M/S. GREAT FORTUNE INVESTMENTS AND INFRASTRUCTURE PVT.LTD,,NASHIK vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 1,, NASHIK

आदेश / ORDER PER DR. DIPAK P. RIPOTE, AM: This is an appeal filed by the Assessee directed against the order of ld.Commissioner of Income Tax(Appeals)-1, Nashik, Appeal Number NSk/CIT(A)-1/260/2016-17 dated 03.07.2017 for the Assessment Year 2014- 15. The Assessee raised following grounds of appeal: “1] The learned CIT(A) erred in confirming the total addition of Rs. 13,40,763/- u/s 23(1 )(a) by estimating the fair market rent in respect of two properties owned by the assessee without appreciating that the said properties were held by the assessee for its business purposes and hence, the deemed rental income thereon was no assessable as income from house property u/s 23 of the Act. Without prejudice to the above ground, assuming without admitting that the deemed rental income from the above properties is taxable as income from house property u/s 23(1 )(a), it is submitted as under – 2] The learned CIT(A) erred in holding that the fair market rent of the show room at Rushiraj Regency, Nashik was rightly considered by the A.O. at Rs. 18,00,000/- per annum on the basis of alleged market enquiry and thereby making the addition of Rs. 12,60,000/- as net

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

income u/s 23(1 )(a) pertaining to the said property after allowing the standard deduction u/s 24 of the Act. 3] The learned CIT(A) further erred in holding that the fair market rent of the flat at Siddhivinayak Park, Nashik was rightly considered by the A.O. at Rs. 1,44,000/- per annum on the basis of alleged market enquiry as against the actual rent received by the assessee of Rs.28,625/- and thereby making the net addition of Rs.80,763/- as net income u/s 23(1 )(a) pertaining to the above flat after allowing the standard deduction u/s 24 of the Act. 4] The learned CIT(A) failed to appreciate that the fair market rent of the above properties was estimated by the A.O. at a very high value and in view of the settled position of law, the municipal ratable value of the said property should have been considered as fair rent for the purposes of deeming provisions of section 23(1)(a) and thus, the addition made by the A.O. was not justified on the facts of the case. 5] The appellant craves, leave to add, alter, amend or delete any of the above grounds of appeal.” 2. Brief facts of the case, as emanating from the order of the Ld.CIT(A), are that the assessee is a private limited domestic company engaged in the business of Distribution of Mutual Funds. The appellant has filed its returns of income declaring total income of Rs.1,20,08,530/- on 25.09.2014. It is an admitted fact that the assessee owns more than one house property. Therefore, provisions of Section 23(1)(4) were applicable. Accordingly, the Assessing Officer made addition of Rs.13,40,763/- on account of deemed let out of house properties u/s 23(1)(a) of the Act and assessed the income of the appellant at Rs.1,33,49,293/-. The impugned properties whose deemed rent has been calculated by the AO are as under: Flat in Siddhivinayak Park ,Nasik - Given on Rent to employee Showroom in Rishiraj Regency ,Gangapur Road, Nasik.- Vacant Property

However, the Assessing Officer(AO) , in the assessment order in para 5.5 has observed that the flat in Siddhivinayak Park was rented out by assessee at a rent of Rs.28625/-, which according to the AO was much below the market rate. 2.1 Inspector of the Department was deputed by the Assessing Officer (AO) to enquire the Market Rent of the properties as per local enquiry, the Inspector has submitted the following report , which is reproduced below:

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

“As directed I have visited the following premises for local enquiry regarding rent during F.Y.2013-14. i) Show Room (Rushiraj Regency Gangapur Road, Nashik) ii) Show Room (Rushiraj Heights, Parijat Nagar, Nashik). iii) Flat (Siddhivinayak Park, Anandwalli, Gangapur road, Nashik). 02. Regarding Show Room, Rushiraj Regency, I have enquired with a owner of cloth showroom which was situated near the same premises. He has stated that the rent of shop of this premises of same are should be Rs.1,40,000/- to Rs.1,60,000/- pe month during the period. 03. Regarding show room Rushiraj Heights, Parijat Nagar, I have enquired with Bank Manager of Kotak Mahindra Bank, he has stated that the rent rate of this premises should be Rs.2,50,000/- per month during the period. 04. Regarding flat at Siddhivinayak Park, Anandwalli, I have enquired with a local person of the area, he has stated that rent of this area should be Rs.12,000/- to Rs.15,000/- per month during the period.” It is mentioned in the Assessment Order that the assessee company has offered for taxation as income from House Property on the premises i.e. Showroom Rushiraj Height, Parijat Nagar to amounting to Rs.1,00,000/- after claiming standard deduction of Rs.9,00,000/- @30% and Flat at Siddhivanayak Park amounting to Rs.20,037/- after claiming standard deduction of Rs,8,588/-. 2.2. It is further mentioned in the assessment order as under : “In view of the above, it was observed that assessee has let-out of the above two properties. Therefore, assessee was required to show deemed rent on the showroom, Rushiraj Regency. Since, the assessee has not shown deemed rent on the above property and failed to produce any supporting evidence in respect of business use of property. ON the basis of assessee’s submission and inspector report of the Revenue, I am of belief that assessee should have offered deemed rent on said property. The annual lettable value as per section 23 of the I.T.Act is estimated at Rs.8,00,000/*- [1,50,000/- x 12] based on inspector report. Therefore, after allowing standard deduction of Rs.5,40,000/- @ 30% of Rs.18,00,000/-) addition of Rs.12,60,000/- is to be made to the total income of the assessee under the head income from house property as deemed rent under section 23 of the Income Tax Act, 1961.”

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

Based on the Inspector’s Report the AO decided the deemed rent of the impugned properties and made addition to the total income. The Assessee filed appeal before the CIT(A). 2.3 Ld. CIT(A) in para 6.3 observed as follows: “I have considered the facts of the case, the assessment order and the submissions of the appellant. The Assessing Officer had genuine belief that the rent received shown by appellant is less. Therefore, to ascertain the correct ALV of property the Assessing Officer conducted enquiry through his Inspector. Based on the Inspector’s report the AO computed the ALV of the property. Section 23(1)(a) relates to the determination of the annual letting value of such property and speaks of the sum for which the property might reasonable be expected to let out from year to year. What the law contemplates by annual value is not actual rent received by the owner of the property but a notional income which is to be gathered from what a hypothetical tenant would pay for the property under assessment. The Court in Moni Kumar Subba, supra, has upheld this view. I do not find any infirmity in the action of the Assessing Officer and is upheld.” 3. Aggrieved by the order of the ld.CIT(A), the assessee filed appeal before this Tribunal. The ld.Authorised Representative (ld.AR) has submitted that ld.CIT(A) has erred in upholding the order of Assessing Officer. The ld.AR submitted that the AO should have adopted Municipal rateable Value instead of relying on some hearsay information collected by the Inspector of the Revenue. There is no basis for the information collected by the Inspector. The ld.AR relied on following case laws:  Pankaj Wadhwa vs. ITO [(2019) 174 ITD 479 (Mumbai)  Owais M. Husain. ITO [(2018) 194 TTJ 102 (Mumbai)]  Sanjay Brahmdev Kapoor v. ACIT [(2020) 182 TTD 243 (Mumbai)]  DCIT v. Virendra Jain [ITA No.3666/Mum/2017] dated 14.112017  ACIT v. Avinash N.Bhosale [ITA No.2582/PUNE/2012] dated 21.05.2014  PCIT v. Karia Can Company Ltd. [(2018) 257 Taxman 189 (Bom)(HC)]

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

 Smt.Smitaben Ambani v. CIT [(2010) 323 ITR 104 (Bom)(HC)] 4. Per contra, the ld.Departmental Representative(ld.DR) relied upon the order of the ld.CIT(A) and AO. 5. We have heard both the parties, perused the material available on record and orders of the Lower Authorities. The AO has relied on the Inspector’s Report. On perusal of the Inspector’s Report which is produced in the assessment order, it is observed that the Inspector has merely enquired with some person and based on that information stated the Rent of the impugned area. The Inspector has not studied actual rental agreement pertaining to the neighbourhood premises. The Inspector has neither recorded any statement under section 131 or collected information under section 133(6) of the Act. In this factual background, the Inspector’s Report is not fully reliable.

5.1. In similar circumstances, the Hon’ble ITAT Pune Benches, in the case of Addl.CIT vs Avinash Bhosale, ITA No.2582/PUN/2012 dated 21.05.2014 has held as under: “4. The next issue is with regard to estimation of annual value of let out property at Mumbai at ₹ 30,00,000/-. The Assessing Officer noted that the assessee has shown rent received from a house property at Walkeshwar, Mumbai at ₹ 80,500/-, after deduction of ₹ 34,500/- for repairs and collection charges from the total rent receipt of ₹ 1,15,000/-. The flat was 1169 sq. ft. in area and it was let out on rent to the associate concern M/s. Avinash Construction. The Assessing Officer observed that the property was purchased on 30.08.1999 and the total purchase price was at ₹ 2,44,70,031/- . Considering the locality of the property, very low rental income was shown from this related concern, and therefore, the annual value of the property was required to be determined u/s.23(1)(a) of the Act. The Assessing Officer cited information regarding rent available on the website www.realestatemumbai.com., according to which rent in Walkeshwarnagar area, Mumbai per month approximately was ₹ 2,50,000/- to ₹ 3,00,000/-. 4.1 The matter was carried before first appellate authority, wherein the various contentions were raised on behalf of assessee and the CIT(A) on perusal of the order passed by ITAT, Pune Bench in the assessee’s own case in ITA

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

No.1425/PN/2008 dated 24.09.2010, wherein, the issue has been decided in favour of assessee as under: “21. We have heard the rival submissions and perused the orders of the revenue authorities as well as paper book filed before us and copies of the decisions filed before us. Undisputedly, this is the case, where the property is let to the sister concern for rent and therefore, clause (b) of section 23(1) apply to the case. AO has not made out a case that the case fall in the exempted cases of Maharashtra Rent Control Act, 1999. The provisions of clause (b) of section 23 are as under:- “23(1) Annual value how determined Subsection (1) for the purpose of section 22, the annual value of any property shall be deemed to be, (a)The sum for which the property might reasonably be expected to let from year to year; or (b)Where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable” Clause (b) refers to a property, which are let. Annual value of a property determined under section 23 shall be adopted for computing the income from property in terms of section 22. The annual value determination shall be strictly in accordance with the provisions contained in section 23 as upheld by the Co-ordinate Bench in the case of Delite Enterprises (P) Ltd. V. ITO (2008) 22 SOT 245 (Mum). Accordingly, where the Rent Control Act is applicable only the standard rent is to be taken as the annual letting value. In the absence of standard rent the municipal ratable value is to be taken. Where the municipal ratable value of rent is less than actual rent, the actual rent shall be fair rental value for computing income from house property. However, it is the decision of the co-ordinate Bench in the case of Makrupa Chemicals (P) Ltd. (2007) 108 ITD 95/12 SOT 68 (Mum) that the standard rent is the upper limit for determining the annual value. The above synopsis goes well with the decisions of the Apex Court in the case of Dewan Daulat Rai Kapoor (supra) and also apex court judgment in the case of Dr. Balbir Singh and others (supra) for the proposition that the ratable value determined by the municipal authority is binding unless the standard rent is higher. 11. In the light of the above legal position we have examined the facts of the instant case. The assessee has let out space to the sister concern, which is undisputed fact and is receiving Rs 10,000/- per month from each sister concern. Therefore, the assessee's property is covered by provisions of clause (b) of section 23(1). This is a fact that assessee's actually rent received or receivable in respect of the said property is not in excess of the ALV computed under clause (a) of section 23(1). In the light of these facts, AO's decision to invoke a comparable case to the property covered under clause (b) is not in

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

tune with the above referred legal position. Further, it is not also the case of the AO that assessee is covered by the exemptions provided in the Maharashtra Rent Control Act and, therefore, ALV of the property shall be determined on the basis of the comparable cases. In any case, the standard rent is upper limit for determination the ALV as held in the case of Makrupa Chemicals Pvt Ltd (supra). Therefore, we are of the opinion that the order of the CIT (A) does not call for any interference. 22, Thus, it is not the case of the revenue that the ALV determined by the assessee is less than the standard rent. Considering the above factual and legal position in force, we are of the opinion that the order of the CIT(A) does not call for any interference for the above reasons. Accordingly, ground 1 of the revenue is dismissed.” In this background, the CIT(A) granted relief to the assessee. This reasoned finding of CIT(A), which is based on decision of ITAT in assessee’s own case, needs no interference from our side. We uphold the same.” 5.2. The Hon’ble Delhi High Court Full Bench in the case of CIT v/s Moni Kumar Subba [2011] 199 Taxman 301 (Del) in para 16 has observed as under: Quote “ Since the provisions of fixation of annual rent under the Delhi Municipal Corporation Act are pari materia of section 23 of the Act, we are inclined to accept the aforesaid view of the Calcutta High Court in Satya Co. Ltd.'s case (supra) that in such circumstances, the annual value fixed by the Municipal Authorities can be a rationale yardstick. However, it would be subject 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 circumstances because of passage of time, viz., the annual value was fixed by the Municipal Authorities much earlier in point of time on the basis of rent than received, this may not provide a safe yardstick if in the assessment year in question when assessment is to be made under 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 valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the 'fair rent' in the market and there is sufficient material on record for taking a different valuation” Unquote. 5.2.1 Hon’ble Bombay High Court in the case of CIT v/s Tip TopTypography , [2014] 48 taxmann.com 191 (Bombay) has agreed with the above view of the Hon’ble Delhi High Court in para 50 of the order as under: Quote , “50. We have broadly agreed with the view taken by the Full Bench of the Delhi High Court. Hence, the issue of determination of the

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

"fair rental value" in respect of properties not covered by or covered by the Rent Control Act is to be undertaken in terms of the law laid down in the Full Bench decision of the Delhi High Court.” Unquote. 5.3 Hon’ble High Court has provided guidance to the assessing officer as under : Quote , “ the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position. He must not make a guess work or act on conjectures and surmises. There must be definite and positive material to indicate that the parties have suppressed the prevailing rate. Then, the enquiries that the Assessing Officer can make, would be for ascertaining the going rate. He can make a comparative study and make a analysis. In that regard, transactions of identical or similar nature can be ascertained by obtaining the requisite details. However, there also the Assessing Officer must safeguard against adopting the rate stated therein straightway. He must find out as to whether the property which has been let out or given on leave and license basis is of a similar nature, namely, commercial or residential. He should also satisfy himself as to whether the rate obtained by him from the deals and transactions and documents in relation thereto can be applied or whether a departure therefrom can be made, for example, because of the area, the measurement, the location, the use to which the property has been put, the access thereto and the special advantages or benefits. It is possible that in a high rise building because of special advantages and benefits an office or a block on the upper floor may fetch higher returns or vice versa.” Unquote. 5.4 In the case under consideration the Assessing Officer has not carried out any such investigation as observed by the Hon’ble High Court. Rather the AO has merely relied on the report submitted by the Assessing Officer, which is based on hearsay opinions. The AO was duty bound to conduct proper investigation before rejecting the assessee’s claim of deciding Annual value based on the Annual rateable value decided by Municipal Authorities. The AO has also not given any specific reasons for rejecting the Rent claimed to be earned by the assessee from the impugned flat in Siddhivinayak Park.

ITA No.2325/PUN/2017 for A.Y. 2014-15 Great Fortune Investments & Infrastructure Pvt. Ltd., (A)

5.3 Thus, it is a settled proposition that , the places where Rent Control Act is not applicable, the Annual Value decided by Municipal Authorities can be a rational yardstick . In the case under consideration the DR has not brought to our notice any reason for which Municipal Value cannot be considered as Fair Rent u/s 23(1). Neither the AO nor the CIT(A) has discussed why Annual value decided by Municipal Corporation shall not be adopted as Fair Rent for the purpose of section 23(1) in this case. We have already discussed why the report submitted by the Inspector cannot be considered. Therefore, in the facts and circumstances of the case , we are of the opinion that , in this case the Municipal Ratable Value of the impugned property or the actual rent offered by the assessee in the return of income , whichever is higher, shall be adopted as fair rent u/s 23(1)(a) of the Act.