THE ACIT 6(2), MUMBAI V. M/S. CARDIFF EXPORTS PVT. LTD, MUMBAI

ITA 6689/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55542 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-10-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 05-11-2007
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T T JACOB
• Keywords: Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI C BENCH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER & SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A.NO.6689/MUM/2007- A.Y 2004-05 ASST. COMMISSIONER OF I.T., CIRCLE 6(2), MUMBAI. VS. M/S CARDIFF EXPORTS PVT. LTD., 10A, 118, CAMA INDUSTRIAL ESTATE, SUNMILL COMPOUND, LOWER PAREL, MUMBAI 400 013. PAN: AAACC O438 M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.T.JACOB. RESPONDENT BY : SHRI VIJAY MEHTA. DATE OF HEARING: 05-10-2011 DATE OF PRONOUNCEMENT: 14-10-2011 O R D E R PER T.R.SOOD, AM: IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING GR OUND: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.20,00,000/- MA DE BY THE AO REPRESENTING THE NOTIONAL INTEREST @ 8% ON SECURITY DEPOSIT OF RS.2.50 CRORES, FOR THE PURPOSE OF DETERMINATION OF A.L.V. OF THE HOUSE PROPERTY WITHIN THE MEANING OF SECTION 23 OF THE IN COME TAX ACT. 2. AFTER HEARING BOTH THE PARTIES, WE FIND THAT DUR ING THE ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAD SHOWN RENT FROM HOUSE PROPERTY AT RS.1,50,500/-. THE ASSESSEE HAD GIVEN HIS FLAT NO.17B, MAKER TOWER B, ADMEASURING ABOUT 3000 SQ.FT ON RENT TO ABN AMRO BANK. THE ASSESSEE HAD ALSO RECEIVED INTEREST FREE DEPOSIT OF RS.2.5 CRORES. THE ASSESSEE HAD NOT TAKEN ANY COGNI ZANCE OF ITA NO.6689 OF 2007 2 DEPOSIT WHILE REFLECTING THE INTEREST INCOME. ON EN QUIRY REGARDING THE RATEABLE VALUE ETC., THE FOLLOWING EXPLANATION WAS GIVEN: THE ASSESSEE HAS OFFERED FOR TAXATION WHATEVER REN T HAS BEEN RECEIVED AS PER AGREEMENT. AMOUNT AT WHICH PROPERTY HAS BEEN LET OUT IS AT FAIR MARKET RENT PREVALENT AT THE TIME OF AGREEMENT AND IT IS A REGISTERED AGREEMENT WITH A MULTINATIONAL BANK. A S FAR AS PAYMENT OF INTEREST IS CONCERNED IT BECOMES PAYABLE WHEN CO MPANY DEFAULT IN REFUNDING MONEY NOT OTHERWISE. IF COMPANY COULD EAR NED INCOME ON DEPOSIT IT COULD HAVE BEEN ACCOUNTED. IF YOU GO BY MUNICIPAL ASSESSMENT OF ANNUAL VALUE OF COMPANYS PROPERTY IT COMES EVEN LESSER THAN WHAT HAS BEEN OFFERED FOR TAXATION. SINCE ASSESSEE DID NOT PROVIDE ANY DETAILS OF MUNIC IPAL VALUE ETC., AO INVOKED THE PROVISIONS OF SEC.23[1][A] AND ADDED NOTIONAL I NTEREST TOWARDS INCOME FROM HOUSE PROPERTY. 3. ON APPEAL BEFORE THE LD. CIT(A) IT WAS MAINLY SU BMITTED THAT THERE IS NO SUCH PROVISION FOR ADDING THE NOTIONAL INTEREST TOWARDS THE RENTAL INCOME, THEREFORE, ADDITION WAS NOT JUSTIFIE D. THE LD. CIT(A) AGREED WITH THE CONTENTION AND DELETED THE ADDITION . 4. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN IDENTICAL CASE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. RECLAMATION REALTY INDIA PVT. LTD. & ORS., I.T.A.NO .1411/MUM/07 & ORS. THAT NOTIONAL INTEREST CANNOT BE ADDED. 5. ON THE OTHER HAND, LD. DR STRONGLY SUPPORTED THE ORDER OF THE AO AND ALSO RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [323 ITR 38]. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT THE ISSUE REGARDING RATEABLE VALUE AND NOTIONAL INT EREST HAS BEEN CONSIDERED BY THE TRIBUNAL IN I.T.A.NO.1411/M/07 [S UPRA] AS WELL AS BY ITA NO.6689 OF 2007 3 THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MONI KUMAR SUBBA [SUPRA]. THE TRIBUNAL HAS MAINLY RELIED ON THE DECI SION OF JCIT VS. J. K. INVESTORS LTD. [248 ITR 723] WHICH HAS BEEN CONSIDE RED BY THE HON'BLE DELHI HIGH COURT ALSO. SINCE THE DECISION OF HON'BL E DELHI HIGH COURT IS A FULL BENCH DECISION, THEREFORE, WE ARE OF THE VIE W THAT THE TRIBUNAL SHOULD GIVE MUCH MORE CREDENCE TO THE DECISION OF T HE HON'BLE DELHI HIGH COURT AND THE INTERPRETATION OF THE DECISION O N J.K. INVESTORS LTDS CASE [SUPRA] GIVEN BY THE HON'BLE HIGH COURT. IN F ACT, THE HON'BLE DELHI HIGH COURT IN THIS DECISION HAS MADE THE FOLL OWING OBSERVATIONS: WE APPROVE THE AFORESAID VIEW OF THE DIVISION BENC H OF THIS COURT AND THE OPERATIVE WORDS IN SECTION 23(1)(A) O F THE ACT ARE 'THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXP ECTED TO LET FROM YEAR TO YEAR'. THESE WORDS PROVIDE A SPECIFIC DIREC TION TO THE REVENUE FOR DETERMINING THE 'FAIR RENT'. THE ASSESSING OFFI CER, HAVING REGARD TO THE AFORESAID PROVISION IS EXPECTED TO MAKE AN INQU IRY AS TO WHAT WOULD BE THE POSSIBLE RENT THAT THE PROPERTY MIGHT FETCH. THUS, IF HE FINDS THAT THE ACTUAL RENT RECEIVED IS LESS THAN T HE 'FAIR/MARKET RENT' BECAUSE OF THE REASON THAT THE ASSESSEE HAS RECEIV ED ABNORMALLY HIGH INTEREST-FREE SECURITY DEPOSIT AND BECAUSE OF THAT REASON, THE ACTUAL 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 ITA NO.6689 OF 2007 4 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 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. ITA NO.6689 OF 2007 5 (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. (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. (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.' ITA NO.6689 OF 2007 6 FOLLOWING THE ABOVE DECISION, WE SET ASIDE THE ORDE R OF THE LD. CIT(A) AND REMIT THE MATTER BACK TO THE FILE OF THE AO WIT H A DIRECTION TO DECIDE THE SAME IN THE LIGHT OF THE ABOVE OBSERVATI ONS AFTER PROVIDING AN ADEQUATE OPPORTUNITY TO THE ASSESSEE. 7. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 14/10/2011. SD/- SD/- (VIJAY PAL RAO) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 2011. P/-*