATYA CO. LTD. [1997] 140 CTR (CAL) 569 T HAT IN SUCH CIRCUMSTANCES, THE ANNUAL VALUE FIXED BY THE MUNIC IPAL AUTHORITIES CAN ITA NOS.4545,4536 & 5012 & 5013 OF 2010 7 BE A RATIONAL YARDSTICK. HOWEVER, IT WOULD BE SUBJE CT TO THE CONDITION THAT THE ANNUAL VALUE FIXED BEARS A CLOSE PROXIMITY WITH THE ASSESSMENT YEAR IN QUESTION IN RESPECT OF WHICH THE ASSESSMENT IS TO BE MADE UNDER THE INCOME-TAX LAWS. IF THERE IS A CHANGE IN CIRCUM STANCES BECAUSE OF PASSAGE OF TIME, VIZ., THE ANNUAL VALUE WAS FIXED B Y THE MUNICIPAL AUTHORITIES MUCH EARLIER IN POINT OF TIME ON THE BA SIS OF RENT THAN RECEIVED, THIS MAY NOT PROVIDE A SAFE YARDSTICK IF IN THE ASSESSMENT YEAR IN QUESTION WHEN ASSESSMENT IS TO BE MADE UNDE R THE INCOME-TAX ACT, THE PROPERTY IS LET OUT AT A MUCH HIGHER RENT. THUS, THE ASSESSING OFFICER IN A GIVEN CASE CAN IGNORE THE MUNICIPAL VA LUATION FOR DETERMINING ANNUAL LETTING VALUE IF HE FINDS THAT T HE SAME IS NOT BASED ON THE RELEVANT MATERIAL FOR DETERMINING THE 'FAIR RENT' IN THE MARKET AND THERE IS SUFFICIENT MATERIAL ON RECORD FOR TAK ING A DIFFERENT VALUATION. WE MAY PROFITABLY REPRODUCE THE FOLLOWING OBSERVA TIONS OF THE SUPREME COURT IN THE CASE OF CORPORATION OF CA LCUTTA V. SMT. PADMA DEBI, AIR 1962 SC 151, 153. 'A BARGAIN BETWEEN A WILLING LESSOR AND A WILLING L ESSEE UNINFLUENCED BY ANY EXTRANEOUS CIRCUMSTANCES MAY AFFORD A GUIDIN G TEST OF REASONABLENESS. AN INFLATED OR DEFLATED RATE OF REN T BASED UPON FRAUD, EMERGENCY, RELATIONSHIP AND SUCH OTHER CONSIDERATIO NS MAY TAKE IT OUT OF THE BOUNDS OF REASONABLENESS.' THUS THE RATEABLE VALUE, IF CORRECTLY DETERMINED, U NDER THE MUNICIPAL LAWS CAN BE TAKEN AS ALV UNDER SECTION 23(1)(A) OF THE ACT. TO THAT EXTENT WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT RATEABLE V ALUE IS NOT BINDING ON THE ASSESSING OFFICER. IF THE ASSESSING OFFICER CAN SHOW THAT RATEABLE VALUE UNDER MUNICIPAL LAWS DOES NOT REPRES ENT THE CORRECT FAIR RENT, THEN HE MAY DETERMINE THE SAME ON THE BASIS O F MATERIAL/EVIDENCE PLACED ON RECORD. THIS VIEW IS FORTIFIED BY THE DE CISION OF THE PATNA HIGH COURT IN THE CASE OF KASHI PRASAD KATARUKA V. CIT [1975] 101 ITR 810. THE ABOVE DISCUSSION LEADS TO THE FOLLOWING CONCLUS IONS: (I) ALV WOULD BE THE SUM AT WHICH THE PROPERTY MAY BE REASONABLY LET OUT BY A WILLING LESSOR TO A WILLING LESSEE UNINFLU ENCED BY ANY EXTRANEOUS CIRCUMSTANCES. (II) AN INFLATED OR DEFLATED RENT BASED ON EXTRANEO US CONSIDERATION MAY TAKE IT OUT OF THE BOUNDS OF REASONABLENESS. (III) ACTUAL RENT RECEIVED, IN NORMAL CIRCUMSTANCES , WOULD BE RELIABLE EVIDENCE UNLESS THE RENT IS INFLATED/DEFLATED BY RE ASON OF EXTRANEOUS CONSIDERATION. (IV) SUCH ALV, HOWEVER, CANNOT EXCEED THE STANDARD RENT AS PER THE RENT CONTROL LEGISLATION APPLICABLE TO THE PROPERTY . (V) IF STANDARD RENT HAS NOT BEEN FIXED BY THE RENT CONTROLLER, THEN IT IS THE DUTY OF THE ASSESSING OFFICER TO DETERMINE THE STANDARD RENT AS PER THE PROVISIONS OF RENT CONTROL ENACTMENT. ITA NOS.4545,4536 & 5012 & 5013 OF 2010 8 (VI) THE STANDARD RENT IS THE UPPER LIMIT, IF THE F AIR RENT IS LESS THAN THE STANDARD RENT, THEN IT IS THE FAIR RENT WHICH SHALL BE TAKEN AS ALV AND NOT THE STANDARD RENT. WE MAY ALSO ADD THAT IN PLAC E LIKE DELHI, THIS HAS NOW BECOME REDUNDANT INASMUCH AS THE VERY BASIS OF FIXING PROPERTY TAX HAS UNDERGONE A TOTAL CHANGE WITH AMENDMENT OF THE MUNICIPAL LAWS BY THE AMENDMENT ACT, 2003. NOW THE PROPERTY T AX IS ON UNIT METHOD BASIS. (V) IF STANDARD RENT HAS NOT BEEN FIXED BY THE RENT CONTROLLER, THEN IT IS THE DUTY OF THE ASSESSING OFFICER TO DETERMINE THE STANDARD RENT AS PER THE PROVISIONS OF RENT CONTROL ENACTMENT. (VI) THE STANDARD RENT IS THE UPPER LIMIT, IF THE F AIR RENT IS LESS THAN THE STANDARD RENT, THEN IT IS THE FAIR RENT WHICH SHALL BE TAKEN AS ALV AND NOT THE STANDARD RENT. WE MAY ALSO ADD THAT IN PLACE LIKE DELHI, THIS HAS NOW BECOME REDUNDANT INASMUCH AS THE VERY BASIS OF FIXING PROP ERTY TAX HAS UNDERGONE A TOTAL CHANGE WITH AMENDMENT OF THE MUNI CIPAL LAWS BY THE AMENDMENT ACT, 2003. NOW THE PROPERTY TAX IS ON UNI T METHOD BASIS. WE WOULD LIKE TO REMARK THAT STILL THE QUESTION REM AINS AS TO HOW TO DETERMINE THE REASONABLE/FAIR RENT. IT HAS BEEN IND ICATED BY THE SUPREME COURT THAT EXTRANEOUS CIRCUMSTANCES MAY INF LATE/DEFLATE THE 'FAIR RENT'. THE QUESTION WOULD, THEREFORE, BE AS T O WHAT WOULD BE CIRCUMSTANCES WHICH CAN BE TAKEN INTO CONSIDERATION BY THE ASSESSING OFFICER WHILE DETERMINING THE FAIR RENT. IT IS NOT NECESSARY FOR US TO GIVE ANY OPINION IN THIS BEHALF, AS WE ARE NOT CALLED UP ON TO DO SO IN THESE APPEALS. HOWEVER, WE MAY OBSERVE THAT NO PARTICULAR TEST CAN BE LAID DOWN AND IT WOULD DEPEND ON THE FACTS OF EACH CASE. WE WOULD DO NOTHING MORE THAN TO EXTRACT THE FOLLOWING PASSAGE FROM THE SUPREME COURT JUDGMENT IN THE CASE OF MOTICHAND HIRACHAND V. BOMBAY MUNICIPAL CORPORATION, AIR 1968 SC 441, 442 : 'IT IS WELL-RECOGNIZED PRINCIPLE IN RATING THAT BOT H GROSS VALUE AND NET ANNUAL VALUE ARE ESTIMATED BY REFERENCE TO THE RENT AT WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM Y EAR TO YEAR. VARIOUS METHODS OF VALUATION ARE APPLIED IN ORDER T O ARRIVE AT SUCH HYPOTHETICAL RENT, FOR INSTANCE, BY REFERENCE TO TH E ACTUAL RENT PAID FOR THE PROPERTY OR FOR OTHERS COMPARABLE TO IT OR WHER E THERE ARE NO RENTS BY REFERENCE TO THE ASSESSMENTS OF COMPARABLE PROPE RTIES OR TO THE PROFITS EARNED FROM THE PROPERTY OR TO THE COST OF CONSTRUCTION.' THE OTHER ISSUE REGARDING ESTIMATION OF ANNUAL VALU E AT 8.5% IS ALSO SET ASIDE TO BE DECIDED ALONG WITH THE OTHER ISSUES IN THE LIGHT OF THE DIRECTIONS ISSUED IN EARLIER YEARS FOR A.YRS. 1999- 2000 AND 2001-02 IN I.T.A.NOS.4151 & 4057/M/06 AND I.T.A.NOS.5284 & 524 1/M/04. 9. THE OTHER DISPUTE IN A.Y 2006-07 HAS BEEN RAISED BY WAY OF GROUND NO.3 IN I.T.A.NO.4535/M/10, WHICH READS AS U NDER: ITA NOS.4545,4536 & 5012 & 5013 OF 2010 9 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) FURTHER ERRED IN CONFIRMING THE TREA TMENT OF RS.3,00,00,000 BEING THE FORFEITURE OF RENT DEPOSIT AS INCOME UNDER SECTION 41. THE ASSESSING OFFICER HAS NOT GIVEN ADE QUATE OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS CASE BEFORE HIM. EVE N OTHERWISE, THE SUM WAS NOT TAXABLE AS IT WAS IN THE NATURE OF CAPITAL RECEIPT AND NOT A CESSATION OF LIABILITY. 10. DURING THE COURSE OF ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAS CREDITED A SUM OF RS.3 CRORES BEING FO RFEITURE OF THE SECURITY DEPOSIT. HOWEVER, WHILE WORKING OUT THE TA XABLE INCOME IN THE COMPUTATION ASSESSEE HAS REDUCED THIS AMOUNT TO BE CONSIDERED SEPARATELY AND FINALLY THIS AMOUNT WAS NOT OFFERED FOR TAXATION. ON A QUERY WHY THIS AMOUNT SHOULD NOT BE TAXED, IT WAS C ONTENDED THAT SAME IS IN THE NATURE OF CAPITAL RECEIPT AND, THERE FORE, CANNOT BE TAXED. DESPITE OPPORTUNITIES GIVEN BY THE AO NO FUR THER DETAILS WERE SUBMITTED. ACCORDINGLY, AO WAS OF THE VIEW THAT THI S FORFEITURE CANNOT BE TREATED AS CAPITAL RECEIPT, BECAUSE AFTER FORFEI TURE THE ABOVE AMOUNT BECOMES TAXABLE U/S.41 AS CESSATION OF LIABI LITY DURING THE YEAR AND IS A REGULAR INCOME. IN THIS REGARD, HE ALSO RE LIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. T. V. SUNDERAM IYENGAR AND SONS LTD. [222 ITR 344] 11. ON APPEAL, ASSESSEE DID NOT MAKE MUCH ARGUMENT AND LD. CIT(A) HAS OBSERVED THAT NO SUBMISSIONS WERE MADE O N THIS GROUND. ACCORDINGLY, LD. CIT(A) CONFIRMED THE ACTION OF THE AO AND FURTHER RELIED ON THE DECISION OF PUNJAB & HARYANA HIGH COU RT IN THE CASE OF CIT VS. HARYANA CO-OP. SUGAR MILLS LTD. [154 ITR 75 1]. ITA NOS.4545,4536 & 5012 & 5013 OF 2010 10 12. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTE D THAT RECEIPTS OF RS.3 CRORES WAS OF CAPITAL NATURE AND NOT TAXABL E AND IN THIS REGARD HE RELIED ON THE DECISION OF THE MUMBAI BENCH OF TH E TRIBUNAL IN THE CASE OF ACIT VS. DAS & CO. [133 TTJ 542], COPY OF T HIS DECISION IS FILED ON RECORD. ON QUERY BY THE BENCH, HE ADMITTED THAT THE PROPERTY WAS LET TO THE SISTER CONCERN ON RENT IN APRIL 20, 1991 . THE RENT WAS INCREASED FROM TIME TO TIME AND ULTIMATELY ON 29-9- 2004 THE RENT WAS INCREASED TO RS.4 LACS P.M. AND LEASE WAS EXTENDED UPTO 31-3-2015. IN TERMS OF CL.3 OF THIS AGREEMENT, THE SECURITY DEPOS IT GIVEN BY THE LESSEE COULD BE FORFEITED IN THE EVENT OF PREMATURE VACATION OF THE PREMISES AT THE OPTION BY THE LESSOR. HE ALSO ADMIT TED THAT AFTER SUCH VACATION THE PROPERTY HAS NOT BEEN LET OUT TO ANY O THER PERSON. IT WAS ALSO ADMITTED THAT NO TERMINATION AGREEMENT WAS DRA WN BETWEEN THE PARTIES. THE LD. COUNSEL OF THE ASSESSEE WAS DIRECT ED TO FILE THE RELEVANT LEASE AGREEMENT AND A NOTE ON THE PROPERTY LET OUT WHICH HAS BEEN FILED VIDE LETTER DATED 1-12-2011. 13. ON THE OTHER HAND, LD. DR SUBMITTED THAT IT IS A CLEAR CASE OF SECURITY WHICH WAS TAKEN FOR THE PURPOSE THAT IN CA SE LESSEE FAILS TO PAY THE RENT, THEN SUCH SECURITY COULD BE ADJUSTED AGAINST THE RENT. FORFEITURE OF THE SECURITY WOULD PARTAKE THE SAME N ATURE OF INCOME AGAINST WHICH IT WAS TAKEN AND THERE IS NO QUESTION OF TREATING THE SAME AS CAPITAL RECEIPT. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND THAT THE ASSESSEE HAD LEASED OUT THE PROPERTY TO PUROLAT OR INDIA LTD., ITA NOS.4545,4536 & 5012 & 5013 OF 2010 11 ORIGINALLY ON 10-12-1987. AS PER THE COPY OF THE AG REEMENT, WHICH HAS BEEN FILED BEFORE US, THE CLAUSE REGARDING SECURITY IS MENTIONED IN CLAUSE-2 WHICH READS AS UNDER: 2. THAT THE LESSEE AT THE REQUEST OF THE LESSOR HA S, AGREED TO GIVE AN INTEREST FREE SECURITY DEPOSIT TO THE LESSOR OF A SUM OF RS..1,00,00,000/ (RUPEES ONE CRORE ONLY) TO BE RET AINED BY THE LESSOR AS SECURITY FOR DUE PERFORMANCE OF ITS TERM S AND COVENANTS BY THE LESSEE. THE SECURITY DEPOSIT OF RS.ONE CRORE SH ALL BE DEPOSITED BY THE LESSEE WITH THE LESSOR ON OR BEFORE 30TH JUNE, 1990. THE LESSEE FURTHER AGREES THAT A SUM OF RS.40.OO LACS HALL. BE DEPOSITED ON ITS BEHALF BY MARCH, 1988 AND A SUM OF RS.30 LACS BY DE CEMBER, 1989. BALANCE SUM SHALL BE DEPOSITED ON OR BEFORE JUNE, 1 990. THE SAID SECURITY DEPOSIT SHALL BE REFUNDED BY THE LESSOR TO THE LESSEE UPON EXPIRY OR TERMINATION OF THE LEASE OR ITS RENEWED T ERM AND HANDING OVER OF VACANT POSSESSION OF THE DEMISED PREMISES BY THE LESSEE TO THE LESSOR, SUBJECT, HOWEVER, TO :- 1) LESSOR HAVING, ENTERED INTO SIMILAR ARRANGEMENT WITH OTHER PARTY, WHO HAS AMONG OTHERS, AGREED TO PAY A SIMILAR OR H IGHER DEPOSIT AND, TILL THE CONSUMMATION OF SUCH ALTERNATE ARRANGEMENT , REPAYMENT OBLIGATION ON PART OF THE LESSOR WILL REMAIN SUSPEN DED. OR II) THE LESSOR ELECTING TO DISPOSE OFF THE DEMISED PREMISES, IN WHICH CASE DEPOSIT MONEY WOULD BE RETURNED TO THE LESSEE OUT OF THE SALE PROCEEDS OF THE DEMISED PREMISES : THE OBJECT BEING THAT THE LESSOR WILL NOT BE CALL ED UPON TO REFUND THE DEPOSIT UNLESS HE IS IN RECEIPT OF MONEY FROM ANY OTHER ARRANGEMENT OF, THE ABOVE NATURE. IT IS, ALSO CLARI FIED THAT THE REPAYMENT OBLIGATION WOULD ARISE PROVIDED, THE LICENSOR IS SA TISFIED THAT THERE ARE NO DUES OUTSTANDING FROM THE LICENSEE TO ANY ONE, I NCLUDING ANY AUTHORITY GOVERNMENT OR LOCAL IN RESPECT OF THE D EMISED PREMISES AND THE LESSEE MAKING GOOD THE DEFICIENCY IN THE DE MISED PREMISES ENSURING THAT THE DEMISED PREMISES VACATED ARE OF T HE SAME CONDITION AS THEY WERE ORIGINALLY AT THE TIME OF ENTERING INT O THE LEASE ARRANGEMENT. THUS, FROM THE ABOVE IT IS CLEAR THAT SECURITY WAS GIVEN MAINLY FOR DUE PERFORMANCE OF THE TERMS AND COVENANTS OF THE AGREE MENT WHICH, IN TURN, MEANS THAT SECURITY WAS MAINLY GIVEN TO ENSUR E THE TIMELY ITA NOS.4545,4536 & 5012 & 5013 OF 2010 12 PAYMENT OF RENT ETC. THIS AGREEMENT WAS RENEWED ON 20-4-1991 ON THE SAME TERMS AND CONDITIONS. IT WAS FURTHER RENEW ED ON 1-9-2000, WHEN THE SECURITY WAS INCREASED TO RS.3 CRORES AND LEASE PERIOD WAS EXTENDED UPTO 31-3-10. THUS, IT IS CLEAR THAT THE O NLY AMOUNT OF SECURITY WAS INCREASED BUT THE OTHER TERMS AND COND ITIONS REMAINED THE SAME. IT IS MENTIONED IN THE NOTE FURNISHED ALO NG WITH THE LETTER DATED 1-12-2011 THAT A FURTHER SUPPLEMENTARY AGREEM ENT WAS ENTERED INTO ON 29-9-2004 BY WHICH RENT WAS INCREASED TO RS .4 LACS AND LEASE WAS FIXED FOR A PERIOD UPTO 31-3-2015. THE RELEVANT PORTION OF THE NOTE READS AS UNDER: THE FIRM HAD ENTERED INTO A RENT AGREEMENT WITH PI L VIDE RENT AGREEMENT DATED APRIL 20, 1991 AT A MONTHLY RENT OF RS.42,000. AS PER THE TERMS OF AGREEMENT, PIL HAD GIVEN THE ASSESSEE AN INTEREST FREE SECURITY DEPOSIT OF RS.1,00,00,000 WHICH IN LATER Y EARS WAS INCREASED TO RS.3,00,00,000. ON SEPTEMBER 29, 2004 THE PARTIE S ENTERED INTO A SUPPLEMENTARY RENT AGREEMENT BY WHICH THE LEASE PER IOD WAS EXTENDED TO MARCH 31, 2015 AND THE RENT WAS ALSO INCREASED T O RS.4,00,000 PER MONTH. THE LEASE WAS FOR A FIXED PERIOD UPTO MARCH 31, 2015. IN TERMS OF CLAUSE 3 OF THIS AGREEMENT; IT WAS STATED THAT T HE SECURITY DEPOSIT GIVEN BY THE LESSEE WOULD BE FORFEITED IN THE EVENT OF PREMATURE VACATION OF PREMISES AT THE OPTION OF THE LESSOR. T HE UMBILICAL CORD OF THIS CLAUSE RUNS FROM THE ORIGINAL AGREEMENT DATED DECEMBER 10, 1987, CLAUSE 2 WHICH EMPOWERED THE LESSOR (ASSESSEE) TO F ORFEIT THE DEPOSIT. ON APRIL 1, 2005 PIL INFORMED ITS INTENTION OF VACA TING THE PREMISES BY TERMINATING THE AGREEMENT DUE TO INCREASED PRESS URE ON ITS MARGIN AND COST CUTTING MEASURES. IT ALSO REQUESTED THE AS SESSEE TO TAKE THE POSSESSION OF THE LAND AND BUILDING AND REFUND THE SECURITY DEPOSIT OF RS.3,00,00,000. THE ASSESSEE REFUSED TO REFUND THE SECURITY DEPOSIT CITING THE TERMS OF THE AGREEMENT OF FORFEITURE OF SECURITY DEPOSIT ON PREMATURE TERMINATION OF LEASE. ACCORDINGLY THE DEP OSIT WAS FORFEITED AND THE AGREEMENT WAS TERMINATED WITH EFFECT FROM A PRIL 1, 2005. HOWEVER, THE COPY OF THE LEASE DEED DATED 29-9-2004 HAS NOT BEEN FURNISHED. WE HAD ALSO ENQUIRED FROM THE LD. COUNSE L OF THE ASSESSEE WHETHER THESE PREMISES WERE GIVEN ON LEASE TO ANY O THER PARTY. HE ITA NOS.4545,4536 & 5012 & 5013 OF 2010 13 SUBMITTED THAT THE PREMISES HAVE NOT GIVEN TO ANY O THER PARTY AND ARE LYING VACANT. HE ALSO ADMITTED THAT NO TERMINATION AGREEMENT WAS SIGNED, BUT THE LESSEE FOUND THE RENT TO BE EXCESSI VE AND VACATED THE PREMISES. 15. THE LD. COUNSEL OF THE ASSESSEE HAD MAINLY RELI ED ON THE DECISION OF ACIT VS. DAS & CO. [SUPRA]. WE FIND THA T THE SAID DECISION IS CLEARLY DISTINGUISHABLE BECAUSE IN THAT CASE THE INCOME WAS ASSESSED AS BUSINESS INCOME AND LESSOR IN THAT CASE WAS DOIN G THE BUSINESS OF WARE HOUSING. THEREFORE, THERE IS AN ELEMENT OF OTH ER SERVICES INVOLVED IN THAT CASE. FURTHER IN THAT CASE THE LESSEE HAD P AID A SUM OF RS.24,37,500/- TOWARDS DAMAGES AND HAS ALSO ENTERED INTO A TERMINATION AGREEMENT WHEREBY HE HAS AGREED TO GET THE SECURITY FORFEITED AND HAD ALSO AGREED TO PAY FURTHER DAMAG ES. THEREFORE, THE COMPENSATION WAS TOWARDS THE DAMAGES OF THE PREMISE S. IN THE CASE BEFORE US THERE IS NO TERMINATION DEED ENTERED IN T O BY THE ASSESSEE AND IT IS NOT EVEN SUGGESTED THAT ANY PART OF THE S ECURITY IS TOWARDS DAMAGES OF THE PROPERTY. ADMITTEDLY, ASSESSEE HAD G IVEN THESE PREMISES TO THE SISTER CONCERN WHERE ASSESSEE IS HO LDING 40% SHARES. WE FAIL TO UNDERSTAND WHY THE OTHER PARTY HAS ALLOW ED THE SECURITY TO BE FORFEITED. EVEN IF FULL RENT WAS CHARGED THE ANN UAL RENT WOULD COME TO RS.48 LACS AND IT COULD HAVE LASTED FOR ANOTHER SIX YEARS WITHOUT ANY FURTHER MONEY, STILL THE LESSEE HAS WALKED AWAY ALL OWING THE ASSESSEE TO FORFEIT THE SECURITY. THIS IS CLEARLY A COLLUSIV E ARRANGEMENT. SUCH FORFEITURE IN THE ABSENCE OF ANY DAMAGE TO THE PROP ERTY HAS TO PAR ITA NOS.4545,4536 & 5012 & 5013 OF 2010 14 TAKE THE NATURE OF REVENUE RECEIPT. THEREFORE, IN O UR OPINION, THIS AMOUNT HAS TO BE ASSESSED AS REVENUE RECEIPT UNDER THE HEAD INCOME FROM HOUSE PROPERTY/INCOME FROM OTHER SOURCES. HOW EVER, WE WOULD LIKE TO OBSERVE THAT SINCE WHILE DECIDING THE MAIN ISSUE REGARDING DETERMINATION OF THE RENT U/S.23[1][A], WE HAVE REM ANDED THE MATTER BACK TO THE FILE OF THE AO TO BE DECIDED IN THE LIG HT OF THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [SUPRA]. THEREFORE, IF THE PORTION OF THE PREMISES GIVEN TO PUROLATOR INDIA LTD. REMAINS VACANT AND IF A NOTIONAL RENT IS DETERMINED U/S.23[1][A], THEN FORFEITURE OF SECURITY CAN BE AD JUSTED AGAINST RENT. THEREFORE, WE DIRECT THE AO TO CONSIDER THE TAXABIL ITY OF THIS AMOUNT ALONG WITH THE MAIN DISPUTE INVOLVED. 16. GROUNDS NO.3 & 4 OF I.T.A.NO.4536/M/10 WERE NOT PRESSED BEFORE US. THEREFORE, SAME ARE DISMISSED AS NOT PRE SSED. 17. IN THE RESULT, APPEALS OF THE ASSESSEE AS WELL AS REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 3 0-12-2011. SD/- SD/- (R.S.PADVEKAR) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30-12-2011. P/-* ITA NOS.4545,4536 & 5012 & 5013 OF 2010 15