AGNI INVESTMENT AND TRADING PVT. LTD. (NOW KNOWN AS : AGNI COMMEX LLP), MUMBAI V. ITO 3(1)(1), MUMBAI

ITA 5083/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0922 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2005-2006
• Appeal Filed On: 09-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: J SRAVANAN
• Keywords: Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI SAKTIJIT DEY (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 5083/MUM/2016 ASSESSMENT YEAR: 2005-06 M/S. AGNI INVESTMENT AND TRADING VS. ITO 3(1)(1) PVT. LTD. (NOW KNOWN AS AGNI ROOM NO. 666, 6 TH FLOOR COMMEX LLP), 84-A, MITTAL COURT AAYAKAR BHAVAN 224 NARIMAN POINT, M.K. ROAD MUMBAI 400021 MUMBAI - 400020 PAN NO. ABBFA2197E (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VIJAY MEHTA, AR REVENUE BY: SHRI J. SRAVANAN, DR DATE OF HEARING : 02/0 2/2017 DATE OF PRONOUNCEMENT: 19/04/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2005-06. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 7, MUMBAI AND ARISES OUT O F ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: I. THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IS ILLEGAL, BAD IN LAW, ULTRA VIRES AND CONTRARY TO TH E PROVISIONS OF LAW AND FACTS OF THE CASE AND WITHOUT APPRECIATING THE FACTS OF THE CASE IN THEIR PROPER PERSPECTIVE. ITA NO. 5083/MUM/2016 2 II. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN ADDING RS. 9,86,000/- AS RENT RECEIVABLE U/S 23(1)( B) AND FAILED TO APPRECIATE THAT UNDER SECTION 23(1)(B) ONLY THE ACT UAL RENT RECEIVED OR RECEIVABLE CAN BE TAKEN INTO CONSIDERAT ION AND NOT ANY NOTIONAL ADVANTAGE BY CONSIDERING 10% NOTIONAL INTE REST FREE DEPOSIT RECEIVED FROM THE TENANT. 3. IN A NUTSHELL, THE FACTS ARE THAT BASED ON THE M ONTHLY RENTAL RECEIPTS OF RS. 9,000/-, THE ASSESSEE HAS SHOWN INC OME FROM HOUSE PROPERTY AT RS. 1,08,000/- DURING THE IMPUGNED ASSE SSMENT YEAR. HOWEVER, THE ASSESSING OFFICER (AO) OBSERVED THAT T HE ASSESSEE HAD TAKEN SECURITY DEPOSIT OF RS. 98,60,000/- FROM THE TENANT M/S. RELIANCE INDUSTRIES LTD. AND AS A RESULT, THE SAID AGREEMENT FOR RENT WAS SIGNED ON A MEAGRELY SUM OF RS. 9,000/- P.M. TH E AO FURTHER NOTED THAT THE PROPERTY FLAT NO. 41, VIJAYDEEP, KHA R, MUMBAI IS LOCATED IN A VERY POSH LOCALITY AND THEREFORE RENT CHARGED BY THE ASSESSEE WAS ON A VERY LOW SIDE OF THE MARKET RATE CHARGED IN THE AREA. ACCORDINGLY, THE AO SOUGHT TO MAKE AN ADDITIO N TO THE ANNUAL LETTING VALUE (ALV) ON THE BASIS OF NOTIONAL INTERE ST OF 10% OF THE DEPOSIT OF RS. 98,60,000/- TAKEN FROM THE TENANT. A T THE TIME OF THE ASSESSMENT PROCEEDINGS, THE ASSESSEE SUBMITTED THAT THERE WAS NO PROVISION IN THE ACT TO MAKE ANY ADDITION ON ACCOUN T OF NOTIONAL INTEREST AND THAT THE ALV U/S 23(1)(A) CANNOT EXCEE D THE MAXIMUM CEILING OF RENT LAID DOWN IN THE APPROPRIATE RENT C ONTROL LEGISLATION. THUS THE ASSESSEE SUBMITTED BEFORE THE AO THAT THE RENT DETERMINED CANNOT EXCEED THE CEILING OF RENT FIXED BY BOMBAY R ENT CONTROL ACT (BRCA). THE AO DID NOT AGREE WITH THE ABOVE CONTENT ION OF THE ASSESSEE AS BRCA WAS NOT APPLICABLE BECAUSE THE PAI D UP CAPITAL OF THE TENANT, M/S. RELIANCE INDUSTRIES LTD. FAR EXCEE DED RS. 1 CRORE AND THUS FELL OUTSIDE THE CLAUSES UNDER THE BRCA. THE A O RELIED ON THE ITA NO. 5083/MUM/2016 3 DECISION IN THE CASE OF CORPORATION OF CALCUTTA VS. SM. PADMA DEBI AIR 1961 SC 151, 153 WHEREIN THE FOLLOWING IS HELD: A BARGAIN BETWEEN A WILLING LESSOR AND A WILLING L ESSEE UNINFLUENCED BY ANY EXTRANEOUS CIRCUMSTANCES MAY AFFORD A GUIDING T EST OF REASONABLENESS. AN INFLATED OR DEFLATED RTE OF RENT BASED UPON FRAUD, EMERGENCY, RELATIONSHIP AND SUCH OTHER CONSIDERATIO NS MAY TAKE IT OUT OF THE BOUNDS OF REASONABLENESS THE AO CONCLUDED THAT THE PROVISIONS OF SECTION 23 WERE AMENDED W.E.F. 01.04.1976 TO INCLUDE SUCH CASES WHE RE THE RENT RECEIVED OR RECEIVABLE WAS IN EXCESS OF MUNICIPAL V ALUATION AND ACCORDINGLY HE MADE AN ADDITION OF RS. 9,86,000/- I .E. 10% OF THE TERM DEPOSIT OF RS. 98,60,000/- TO THE INCOME FROM HOUSE PROPERTY DECLARED BY THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE F ILED AN APPEAL BEFORE THE LEARNED CIT(A). WE FIND THAT THE LEARNED CIT(A) UPHELD THE ABOVE ASSESSMENT MADE BY THE AO FOR THE REASONS THA T (I) THE CASE OF THE ASSESSEE IS NOT COVERED UNDER THE PROVISIONS OF BRCA SINCE THE TENANT M/S. RELIANCE INDUSTRIES LTD. HAS PAID UP CA PITAL OF MORE THAN RS. 1 CRORE, HENCE THE DECISIONS RELIED BY THE ASSE SSEE ON THE PRESUMPTION THAT THE PREMISES IN QUESTION FELL UNDE R THE RESPECTIVE RENT CONTROL ACT ARE NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE, (II) THE RELIANCE PLACED BY THE ASSESSEE ON CBDT CIRCULA R NO. 204 DATED 24.07.1976 IS MISPLACED AS THE SAID CIRCULAR STATES IN MANY CASES, HOWEVER THE ACTUAL RENT RECEIVED OR RECEIVABLE IN A YEAR EXCEEDS THE MUNICIPAL VALUATION OF THE PROPERTY. SUB-SECTION 1 OF SECTION 23 HAS BEEN AMENDED TO PROVIDE THAT WHERE ANY PROPERTY IS IN OCCUPATION OF A TENANT AND THE ANNUAL RENT RECEIVED OR RECEIVABLE BY THE OWNER IS IN EXCESS OF THE SUM FOR WHICH THE PROPERTY MIGHT REAS ONABLY BE EXPECTED TO LET FROM YEAR TO YEAR, THE ANNUAL RENT RECEIVED OR ITA NO. 5083/MUM/2016 4 RECEIVABLE SHALL BE TAKEN AS THE ANNUAL VALUE OF TH E PROPERTY, (III) THE RENTAL AGREEMENT FIXING A NOMINAL RENT OF RS. 9,000 /- P.M. FOR A FLAT IN A POSH LOCALITY IS NOTHING BUT A COLOURABLE DEVICE TO AVOID TAX. THEREFORE, THE LEARNED CIT(A) UPHELD THE ASSESSMENT OF THE AO IN MAKING AN ADDITION @ 10% OF SECURITY DEPOSIT TO THE ALV DECLARED BY THE ASSESSEE. 5. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE R ELIES ON THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN CIT VS. TIP TOP TYPOGRAPHY (2014) 368 ITR 330 (BOM), JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN CIT VS. ASIAN HOTELS LTD . (2010) 323 ITR 490 (DEL), AND THE ORDER OF THE ITAT H BENCH, MUMBAI IN THE CASE OF THE ASSESSEE FOR THE A.Y. 2004-05 (ITA NO. 4591/MUM/200 7). 6. PER CONTRA THE LEARNED DR RELIES ON THE ORDER PASSED BY THE LEARNED CIT(A) UPHOLDING THE ADDITION @ 10% OF SECU RITY DEPOSIT MADE BY THE AO TO THE ALV DECLARED BY THE ASSESSEE. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE DISCUSS BELOW THE DECISIONS CITED BEFORE US. 7.1 IN THE CASE OF ASIAN HOTELS LTD. (SUPRA), THE QUESTION BEFORE THE HONBLE HIGH COURT WAS AS FOLLOWS: WHETHER THE TRIBUNAL WAS JUSTIFIED IN LAW IN HOLDI NG THAT THE NOTIONAL INTEREST ON REFUNDABLE INTEREST FREE DEPOSIT RECEIV ED BY THE ASSESSEE IN RESPECT OF A SHOP LET OUT ON RENT WAS NEITHER TAXAB LE AS BUSINESS PROFIT UNDER SECTION 28(IV) OF THE INCOME-TAX ACT, 1961 (T HE ACT) NOR INCOME FROM HOUSE PROPERTY UNDER SECTION 23(1)(A) OF THE A CT? THE HON'BLE HIGH COURT HELD AS UNDER: SECTION 23(1)(A) IS RELEVANT FOR DETERMINING THE I NCOME FROM HOUSE PROPERTY AND CONCERNS DETERMINATION OF THE ANNUAL L ETTING VALUE OF SUCH PROPERTY. THAT PROVISION TALKS OF THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO BE LET FROM YEAR TO YEAR. THIS CONTEMPLATES ITA NO. 5083/MUM/2016 5 THE POSSIBLE RENT THAT THE PROPERTY MIGHT FETCH AND NOT CERTAINLY THE INTEREST IN FIXED DEPOSIT THAT MAY BE PLACED BY THE TENANT WITH THE LANDLORD IN CONNECTION WITH THE LETTING OUT OF SUCH PROPERTY. IT MUST BE REMEMBERED THAT IN A FIXING STATUTE IT WOULD BE UNS AFE FOR THE COURT TO GO BEYOND THE LETTER OF THE LAW AND TRY TO READ INT O THE PROVISION MORE THAN WHAT IS ALREADY PROVIDED FOR. THE ATTEMPT BY E ARNED COUNSEL FOR THE REVENUE TO DRAW AN ANALOGY FROM THE WEALTH TAX ACT, 1957, IS ALSO OF NO AVAIL. IT IS AN ADMITTED POSITION THAT THERE IS A SPECIFIC PROVISION IN THE WEALTH TAX ACT WHICH PROVIDES FOR CONSIDERING O F A NOTIONAL INTEREST WHEREAS SECTION 23(1)(A) CONTAINS NO SUCH SPECIFIC PROVISION. 7.2 IN THE CASE OF TIP TOP TYPOGRAPHY (SUPRA) , THE HON'BLE BOMBAY HIGH COURT HELD AS UNDER: IT IS THUS, MANIFEST THAT VARIOUS COURTS HAVES HEL D A CONSISTENT VIEW THAT NOTIONAL INTEREST CANNOT FORM PART OF ACTUAL R ENT. HENCE, THERE IS NO JUSTIFICATION TO TAKE A DIFFERENT VIEW THAT THAT HA S BEEN STATED IN ASIAN HOTELS LTD . (2010) 323 ITR 490 (DELHI). 7.3 NOW WE TURN TO THE ORDER OF THE CO-ORDINATE BEN CH IN THE CASE OF THE ASSESSEE FOR THE A.Y. 2004-05 (ITA NO. 4519/ MUM/2007): 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESS EE WAS THE OWNER OF FLAT NO. 41, VIJAYDEEP, KHAR MUMBAI WHICH WAS RENTE D OUT @ RS 9,000/- PER MONTH TO M/S. RELIANCE INDUSTRIES LTD. THE ANNUAL LETTING VALUE OF THE PROPERTY WAS SHOWN BY THE ASSESSEE AT RS 1,08,000/-. THE ASSESSEE HAD ALSO RECEIVED INTEREST FREE SECURITY D EPOSIT OF RS 98,60,000/- FROM THE TENANT. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE AS TO WHY NOTIONAL INTEREST @ 10 % ON THE SAID DEPOSIT BE NOT CONSIDERED AS A PART OF THE RENT FOR WORKING OUT THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE ASSESSEE SUBMITTED THAT THE DECISION IN THE CASE OF CIT VS. J.K. INVESTMENTS LTD. 241 ITR 723(BOM) AND CIT VS SATYA CO. LTD . 75 TAXMAN 193 (CAL), NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT RECEIVED FROM THE TENANT CANNOT BE CONSIDERED AS A PART OF THE RENTAL INCOME. THE ASSESSEE FURTHER CONTENDED THAT AS PER SEC. 23(1)(A) OF THE I.T. ACT, THE ANNUAL VALUE OF HOUSE PROPERTY CHARGEABLE UNDER THE HEAD INCOME FROM HOUSE PROPERTY IS THE SUM FOR WHICH THE PROPERTY MIGHT R EASONABLY BEING EXPECTED TO LET. THE WORDS USED IN SEC. 23(1)(A) AR E THE SAME AS THE EXPRESSION USED IN THE MUNICIPAL STATUTE AND THEREF ORE, THE ANNUAL VALUE OF THE PROPERTY AS DEFINED IN SEC. 23(1)(A) O F THE I.T. ACT IS THE MUNICIPAL VALUATION. THE ASSESSEE FURTHER CONTENDED THAT SEC. 23(1)(A) ITA NO. 5083/MUM/2016 6 IS APPLICABLE WHEN THE ACTUAL RENT RECEIVED OR RECE IVABLE EXCEEDS THE MUNICIPAL VALUE OF THE PROPERTY. SINCE THE ACTUAL R ENT RECEIVED IN THE CASE OF THE ASSESSEE WAS GREATER THAN THE MUNICIPAL VALUATION, THE SAME I.E. THE AMOUNT OF RS 1,08,000/- HAS TO BE TREATED AS THE ANNUAL LETTING VALUE. 4. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT TH E CONTENTION OF THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, RENT CONTROL ACT IS NOT APPLICABLE TO THE PROPERTY OWNED BY THE ASSESSEE SI NCE THE CAPITAL OF THE TENANT EXCEEDED RS 1 CRORE. FURTHER, ACCORDING TO HIM, BOTH THE TENANTS AND THE ASSESSEE COMPANY BELONGED TO THE SA ME GROUP OF COMPANIES BECAUSE OF WHICH THERE ARE CHANCES OF COL LUSION BETWEEN THE ASSESSEE COMPANY AND THE TENANT IN FIXING THE RENT AT MEAGER SUM OF RS 9,000/- PER MONTH. THEREFORE, HE PROCEEDED TO TREAT 10% OF THE INTEREST FREE SECURITY DEPOSIT OF RS 98,60,000/- AS A PART O F THE RENTAL INCOME OF THE ASSESSEE. ACCORDINGLY, HE COMPUTED THE INCOME F ROM HOUSE PROPERTY BY TAKING THE ANNUAL LETTING VALUE OF THE PROPERTY AT RS 10,94,000/- (`RS 1,08,000+ RS 9,86,000/-). 5. THE LD. CIT(A) DELETED THE ADDITION OF RS 9,86, 000/- MADE BY THE ASSESSING OFFICER TO THE ANNUAL LETTING VALUE O F THE PROPERTY IN RESPECT OF NOTIONAL INTEREST WORKED OUT AT 10% ON I NTEREST FREE DEPOSIT OF RS 98,60,000/- TO THE ACTUAL RENT OF RS 1,08,000 /- AND ADOPTED THE ANNUAL LETTING VALUE OF THE PROPERTY U/S. 23(1)(B) AT RS 10,94,000/- 6. AGGRIEVED, REVENUE PREFERRED AN APPEAL BEFORE US . 7. WE HEARD BOTH THE PARTIES. WE FIND THAT THE REC ENT DECISION OF THE (DELHI HIGH COURT)-FULL BENCH IN THE CASE OF CIT VS MONI KUMAR SUBHAS HAS HELD AS FOLLOWS: IF ASSESSING OFFICER FINDS THAT THE ACTUAL RENT RE CEIVED IS LESS THAN THE FAIR MARKET RENT BECAUSE THE ASSESSEE HAS REC EIVED ABNORMALLY HIGH INTEREST FROM SECURITY DEPOSIT, HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF. HOWEVER, BY NO S TRETCH OF IMAGINATION THE NOTIONAL INTEREST ON THE INTEREST F REE SECURITY CAN BE TAKEN AS DETERMINATIVE FACTOR TO ARRIVE AT THE FAIR RENT SEC. 23(1)(A) OF THE I.T. ACT, 1961 DOES NOT MANDATE THI S. THEREFORE, WE CONFIRM THE ORDER OF THE LD. CIT(A) A ND DISMISS THE REVENUES APPEAL. 8. FACTS BEING SIMILAR, WE FOLLOW THE DECISIONS NAR RATED AT PARA 7.1 TO 7.3 HERE-IN-ABOVE AND ALLOW THE APPEAL FILED BY THE ASSESSEE. ITA NO. 5083/MUM/2016 7 ORDER PRONOUNCED IN THE OPEN COURT ON 19/04/2017 SD/- SD/- (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI: DATED: 19/04/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI