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Facts
The assessee, a partnership firm, leased out its property to Yes Bank Ltd. for a significant rent. The assessee's PAN details were erroneously updated, leading to the issuance of a notice under Section 148. The Assessing Officer (AO) made additions for notional rent and unexplained investment.
Held
The Tribunal held that the rental proceeds from the property should be treated as 'Income from House Property' and not business income. The addition for unexplained investment was deleted as the source of investment was explained. The notional rent computation based on property tax was deemed unsustainable.
Key Issues
Whether notional rent can be computed for a vacant property based on property tax, and whether additions for unexplained investment are justified.
Sections Cited
23(1)(a), 23(1)(c), 147, 148, 139(1), 69, 250, 56(2)(vii)(b), 56(2)(x), 23(5), 23, 24
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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI OMKARESHWAR CHIDARA
A.Y. 2014-15 Ambika Trading Corporation The present appeal filed by the assessee arises out of final assessment order passed by NFAC, Delhi, for assessment year 2014-15 on following grounds of appeal:
“1. Addition of notional Rent Income of Rs.28,23,973/- U/sec 23(1)(a) 1.1. On the facts and circumstances of the case and in Law, the Id. Commissioner of Income tax (Appeals), NFAC, Delhi, erred in making addition of notional rent income under the head "Income from House Property U/sec 23(1)(a) of the Act at Rs.28,23,973/- being deemed rent for the commercial premises at 'Anupam Society' ignoring the fact that the said commercial premises was actually let out till A.Y.2010-11 but remained vacant since then and also throughout the year and therefore the ALV of the said property was to be taken at 'Rs. Nil" as provided U/sec 23(1)(c )of the Act. 1.2. Without Prejudice, the Id. Commissioner of Income tax (Appeals)erred in adding notional rent U/sec 23(1)(a) of the Act at Rs.28,23,973/- based on actual rent received from another property of the Appellant ignoring the fact that actual rent received from the said premises in AY 2010-11 was just Rs.73,524/- p.a. and therefore, the notional rent can not exceed the municipal ratable value of Rs. 1,91,183/-,i.e. the municipal tax of the said premises.
2. Ground No.2: The appellant craves leave to add, amend, alter, modify, delete and/or change all or any of the above grounds on or before the date of hearing” Brief facts of the case are as under:
The assessee is a Partnership Firm formed in the year 1984- 85 having income from House Property i.e. Rent from lease of its premises situated at Ground Floor, Shree Amba Shanti Chambers, Opp. Hotel Leela, Andheri Kurla Road, Andheri (East), Mumbai- 400 059. The assessee invested in the said premises on which no depreciation was claimed. The assessee leased out the said premises to Yes Bank Ltd. vide Leave License Agreement dated 30/04/2013 for a Lease Rent of Rs.7,57,868/- per month.
2.1. The assessee e-filed its return of income under section 139(1) for year under consideration under the PAN AAGF2653R on 25.08.2014 showing the said Lease Rent income under the head" Income from House Property". Thereafter, to make changes in the PAN database with the Department, the accountant inadvertently and erroneously submitted Form for Application of PAN instead of Form for Changes in PAN Data. The assessee was thus allotted new PAN AAJFA1123H in the year 2015-16 (Α.Υ. 2016-17). Therefore, the Firm was inadvertently and erroneously having two PAN i.e. AAGF2653R and AAJFA1123H. Thereafter, the assessee regularly filed its return of income from A.Y. 2016- 17 and onwards under the newly allotted PAN AAJFA1123H. The assessee submitted that From A.Y. 2007-08 to AY 2015-16, the return was filed under PAN AAGFA2653R, whereas from A.Y. 2016-17 onwards the returns were filed under PAN AAJFA1123H which was newly allotted. 2.1. The Ld.AO issued notice U/Sec. 148 on 25.03.2021 to the assessee on PAN AAJFA 1123H(new PAN) on the ground that the assessee failed to file its return u/s.139(1) for the year under consideration( being 2014-15), although per ITD and the ITBA portal is reflecting following high volume transactions. The Ld.AO thus concluded that income has escaped assessment. 2.2. In reply to the notice issued u/s.148 dated 25.03.2021 the assessee filed its return of income declaring the same income as per return of income originally filed u/s.139(1) of the Act on A.Y. 2014-15 Ambika Trading Corporation 25/08/2014 together with the Balance Sheet, Profit and Loss Account and copy of acknowledgement of Return of income filed originally u/s.139(1) of the Act under the PAN AACFA 2653R(old PAN). 2.4. During the assessment proceedings u/s.147, the Ld.AO observed that, the assessee declared income only under the head ‘Income from House Property’, though the main business activity of the assessee was leasing out and renting out properties. The Ld.AO observed that no other business activity was carried out by the assessee. The Ld.AO thus assessed rental income under the head, ‘Income from Business & Profession' and disallowed the standard deduction claimed amounting to Rs.24,78,911/-. The Ld.AO further observed that, the assessee claimed expense of Rs.8,04,915/- in both 'House Property Schedule and Business and Profession' Schedule in the ITR. Since, during the assessment proceedings, the assessee failed to furnish any documentary evidences in support of its claim, the Ld.AO disallowed the Rs.8,04,915/-. Thus, making total disallowance of Rs. 32,83,826, the gross rental receipts of Rs. 90,67,952/- were assessed by the AO as Income under the head 'Income from Business & Profession. 2.5. Further, the Ld.AO made addition of Rs.7,91,06,000/- as unexplained investment u/s 69 of the Act, as the assessee did not explain the source of investment in immovable property. Aggrieved by the order of the Ld.AO the assessee preferred appeal before the Ld.CIT(A).
On notional rental income computed in the hands of the assessee, the Ld.CIT(A) observed as under:
A.Y. 2014-15 Ambika Trading Corporation 7.10 To conclude the discussions made in preceding paragraphs, it is hereby decided that rental proceeds of Rs. 90,67,952/- received by the appellant from Yes bank Ltd. during the year on account of lease of property: Shree Amba Shanti Chambers) is not the business income of the appellant but 'Income from House Property. However, as the property tax of Rs. 1,91,183/- out of total property tax of Rs. 8,04,915/- paid by the appellant during the year, pertains to another property viz Anupam Building/Society, Malad, property tax of Rs 1,91,183/- is disallowed to be deducted against the rental proceeds of 90,67,952/- pertaining to property: Shree Amba Shanti Chambers). Property tax of Rs. 1,91,183/- is however, allowed for deduction against the notional annual rental value of the property. 'Anupam Building /Society' worked out separately in Para 7.9 above. In the net result, Total Income from House Property earned by the appellant during the year under consideration is determined to be Rs. 77,60,907/- (59,17,954 + 18,42,953/-) as against income of Rs. 57,84,126/- declared in its ITR for the AY 2014-15, thus making an addition of Rs. 19,76,781/-. Consequently, the addition of Rs. 32,83,826/- made by the A.O. to the returned income of the appellant, in the impugned order dated 20.03.2022 is hereby restricted to Rs. 19,76,781/. The AO is also directed to allow credit of prepaid and other taxes, if any paid by the appellant in relation to this income already declared in the return of income filed on 25.08.2014 for AY 2014-15 under the old PAN AAGFA2653R to avoid any double taxation. The ground of appeal no. 2 taken by the appellant is, thus, partly allowed.
3.1. On the issue of addition under section 69 of the Act, the Ld.CIT(A) deleted it, by observing as under: Further, all the payments made by the appellant as shown in above ledger are also reflected in the bank account statements of the appellant for the relevant period. The appellant has submitted that all the payments were made from its own internal sources and accruals. On further perusal of Balance Sheet and Bank account statements of the appellant for the preceding Financial Years ie. 2011-12 & 2012-13, it is seen that the appellant firm had sufficient own sources for making above investment.
8.4 In view of the above discussion, it is noted that actual investments made by the appellant for purchase of Unit at Srikant Chambers II is Rs. 3,77,25,000/- (excluding stamp duty & other charges) as against stamp duty valuation of Rs. 7,91,06,000/-mentioned in the AIR information and taken by the A.O. in the impugned order. The said investment value of 3,77,25,000/- which is duly reflected in the books of the account of the appellant for the period ended 31.03.2014 and the source of the said investments is also explained. Consequently, the addition of Rs. 7,91,06,000/-made by the A.O. u/s 69 of the Act in the impugned order dated 20.03.2022 treating the above investment as A.Y. 2014-15 Ambika Trading Corporation 'unexplained' is hereby deleted. The ground of appeal no. 3 taken up by the appellant is therefore allowed. 8.5 It is pertinent to mention here that the provisions of section 56(2)(vii)(b) as applicable to AY 2014-15 under consideration providing for taxation of the difference between the stamp duty value of the immovable property and actual consideration as income of the purchaser were applicable only to Individual and HUF assessees, and thus not applicable to the appellant being a partnership firm. The provisions were subsequently amended to include all types of assessees only w.e.f. 01.04.2017 u/s 56(2)(x) and hence not applicable to the AY 2014-15 under consideration in this case 3.3. The Ld.CIT(A), in addition to the above observed that assessee has made payments towards property tax in respect of the property in an Anupam society, which was not leased out. Assessee was called upon by issuance of notice under section 250 of the act, as to why, the property taxes paid in respect of the premises at Anupam Society should not be disallowed as deduction against the rental received from Shri Amba Shanti Chambers. 3.4. The assessee in response submitted that the property is situated at Anupam society is owned by the assessee which is commercial premises. It was submitted that the said premises was rented to United Bank of India and assessee regularly receive rent from the licensee till February 2009. However subsequently a dispute arose between assessee and United Bank of India leading to the vacating of the premises by the licensee. It was submitted that a suit was filed by the assessee before the Hon’ble Small Causes Court at Mumbai. 3.5. The assessee had submitted that property tax paid against the commercial property owned by the assessee were paid in financial year 2013-14 and claimed as business expenses in the said year. From the details filed by the assessee, the Ld.CIT(A)
A.Y. 2014-15 Ambika Trading Corporation observed that United Bank of India had cleared the arrears of rent during the financial year 2009-10 itself and had vacated the premises based on which the appeal filed by a assessee against United Bank of India stood withdrawn on 16/09/2011. The Ld.CIT(A) has observed that there was no restriction or probation or any direction from Hon’ble Court in letting out the premises to anyone else during the pendency of a subsequent petition claiming Mesne Profit and that the assessee was free to let out the premises at Anupam society during the financial year relevant to assessment year under consideration. The Ld. CIT(A) has reproduced the order passed by Hon’ble Small Causes Court dated 04/10/2019 passed in Mesne Profit Application filed by assessee. 3.6. The Ld. CIT(A) has computed the fair rental value of Anupam society proportionately based on the location as I left the property tax paid by the assessee against by Shanti Chambers as under: The appellant paid property taxes amounting to Rs.6,13,732/- in respect of property situated at Shree Amba Shanti Chambers', Andheri Kurla Road during the FY 2013-14 against gross rental proceeds of Rs.90,67,952/- received from the said property Thus, the property taxes paid by the appellant were 6.77 percent of the gross annual rental value of property situated at Shree Amba Shanti Chambers', Andheri Kurla Road. The property lax paid by the appellant for the Anupam society building for the FY 2013-14 was Rs1,91,183/-. Thus, by applying the same percentage and doing reverse calculation, the gross notional annual rental value of 'Anupam Building, Malad comes out to be Rs.28,23,973/-. Accordingly, the notional rental Income from House Property (Anupam Building) u/s 23(1)(a) is worked out as under: Notional Rent received from let out of Anupam Building, Malad Rs 28.23,973/- Less Property Tax Paid Rs 1,91,183/- Net Annual Value Rs. 26,32,790/- A.Y. 2014-15 Ambika Trading Corporation Less Standard Deduction @30% Rs. 7,89,837/- Income from House Property (Anupam Building): Rs. 18,42,953/- Aggrieved by the order of the Ld.CIT(A) the assessee is in appeal before this Tribunal.
The Ld.AR submitted that, the authorities below erred in not considering the fact that the property at 'Anupam' was vacant since AY 2009-10 due to disputes with earlier lease and therefore the ALV of the said property was Rs. NIL as provided U/sec 23(1)(c) of the Act as the same was vacant for the "whole year". He placed reliance on Section 23(1)(c) provides that reads as under: "(c) where the property or any part of the property 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 receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable". 4.1. It is submitted that the assessee could not lease the said property and was vacant for the whole year and was also not self occupied and therefore the ALV shall be Rs. NIL as provided U/sec 23(1)(c). He drew support for following decision: (i) Decision of Hon’ble Andhra Pradesh High Court in case of Vivek Jain V. ACIT reported in [2011] 14 taxmann.com 146 (ii) Decision of coordinate Bench of this Tribunal in case of Sonu Realtors (P.) Ltd V.DCIT reported in 97 taxmann.com 534 (iii) Decision of coordinate Bench of this Tribunal in case of Premsudha Exports (P.) Ltd V. ACIT reported in [2008] 110 ITD 158 ) iv. Decision of Hon’ble Chennai Tribunal in case of Asfa Technologies & BPO (P) Ltd. V. ITO reported in 143 taxmann.com 170 4.2. Alternatively, the Ld.AR proposed that the notional rent under section 23(1)(a) of the Act shall not exceed Rs.1,91,183/-, i.e. the municipal tax of the said premises which is the ALV of the said premises under section 23(1)(a) of the Act.
A.Y. 2014-15 Ambika Trading Corporation He placed reliance on following decisions in support: (i) Decision of coordinate Bench of this Tribunal in case of Shri Anand J. Jain V. DCIT in vide order dated 18.01.2021 (ii) Decision of coordinate Bench of this Tribunal in case of Pankaj Wadhwa V. ITO reported in [2019] 101 taxmann.com 161 4.3. On the contrary, the Ld.DR relied on orders passed by the authorities below. He submitted that, the Ld. CIT(A) rightly observed the property was ready to be leased out as the dispute with United Bank of India got concluded as soon as assessee withdrew its case. We have produced the submissions advanced by both sides in the light of the records placed before us.
The controversy raised in Ground No. 1 is whether notional rent can be computed in respect of a vacant premise based on the proportionate to the property taxes paid by the assessee. 5.1. Ld.AR vehemently has argued that the premises was vacant due to impossibility of letting out and therefore ALV cannot be computed in respect of Amba Shanti Chambers. It is noted that the assessee had claimed the property taxes paid against the premises as expenditure. 5.4. Further in respect of premises at Anupam society, the assessee had not declared any rental income under the head income from house property but had claimed the property taxes paid as expenditure. 5.3. The Ld.AR argued that even the legislature has recognized the impossibility of letting out the property immediately on completion and, therefore, notified sub section (5) to section 23 and, therefore, the provisions of sections 23 and 24 should be A.Y. 2014-15 Ambika Trading Corporation interpreted keeping in mind the subsequent introduction of section 23(5). The Ld.AR also submitted that sections 22 & 23 have to be interpreted reasonably and in a manner that it cause no hardship to the assessee. The Ld.AR therefore submitted that the annual value of the unsold units should be ignored or to be taken as Nil.
Admittedly, there is no evidence please don’t record by the assessee that the premises and Anupam society was sub judice and therefore it could not have been let out. The documents filed by the assessee in respect of the suit filed with honourable small causes court attained its finality based on which the assessee withdrew its suit. Except for Mesne Profit application, nothing was pending which could lead to the conclusion that the premises at Anupam society could not have been left out to due to impossibility. We therefore find the decisions relied by the Ld.AR in respect of the proposition that no ALP could be computed in respect of premises at Anupam society will be of any support.
Now coming to the manner in which the Notional rent has been computed, it is noted that the notional rent in respect of both the properties are computed under section 23 (1) (a) of the is noted that based on the property taxes paid by the assessee the rental income was re worked on percentage basis. Such kind of computation in our view is unsustainable in the eyes of law. Hon'ble Bombay High Court in the case CIT Vs.Tip top Typography reported in (2014)48Taxmann.com191, held that, rent should be computed at Municipal ratable value. The assessing officer is directed to ascertain the municipal valuation for computing A.Y. 2014-15 Ambika Trading Corporation notional rent. We accordingly direct the Ld.AO to ascertain the Municipal ratable value for computing the notional rent. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Accordingly the grounds raised
by the assessee are partly allowed.
8. Identical is the issue raised by the assessee for assessment year 2016-17. Following the above observations mutatis mutandis, the Ld.AR is directed to compute the notional rent by ascertaining the municipal ratable value. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law.
In the result the appeals filed by the assessee for both assessment years stands partly allowed. Order pronounced in the open court on 28/02/2025