Shanti Exports Pvt. Ltd., Ahmedabad V. The Deputy Commissioner of Income Tax, Circle-4(1)(1), Ahmedabad

ITA 640/AHD/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5128 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2013-2014
• Appeal Filed On: 14-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B P SRIVASTAVA
• Keywords: Transfer pricing; Maximum Marginal Rate

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ./ITA NO. 640/AHD/2017 ( / ASSESSMENT YEAR : 2013-14 ) SHANTI EXPORTS PVT.LTD. 2 ND FLOOR, CHIRIPAL HOUSE SATELLITE ROAD AHMEDABAD-380 015 / VS. THE DCIT CIRCLE-4(1)(1) AHMEDABAD-380 015 ./ ./ PAN/GIR NO. : AAFCS 0472 C ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT BY : SHRI GAURAV NAHTA, AR / RESPONDENT BY : SHRI B.P. SRIVASTAVA, SR.DR / DATE OF HEARING 07/01/2019 !'# / DATE OF PRONOUNCEMENT 01 /02/2019 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: THE CAPTIONED APPEAL HAS BEEN FILED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TA X (APPEALS)8, AHMEDABAD [CIT(A) IN SHORT] VIDE APPEAL NO.CIT(A)-8 /364/15-16 DATED 12/01/2017 ARISING IN THE ASSESSMENT ORDER PASSED UNDER S.143(3) OF THE INCOME TAX ACT, 1961(HEREINAFTER REFERRED TO AS 'TH E ACT') DATED 07/01/2016 RELEVANT TO ASSESSMENT YEAR (AY) 2013-1 4. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL:- 1. THE LDE.CIT APPEALS 8 AHMEDABAD HAS ERRED IN LAW A ND ON FACTS IN PASSING APPELLATE ORDER DATED 12/01/2017 F OR A.Y. ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 2 - 2013-14 IN THE CASE OF APPELLANT BY CONFIRMING DISA LLOWANCE MADE BY THE A.O. 2. THE LD. CIT APPEALS ERRED IN LAW AND ON FACTS IN CO NFIRMING ADDITION OF RS.28,02,800/- ON ACCOUNT OF FAIR RENTA L INCOME. 3. THE ONLY ISSUE RAISED BY THE ASSESSEE IS THAT LD. CIT (A) ERRED IN CONFIRMING THE ADDITION IN PART MADE BY THE AO AMOU NTING TO RS.28,02,800.00 ON ACCOUNT OF FAIR RENTAL INCOME. 4. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IN THE PRESENT CASE IS A PRIVATE LTD COMPANY AND ENGAGED IN THE BUSINESS OF TRADING OF GRAY, FABRICS, AND CHIPS. THE ASSESSEE IS THE OWNER OF A BUILDING CONSISTING OF SOME FLOORS KNOWN AS CHIRIPAL HOUSE. THE ASSESSEE IN RESPECT OF SUCH BUILDING HAS DECLARED THE GROSS RENT OF 10,80,000.00 ONLY UNDER THE HEAD HOUSE PROPERTY. 5. THE ASSESSING OFFICER (AO) DURING THE ASSESS MENT PROCEEDINGS OBSERVED CERTAIN FACTS AS DETAILED UNDER: I. THAT THE BUILDING WAS RENTED OUT TO THE BANK OF BAR ODA AND OTHER RELATED PARTIES. II. THAT THE RENTAL INCOME FROM THE RELATED PARTIES IS VERY MEAGER CONSIDERING THE HEAVY ELECTRICITY AND BUILDI NG EXPENSES. 5.1. AS PER THE AO, THE RENT CHARGED FROM THE RELA TED PARTIES WAS NOT BASED AT THE FAIR MARKET RATE. THE AO ALSO NOTED TH AT ADDITION WAS MADE ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 3 - IN THE GROSS VALUE OF THE RENT IN THE EARLIER ASSES SMENT YEARS. ACCORDINGLY, A SHOW CAUSE NOTICE DATED 14 TH DECEMBER 2015 WAS ISSUED TO THE ASSESSEE. 5.2. HOWEVER, THE ASSESSEE DID NOT MAKE ANY REPL Y TO THE SHOW CAUSE NOTICE ISSUED BY THE AO. THUS, THE AO CONSIDERING T HE ADDITIONS MADE IN THE EARLIER ASSESSMENT YEARS MADE THE ADDITION OF 34,05,000/- AFTER ALLOWING THE DEDUCTION OF MUNICIPAL TAXES, RENTAL I NCOME DECLARED AND THE STANDARD DEDUCTION UNDER SECTION 24(A) OF THE A CT. THE AO HAS TAKEN THE RENT OF RS. 290/- PER SQUARE FEET WHICH WAS DET ERMINED IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E., 2012- 1 3. 6. AGGRIEVED ASSESSEE, PREFERRED AN APPEAL TO L EARNED CIT(A). THE ASSESSEE BEFORE THE LEARNED CIT(A) SUBMITTED AS UND ER: I. THERE WAS NO RENT AGREEMENT MADE BETWEEN THE ASSESS EE AND THE TENANTS AS THE TENANTS WERE THE RELATED PARTIES TO THE ASSESSEE. II. THE BANK OF BARODA HAS VACATED THE PREMISES IN THE PREVIOUS YEAR 2010-11. AFTER THAT SUCH WAS UTILIZED BY IT DU RING THE PREVIOUS YEAR UNDER CONSIDERATION. III. THE PREVAILING FAIR MARKET RATE IS NOT MORE THAN RS . 29/- TO 30/- PER SQUARE FEET. IV. THE DIFFERENT PORTIONS OF THE BUILDING HAVE A DIFFE RENT AREA IN SIZE WHICH WAS GIVEN ON RENT TO THE RELATED PARTIES . THEREFORE, THE AMOUNT OF RENT RECEIVED FROM THE PAR TIES CANNOT BE COMPARED WITH EACH OTHER. ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 4 - V. THE BUILDING WAS COMMERCIAL PROPERTY WHICH WAS RENT ED OUT TO THE ASSOCIATED PARTIES AS A MEASURE OF COMMERCIA L EXPEDIENCY. VI. THE AO DID NOT VERIFY THE CONDITIONS AS SPECIFIED U NDER SECTION 40A(2) OF THE ACT DURING THE ASSESSMENT PROCEEDINGS. VII. THE PROPERTIES WERE LET OUT TO THE RELATED PARTIES SINCE THE LAST MANY YEARS. THE REVENUE ACCEPTED THE RENT FROM THE RELATED PARTIES UNTIL THE ASSESSMENT YEAR 2007-08. 6.1. HOWEVER, THE LEARNED CIT(A) OBSERVED THAT TH E FAIR MARKET RENT WAS DETERMINED AT RS. 290 PER SQUARE FEET ON THE BASIS OF THE RATE OF RENT AT WHICH THE BUILDING RENTED OUT TO BANK OF BARODA IN THE YEAR 1998 AFTER TAKING THE INCREASE IN RENT AT THE RATE OF 5% FROM THE YEAR 1998 UP TO THE YEAR UNDER CONSIDERATION. 6.2. THE LEARNED CIT(A) FURTHER OBSERVED THAT THE BANK OF BARODA HAD VACATED THE RENTED SPACE IN THE BUILDING WITH EFFEC T FROM 30-6-2010 IN THE PREVIOUS YEAR 2010-11 RELEVANT TO THE ASSESSMENT YE AR 2011-12. THE BANK OF BARODA PAID THE LAST RENT TO THE ASSESSEE IN THE ASSESSMENT YEAR 2011- 12 AT THE RATE OF RS. 236.14 PER SQUARE FEET. 6.3. IN VIEW OF THE ABOVE, THE LEARNED CIT(A) DI RECTED THE AO TO TAKE THE BASIS OF RENT FOR THE ASSESSMENT YEAR 2011-12 A FTER CONSIDERING THE INCREASE IN THE RATE OF RENT AT THE RATE OF 5% PER ANNUM WHICH WORKS OUT AT 248 PER SQUARE FEET. THUS THE LEARNED CIT (A) PART LY CONFIRMED THE ORDER OF THE AO. ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 5 - 7. BEING AGGRIEVED BY THE ORDER OF LEARNED CIT (A), THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. AR BEFORE US FILED A PAPER BOOK RUNNIN G FROM PAGES 1 TO 31 AND SUBMITTED THAT THE RENT CHARGED FROM THE RELATE D PARTIES IS REPRESENTING THE FAIR MARKET RENT. THE LEARNED AR B EFORE US ALSO SUBMITTED THAT THERE WAS NO CAR PARKING FACILITY AV AILABLE IN THE BUILDING. THIS FACT NEEDS TO BE CONSIDERED WHILE DETERMINING THE FAIR MARKET RENT OF THE BUILDING IN THE EVENT OF NOT TREATING THE ACTUA L RENT AS FAIR MARKET RENT. THE LEARNED AR ALSO SUBMITTED THAT THE ASSESSEE AND ITS ASSOCIATES ARE PAYING THE TAXES AT THE MAXIMUM MARGINAL RATE. THER EFORE THERE IS NO LOSS TO THE REVENUE. ACCORDINGLY, THE ENTIRE EXERCISE FO R DETERMINING THE FAIR MARKET RENT WILL BECOME FUTILE AS THERE IS NO LOSS TO THE REVENUE. 8.1. THE LEARNERS AR IN SUPPORT OF HIS CLAI M ALSO PLACED HIS RELIANCE ON THE ORDER OF MUMBAI TRIBUNAL IN THE CASE OF EURO PA CHEMICALS PRIVATE LTD VERSUS ITO REPORTED IN 96 TAXMAN.COM 309. 9. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE LAST RENT CHARGED FROM THE BANK OF BARODA SHOULD BE THE BASIS FOR DET ERMINING THE FAIR MARKET RENT. THE LEARNED DR VEHEMENTLY SUPPORTED TH E ORDER OF AUTHORITIES BELOW. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND P ERUSED THE MATERIALS AVAILABLE ON RECORD. THE ISSUE IN THE INSTANT CASE RELATES TO THE RATE OF RENT TO BE CHARGED FROM THE RELATED PARTIES. THE AO HAS TAKEN THE FAIR MARKET ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 6 - RENT OF THE BUILDING AT RS. 290/- PER SQUARE FEET W HICH WAS CALCULATED ON THE BASIS OF THE RENT CHARGE FROM THE BANK OF BAROD A IN THE YEAR 1998 AFTER GIVING THE EFFECT OF INCREMENTS IN THE RENT A T THE RATE OF 5% PER ANNUM. 10.1. THE LEARNED CIT (A) SUBSEQUENTLY CONFIRM ED THE ORDER OF THE AO WITH A SMALL MODIFICATION. AS SUCH THE LEARNED C IT (A) HAS TAKEN THE BASIS OF THE RENT CHARGED BY THE ASSESSEE FROM THE BANK OF BARODA IN THE ASSESSMENT YEAR 2011- 12, I.E., RS. 236.14 PER SQUA RE FEET WHICH WAS SUBSEQUENTLY INCREASED AT THE RATE OF 5% PER ANNUM. ACCORDINGLY, THE RATE OF RENT AFTER GIVING THE EFFECT OF INCREASED R ENT AT THE RATE OF 5% PER ANNUM WAS WORKED OUT AT 248/- PER SQUARE FEET. ACCORDINGLY, THE LEARNED CIT (A) PARTLY CONFIRMED THE ORDER OF THE A O. 10.2. NOW THE CONTROVERSY BEFORE US ARISES REGA RDING THE RATE OF THE RENT TO BE CHARGED FROM THE RELATED PARTIES IN THE GIVEN FACTS & CIRCUMSTANCES. THE PROVISION OF SECTION 23 OF THE A CT REQUIRES DETERMINING THE RATE OF RENT IN THE MANNER AS MENTI ONED BELOW: 23. (1) FOR THE PURPOSES OF SECTION 22 , THE ANNUAL VALUE OF ANY PROPERTY SHALL BE DEEMED TO BE (A) THE SUM FOR WHICH THE PROPERTY MIGHT REASONABL Y BE EXPECTED TO LET FROM YEAR TO YEAR; OR (B) WHERE THE PROPERTY OR ANY PART OF THE PROPERT Y IS LET AND THE ACTUAL RENT RECEIVED OR RECEIVABLE 73 BY THE OWNER IN RESPECT THEREOF IS IN EXCESS OF THE SUM REFERRED TO IN CLAUSE (A), THE AMOUNT SO RECEIVED OR RECEIVABLE; OR ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 7 - (C) WHERE THE PROPERTY OR ANY PART OF THE PROPERT Y IS LET AND WAS VACANT DURING THE WHOLE OR ANY PART OF THE PREVIOUS YEAR AND OWING TO SUCH VACANCY THE ACTUAL RENT RECEIVED OR RECEIVA BLE BY THE OWNER IN RESPECT THEREOF IS LESS THAN THE SUM REFERRED TO IN CLAUSE (A), THE AMOUNT SO RECEIVED OR RECEIVABLE : 10.3. A PLAIN READING OF THE ABOVE PROVISIONS R EVEALS THAT THE RENT SHOULD BE DECIDED ON THE BASIS OF THE SUM WHICH CAN BE REASONABLY EXPECTED FROM THE LETTING OUT THE PROPERTY DURING T HE YEAR OR THE ACTUAL RENT RECEIVED/RECEIVABLE, WHICHEVER IS HIGHER. 10.4. IN THE INSTANT CASE, THE REVENUE ALLEGES THAT THE ACTUAL RENT RECEIVED/RECEIVABLE IS LESS THAN THE REASONABLE EXP ECTED RENT. THUS THE CONTROVERSY REVOLVES WHAT SHOULD BE THE REASONABLE EXPECTED RENT. THE LAW TO DETERMINE THE REASONABLE EXPECTED RENT PROVI DES A CERTAIN BASIS AS DETAILED UNDER: I) ACTUAL RENT RECEIVED OR RECEIVABLE:- ACTUAL RENT RECEIVED/RECEIVABLE IS AN IMPORTANT FACTOR IN DETER MINING THE ANNUAL VALUE OF A PROPERTY. II) MUNICIPAL VALUE:- THIS IS THE VALUE AS DETERMINED BY THE MUNICIPAL AUTHORITIES FOR LEVYING MUNICIPAL TAXES O N HOUSE PROPERTY. MUNICIPAL AUTHORITIES NORMALLY CHARGE HOU SE TAX/MUNICIPAL TAXES ON THE BASIS OF ANNUAL LETTING VALUE OF SUCH HOUSE PROPERTY. III) FAIR RENT OF THE PROPERTY:- FAIR RENT IS THE RENT WHICH A SIMILAR PROPERTY CAN FETCH IN THE SAME OR SIMILAR L OCALITY IF IT IS LET OUT FOR A YEAR. THE DVO CAN ALSO FIND OUT SU CH VALUE. ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 8 - IV) STANDARD RENT:- THE STANDARD RENT IS FIXED UNDER THE RENT CONTROL ACT. IF THE STANDARD RENT HAS BEEN FIXED FO R ANY PROPERTY UNDER THE RENT CONTROL ACT. 10.5. NOW COMING TO THE FACTS OF THE CASE ON HAND , WE NOTE THAT THE LEARNED CIT (A) HAS DETERMINED THE FAIR RENT OF THE PROPERTY AT RS. 248/- PER SQUARE FEET ON THE BASIS OF THE RENT RECEIVED B Y THE ASSESSEE FROM THE BANK OF BARODA IN THE ASSESSMENT YEAR 2011-12 AS IN CREASED BY 5% P.A. THERE IS NO DISPUTE THAT THE BANK VACATED THE PROPE RTY ON 30 TH JUNE 2010. HOWEVER, THE ASSESSEE CLAIMED THAT THE FAIR RENT FO R THE PROPERTY UNDER CONSIDERATION IS OF THE SAME AMOUNT RECEIVED BY IT FROM ITS ASSOCIATED ENTERPRISES. 10.6. IN OUR CONSIDERED VIEW, ONCE THE ASSESSEE HAS DISPUTED THE FAIR RENT, THEN THE LOWER AUTHORITIES ARE UNDER THE OBLI GATION TO REJECT THE CONTENTION OF THE ASSESSEE WITH COGENT REASONS. AS SUCH THE AUTHORITIES BELOW WERE UNDER THE OBLIGATION TO DETERMINE THE FA IR RENT OF THE PROPERTY IN THE MANNER AS DISCUSSED ABOVE. BUT THE AUTHORITI ES BELOW HAVE NOT DETERMINED THE FAIR RENT WITHOUT CONSIDERING THE PR OCEDURES PRESCRIBED UNDER THE LAW. 10.7. THE RENT CHARGED BY THE ASSESSEE FROM THE BANK OF BARODA CANNOT BE THE BASIS FOR DETERMINING THE FAIR RENT OF THE P ROPERTIES DUE TO THE FOLLOWING REASONS: ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 9 - I. THE PROPERTY WAS RENTED OUT BY THE ASSESSEE TO THE BANK OF BARODA IN THE YEAR 1998, AND IN EVERY RENTAL AGREEM ENT, THERE IS AN ESCALATION CLAUSE FOR ENHANCING THE AMOUNT OF RE NT. THUS THE RENT CHARGED BY THE ASSESSEE FROM THE BANK WAS BASE D ON THE AGREEMENT WHICH WAS MADE IN THE YEAR 1998. AS SUCH THE RENT CHARGED BY THE ASSESSEE FROM THE BANK IN THE YEAR, 2010 WAS NOT BASED ON THE FAIR MARKET RENT. II. THERE IS A TIME GAP OF 1 YEAR & 9 MONTHS WHEN THE A SSESSEE RECEIVED THE LAST RENT FROM THE BANK OF BARODA AND THE YEAR OF CONSIDERATION. AS SUCH THERE CAN BE CERTAIN FACTORS WHICH CAN AFFECT THE FAIR MARKET RATE IN ANY MANNER WHICH HAV E NOT BEEN CONSIDERED WHILE DETERMINING THE FAIR MARKET RENT. 10.8. IN VIEW OF THE ABOVE, WE ARE OF THE CONSID ERED OPINION, THE ISSUE ON HAND NEEDS TO BE EXAMINED IN THE MANNER AS DISCU SSED ABOVE AND AS PER THE PROVISIONS OF LAW. ACCORDINGLY, THE OTHER A RGUMENTS RAISED BY THE LEARNED AR FOR THE ASSESSEE DO NOT REQUIRE SEPARATE ADJUDICATION AT THIS MOMENT. HENCE, WE ARE INCLINED TO RESTORE THIS ISSU E TO THE FILE OF AO AS STIPULATED ABOVE. THUS, THE GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. THIS ORDER PRONOUNCED IN OPEN COURT ON 01/02/2019 SD/- SD/- ( RAJPAL YADAV ) ( WASEEM AHMED ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 01/02/2019 &.., .(.. / T.C. NAIR, SR. PS ITA NO.640/AHD/2018 SHANTI EXPORTS PVT.LTD. VS. DCIT ASST .YEAR - 2013-14 - 10 - / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. )*+ , / CONCERNED CIT 4. , ( ) / THE CIT(A)-8, AHMEDABAD 5. /01 ((*+ , *+# , ) / DR, ITAT, AHMEDABAD 6. 145 6 / GUARD FILE. / BY ORDER, / ( //TRUE COPY// / ( DY./ASSTT.REGISTRAR) $%, / ITAT, AHMEDABAD 1. DATE OF DICTATION 22.1.19 (WORD-PROCESSED BY HON BLE AM IN HIS COMPUTER) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 22.1.19 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S.1.2.19 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 1.2.19 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER