FEMS ESTATE (INDIA) P. LTD, MUMBAI V. DCIT CEN CIR 23, MUMBAI

ITA 5948/MUM/2010

• Counselvise Citation: 594819914 RSA 2010
• Duration Of Justice: 1 year(s) 6 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 25-01-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 29-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRY
• Assessee Lawyers: S D PURANDANE
• Keywords: Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA 5948/MUM/10(A.Y.2007-08) FEMS ESTATE (INDIA) PRIVATE LIMITED, CONSTRUCTION HOUSE B, 2 ND FLOOR, 623, LINKING ROAD, KHAR (WEST), MUMBAI 400 052. PAN: AAACF 0912F (APPELLANT) VS. THE DCIT, CC 23, MUMBAI. (RESPONDENT) APPELLANT BY : SHRI S.D.PURANDANE RESPONDENT BY : SHRI V.V.SHASTRY DATE OF HEARING : 25/01/2012 DATE OF PRONOUNCEMENT : 31 /01/2012 ORDER PER N.V.VASUDEVAN, J.M: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 25/1/10 OF CIT(A) 40 MUMBAI RELATING TO ASSESSMENT YEAR 2007- 08. THE GROUND OF APPEAL RAISED BY THE ASSESSEE READ AS FOLLOWS: THE LEARNED CIT HAS ERRED IN LAW AND FACT IN CONFI RMING THE ADDITION OF RS.14,00,000/- BEING NOTIONAL INTEREST TO THE AN NUAL VALUE OF THE PREMISES AT 7% ON INTEREST FREE DEPOSIT OF RS. 2,00 ,00,000/- RECEIVED FROM THE LEASE. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF RENDERING FINANCIAL SERVICES AND LEASING. THE ASSESSEE OWNED A PROPERTY IN THE PREMISES KNOWN AS TULSI KUNJ, LINK ROAD, SANTACRUZ, MUMBAI- 52. IT HAD LEASED THE SAID PREMISES TO ITS SISTER CONCERN M/S. TRESORIE TRADERS PVT. LTD. THE ASSESSEE RECEIVED RENT OF RS. 3.00 LACS ON SUCH LETTING AND AFTER DEDUCTING 1/3 RD OF THE RENT RECEIVED UNDER SECTION 24 OF THE ACT THE ITA 5948/MUM/2010(A.Y.2007-08) 2 ASSESSEE OFFERED INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY A SUM OF RS. 2,10,000/-. THE AO NOTICED THAT THE ASSESSE E HAD RECEIVED INTEREST FREE SECURITY DEPOSIT OF RS. 2 CRORES FROM THE LESS EE AND THIS HAD TO BE CONSIDERED FOR WORKING OUT ANNUAL VALUE OF THE PROP ERTY. THE ASSESSEE SUBMITTED BEFORE THE AO THAT UNDER SECTION 23(1)(A) OF THE ACT THE ANNUAL VALUE OF THE PROPERTY HAS TO BE DETERMINED ON THE B ASIS OF THE RENT WHICH THE PROPERTY IS EXPECTED TO FETCH IF LET OUT. GENERALL Y THE MUNICIPAL VALUATION IS TAKEN AS THE SUM FOR WHICH THE PROPERTY CAN BE EXPE CTED TO FETCH IF LET OUT. THE ASSESSEE POINTED OUT THAT THE MUNICIPAL VALUATI ON OF THE AFORESAID PROPERTY WAS MUCH LESS THAN THE ACTUAL RENT OF RS.3 LACS RECEIVED BY THE ASSESSEE AND, THEREFORE, THE ANNUAL VALUE HAD TO BE DETERMINED IN TERMS OF SECTION 23(1)(B) OF THE ACT. THE ASSESSEE FURTHER SUBMITTED THAT WHILE WORKING OUT THE ANNUAL VALUE UNDER SECTION 23(1)(B ) OF THE ACT ONE CANNOT ADD ANY NOTIONAL INTEREST ON THE INTEREST FREE SECU RITY DEPOSIT RECEIVED BY THE OWNER OF THE PROPERTY. 3. THE AO HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. THE AO FOUND THAT AS PER THE BALANCE SHEET THE COST OF THE PREMISES TO THE ASSESSEE WAS RAISED RS.1,64,99,330/- AND RETURN OF 10% ON THE COST WOULD FETCH THE ASSESSEE A RETURN OF RS.16.50 LACS. THE ASSESSEE GOT A RETURN OF ONLY RS. 3.00 LACS FROM THE PROPERTY WHICH WAS NOT THE MARKET RENT. THE AO WAS OF THE VIEW THAT IT WOULD BE PROPER TO ADD TO T HE ACTUAL RENT RECEIVED BY THE ASSESSEE 7% OF THE INTEREST FREE SECURITY DEPO SIT RECEIVED BY THE ASSESSEE FROM THE DIVIDEND. THUS THE AO DETERMINED THE ANNU AL VALUE OF THE PROPERTY AT A SUM OF RS. 17 LACS (7% OF RS. 3 LACS + RS.14. 00 LCAS + RS.3 LACS BEING RENT RECEIVED BY THE ASSESSEE). AFTER ALLOWING 30 % DEDUCTION UNDER SECTION 24 OF THE ACT THE AO ARRIVED AT INCOME FROM HOUSE PROPERTY AT RS. 11,90,000/-. THE ACTION OF THE AO WAS CONFIRMED BY THE CIT(A) GIVING RISE TO PRESENT APPEAL BY THE ASSESSEE BEFORE THE TRIBUNAL. ITA 5948/MUM/2010(A.Y.2007-08) 3 4. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL IS NO LONGER RESINTEGRA AND HAS BEEN DECIDED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS . RECLAMATION REALTY LTD. IN ITA NO.1411/MUM/07 ORDER DATED 26/11/2010, WHEREIN THE TRIBUNAL AFTER CONSIDERING THE LAW ON THE ISSUE HE LD THAT WHILE DETERMINING ANNUAL VALUE UNDER SECTION 23(1)(B) OF THE ACT NOT IONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT SHOULD NOT BE ADDED AND IN TH IS REGARD RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF JK INVESTORS, 248 ITR 723(BOM). THE FULL BENCH OF THE HONBLE DELHI HIGH COURT IN CIT VS.MONI KUMAR SUBBA, 338 ITR 38 (DEL) (FB) CONSIDER ED A CASE WHERE THE ASSESSEE LET OUT HOUSE PROPERTY FOR WHICH SHE RECEI VED A RENT OF RS. 6.95 LAKHS AND AN INTEREST-FREE SECURITY DEPOSIT OF RS. 10.78 CRORES. THE PROPERTY WAS NOT SUBJECT TO THE RENT CONTROL ACT. THE AO HEL D THAT IN COMPUTING THE ANNUAL RENT U/S 23(1)(A), THE NOTIONAL INTEREST ON THE SECURITY DEPOSIT (RS. 30.41 LAKHS) HAD TO BE ADDED. THIS WAS REVERSED BY THE CIT (A) & TRIBUNAL. ON APPEAL BY THE DEPARTMENT, THE MATTER WAS REFERRED TO A FULL BENCH . THE HONBLE FULL BENCH HELD: (I) S. 23 (1)(A) REQUIRES DETERMINATION OF THE FAI R RENT BEING THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE AO HAS TO MAKE AN INQUIRY AS TO WHAT WOU LD BE THE POSSIBLE RENT THAT THE PROPERTY MIGHT FETCH. IF HE FINDS THA T THE ACTUAL RENT RECEIVED IS LESS THAN THE FAIR/MARKET RENT BECAUSE THE ASSESSEE HAS RECEIVED ABNORMALLY HIGH INTEREST FREE SECURITY DEP OSIT, HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF. HOWEVE R, BY NO STRETCH OF IMAGINATION, THE NOTIONAL INTEREST ON THE INTEREST FREE SECURITY CAN BE TAKEN AS DETERMINATIVE FACTOR TO ARRIVE AT THE FAI R RENT . S. 23(1)(A) DOES NOT MANDATE THIS; (II) THE ALV FIXED BY THE MUNICIPAL AUTHORITIES CAN BE THE BASIS OF ADOPTING THE ALV FOR PURPOSES OF S. 23 BECAUSE THE PROVISIONS IN THE DELHI MUNICIPAL CORPORATION ACT FOR FIXING ALV ARE PARI MATERIA WITH S. 23. HOWEVER, THE AO CAN IGNORE THE MUNICIPAL VALUAT ION FOR DETERMINING THE ALV IF HE FINDS THAT THE SAME IS NO T BASED ON RELEVANT ITA 5948/MUM/2010(A.Y.2007-08) 4 MATERIAL FOR DETERMINING THE FAIR RENT IN THE MAR KET AND THERE IS SUFFICIENT MATERIAL ON RECORD FOR TAKING A DIFFEREN T VALUATION; (III) IN DETERMINING THE REASONABLE/FAIR RENT, EXTR ANEOUS CIRCUMSTANCES MAY INFLATE/DEFLATE THE FAIR RENT. VARIOUS CIRCUM STANCES CAN BE TAKEN INTO CONSIDERATION BY THE AO WHILE DETERMINING THE FAIR RENT THOUGH NO PARTICULAR TEST CAN BE LAID DOWN AND IT WOULD DEPEN D ON FACTS OF EACH CASE. 5. IN THE PRESENT CASE WE FIND THAT THE AO HAS NOT DISPUTED THE MUNICIPAL VALUATION OR HAS NOT HELD THAT THE SAME I S NOT MORE THAN THE RENT RECEIVED BY THE ASSESSEE. IN SUCH CIRCUMSTANCES WE ARE OF THE VIEW THAT THE ACTION OF THE REVENUE AUTHORITIES IN DETERMINING TH E ANNUAL VALUE OF THE PROPERTY AT RS. 17.00 LACS CANNOT BE SUSTAINED. TH E AO IS DIRECTED TO ACCEPT THE INCOME FROM HOUSE PROPERTY AS RETUNED INCOME BY THE ASSESSEE. 6. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 31 ST DAY OF JAN. 2012. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 31 ST JAN.2012 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RF BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM.