Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘C’ NEW DELHI
Before: SHRI H.S. SIDHU & DR. B.R.R. KUMAR
PER SH. H.S. SIDHU, J.M.
This appeal by assessee has been directed against the order of Ld. CIT(Appeals)-18, New Delhi dated 06.04.2017 for AY 2012-13 on the following grounds of appeal:
“That the Ld. CIT(Appeals)-XVIII, New Delhi has erred both in law and, on facts in determining the income of the assessee company in an order dated 06.04.2017. 1.1 That income assessed under the ‘house property’ in respect of the factory building at Okhla Industrial Estate, New Delhi by the Ld. CIT(Appeals) of Rs. 2,69,21,240/- and Rs. 2,34,09,600/- by the Assessing Officer is based on the factual
ITA No. 3316/D/2017 2
misconceptions and erroneous interpretation of provisions contained in section 22 read with section 23 of the Act. 1.2 That the finding of the Ld. CIT(A) that the assessee had not contested the head of income and, therefore, the income had to be computed under the head ‘income from house property’ despite the fact that the assessee has declared income of Rs. 2,76,000/- under the head ‘business income’ is also not based on correct appreciation facts on record and hence untenable. 1.3 That the Ld. CIT(A) has failed to appreciate that since the assessee had not let out the property but had only made available a small portion of this space for hanging boards of corporate office to group companies namely M/s Luxor Writing Instrument (P) Ltd. and M/s Luxor Fashion and, therefore, the income actually received for making available the space of Rs. 2,76,000/- was assessable under the head ‘income from business or provision’ and not ‘income from house property’ and as such, the addition made and sustained is not in accordance with law. 2. That without prejudice and even otherwise assuming that income was computed under the head ‘income from house property’, the computation of notional income by invoking section 23(1)(a) of the Act by lower authorities is based on fundamental misconception and unsustainable. 2.1 That Ld. CIT(Appeals) and Ld. Assessing Officer have failed to appreciate that the assessee was
ITA No. 3316/D/2017 3
entitled to vacancy allowance and as such, income alternatively had to be computed under section 23(1)(c) of the Act and thus, the addition sustained is otherwise too illegal and untenable. 2.2 That the ld. CIT(Appeals) while sustaining the addition, has failed to appreciate the written submissions placed on record by the assessee including the judicial pronouncements cited by the assessee. 3. That the Ld. CIT(Appeals) has erred both in law and on facts in recording various adverse inferences which are contrary to the facts on record, material placed on record and, are otherwise unsustainable in law and, therefore, addition so sustained is absolutely unwarranted. 4. That enhancement by Ld. CIT(Appeals) in the impugned order is beyond the scope of powers vested u/s 251(2) of the Act and thus in excess of jurisdiction. 5. That the Ld. CIT(A) has erred both in law and on facts in sustaining levy of interest.
It is, therefore, prayed that addition made by the Ld. Assessing Officer and sustained by the Ld. CIT(Appeals) may kindly be deleted and appeal of the assessee be allowed. It be further held that enhancement made by the Ld. CIT(Appeals) is in excess of jurisdiction.”
The brief facts of the case are that assessee is a Private Limited Company and filed its return of income declaring a Loss of Rs. 46,978/-. Notice under section 143(2) of the Income Tax
ITA No. 3316/D/2017 4
Act, 1961 (in short “Act”) was issued on 12.8.2013 and duly served upon the assessee. Later, owing to Departmental restructuring (dated 15.11.2014), the case was placed under the jurisdiction of ITO, Ward 12(1), New Delhi. In response to the notices, the AR of the assesee appeared from time to time and filed the details. During the course of the assessment proceeding, the AO raised the issue of bringing to tax the deemed rent in respect of the property owned by the assessee at 17, Okhla Industrial Estate, Phase – III, New Delhi, 110020. In response thereto the assessee submitted that the said property is the registered office of the company and hence, the same cannot be considered to be a vacant property so as to be charged to tax on deemed income. The AO was however not satisfied with the reply of the assessee and accordingly he estimated the total area of the building of 48770 sq.ft. and by applying a rental value of Rs.40/- per sq.ft. he computed the annual letting value at Rs.2,34,09,600/- and after giving deduction in respect of Municipal Taxes and under section 24(a), made an addition of Rs.1,61,91,699/- and assessed the income at Rs. 1,61,92,750/- u/s. 143(3) of the Act vide order dated 27.3.2015. Against the assessment order dated 27.3.2015, assessee preferred an appeal before the Ld. CIT(A) CIT(A) raising various issues including the actual area of the property and also the ratable value considered by the AO besides the contention that the property being used as registered office, the same cannot be considered to be a vacant property so as to be taxed on deemed rent under section 23(1)(a) of the Act. The Ld. CIT(A) however rejected the contention of the assessee and further enhanced the income by increasing the ratable value to Rs.46/- per sq.ft. as against Rs.40/- per sq.ft. applied by the AO. Aggrieved by the impugnd order of the Ld. CIT(A), the assessee is in appeal before the
ITA No. 3316/D/2017 5
Tribunal challenging the addition made by the AO and further enhanced by the Ld. CIT(A).
At the time of the hearing, the Ld. AR filed a synopsis on each of the ground raised in the appeal memo which reads as under:
“This is an appeal filed by the assessee against the order passed by the learned CIT(A) dated 22.03.2017 under section 250 of the Act whereby ld. CIT(A) upheld the action of the Assessing Officer in making the addition of Rs. 1,62,39,728/- under section 23(1)(a) of the Act and made further enhancement of Rs. 24,11,170/- under section 23(1)(a) of the Act.
The brief facts of the case are that the assessee is a Private Limited Company having PAN AAACI0319R incorporated on 14.11.1990 with the main object to carry on engineering activities in high technology areas.
The return of income for the year under consideration was duly e-filed by the assessee on 17.09.2012 wherein loss of Rs. 46,978 was declared.
The case of the assessee was selected for scrutiny and notice u/s 143(2) dated 12.08.2013 was issued.
The Company has its registered office at 17, Okhla Industrial Estate, Phase – III, New Delhi, 110020 (hereinafter referred to as “office property”). The said office property is an old property acquired in 1992 and is the sole property held by the assessee company. The
ITA No. 3316/D/2017 6
property is a double story building and the total area of the said property is 30,000 sq. feet [1,394sq. meter X 2 X 10.7639].
The assessee company has continued to hold the same to continue its existence as an ongoing concern with an intention to identify a suitable business to carry on the said office property.
During the year under consideration, assessee let out 100 sq. feet of the office property to Luxor Fashion for Rs. 3,000 per month and 400 sq. feet of the office property to Luxor Writing Instruments (P) Ltd. for Rs. 20,000 per month. The remaining area i.e. 29,500 sq. feet was in possession of the assessee. Assessee used the said premises to comply with various statutory functions and to ensure its existence as an ongoing concern.
During the course of assessment proceedings, ld. AO required the assessee to show cause as to why addition should not be made on account of deemed rent that it was reasonably expected to receive from the entire office property. For the said purpose, ld. AO relied upon the rates at which properties nearby were offered for rent.
Assessee vide reply dated 25.03.2015 [Pb page no. 52] duly submitted the following, inter-alia, to justify as to why addition was unwarranted:
That only part of the said property (registered office) was let out while the remaining property was in its possession throughout the year as its registered office and accordingly no addition can be made.
ITA No. 3316/D/2017 7
That even otherwise, out of 250 members of the Okhla Industrial Estate, around 150 members were lying vacant due to the usage restriction imposed on the said land and accordingly it was difficult to let out such land in the first place and no addition can be made on account of 23(1)(c) That the comparison could not be made with nearby properties as the same were fully furnished properties whereas the property of the assessee was an old bare production hall structure constructed in 1990 and accordingly the same even if let out would fetch miniscule rent.
However, ld. AO rejecting the reply of the assessee made addition of Rs. 1,62,39,728/- by taking deemed rental rate of 40 per sq. feet without there being any basis thereof. Further, the area considered by the ld. AO for the purpose of computing annual letting value was 48,770 sq. feet as against the area of 22,000 sq. feet against which show cause was issued.
The increased area considered was based on the reply dated 27.03.2015 furnished by M/s Architects Bureau in response to notice under section 133(6) wherein M/s Architects Bureau had enclosed a letter dated 05.07.2011 [PB page no 56-57] written by assessee to M/s Architects Bureau wherein the estimated covered area of the Ground Floor and other floors and basement has been stated as 48,770 sq. feet. The said area was considered wrongly as architect had stated the area which could be built but not what is actually built.
ITA No. 3316/D/2017 8
Aggrieved by the order of the ld. AO, assessee preferred an appeal before the ld. CIT(A). Before the ld. CIT(A), assessee reiterated its stand and further submitted, inter-alia, the following:
That the communication between assessee and M/s Architects Bureau only referred to the total area that could be built when assessee was contemplating during the year to demolish and construct the said building again (with two floors and one basement) to make the building of utility to the business and the said area cannot be considered as actual area [Pb page no 61] That since the part area was not actually let out but was in its possession for the purpose of business, no addition can be made. That though actual activity could not be carried out, assessee has kept the property for identifying suitable business opportunity and that should be construed as for the purpose of business [Pb page no 64] That even otherwise, the assessee would not have been able to let out the property on account of the fact that the property was an old production hall without any amenities as such and the land usage restriction made the area unattractive and accordingly no addition can be made in accordance with section 23(1)(c) as the property remained vacant throughout the year. That without prejudice to the main submissions, even otherwise, the annual letting value should be on the basis of the municipal valuation.
However, rejecting the explanation of the assessee, the CIT(A) observed that no relief on account of section 23(1)(c) can be given by placing reliance on the
ITA No. 3316/D/2017 9
judgment of Hon’ble High Court in the case of Vivek Jain Vs. ACIT [2011] 14 taxmann.com 146 (AP) holding that party property was not let out throughout the year.
Ld. CIT(A) sustained the addition on account of deemed notional rental from the said property and further made enhancement by considering Rs. 46 per sq. feet as the rental rate as against the rate of Rs. 40 adopted by the ld. AO. Ld. CIT(A) adopted the said rate based by computing average rate for which 500 sq. feet was leased out to Luxor Fashion and Luxor Luxor Writing Instruments (P) Ltd.
Further, the ld. CIT(A) incorrectly considered the area of the property as 48,770 as against the 30,000 sq. feet covered area despite noting that the area of the property as self-assessment property tax form is 30,000 sq. feet.
The ld. CIT(A) further ignored the contention regarding the municipal valuation to be adopted by holding that if actual rent is more than the municipal valuation, the same is to be considered by placing reliance on the judgment of Hon’ble Delhi High Court in the case of John Tinson & Co. (P) Ltd. vs CIT [2006] 157 Taxman 410 (Delhi).
Now, aggrieved by the order of the ld. CIT(A), assessee is in appeal before this Hon’ble Tribunal.
In this regard, it is submitted that the issue involved is squarely covered in favor of the assessee by the judgment of Hon’ble ITAT Delhi in the case of M/S
ITA No. 3316/D/2017 10
Mission Verdes Estate Pvt. Ltd., Vs ACIT, in ITA No. 4236/Del/2015 since the property under consideration is used by the assessee company as its registered office and is therefore outside the scope of section 22 itself.
Property under consideration is used for business and therefore outside the scope of Section 22 itself 19. At first, it is hereby submitted that that the addition made is bad both in law and on facts. Section 22 of the Act, which is the charging section in respect of income from house property, specifically excludes properties used for the purpose of business or profession from its ambit. In this regard, it is relevant to refer the provision of the Act which is produced below for the sake of ready reference:
“Income from house property. 22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner , other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".”
The above section unambiguously provides that properties used for the purpose of business are outside the ambit of section 22. In the case in hand, the property on account of which addition has been made considering the deemed annual value is the registered office of the company in accordance under section 12 of the Companies Act, 2013 (the then section 146 of the Companies Act, 1956). The said fact is evident from the
ITA No. 3316/D/2017 11
perusal of the Company’s master data as appearing on the website of MCA placed at PB page no 68.
It is further pertinent to mention here that the said office is the sole office owned by the assessee company. All the regulatory compliances to keep the business status alive are undertaken from such premises. The fact that the company does not have any other property was submitted time and again vide para no. 3 of letter dated 13.11.2014 [PB page no 19], para no 3 of letter dated 07.01.2015 [PB page no 38] and para 2 of letter dated 27.01.2015 [PB page no 42]. The said fact is nowhere doubted.
Further, all official correspondences made to the assessee are addressed to such address. Even the notices of the ld. AO in relation to assessment proceedings are addressed to such property address. The same is evident from copy of notice under section 142(1) dated 16.10.2016 placed at PB page no 15, notice under section 143(2) dated 14.11.2014 placed at PB page no 29, notice under section 142(1) dated 14.11.2014 placed at PB page no 30.
Further, it is such address which has been captured on the return of income as well as evident from the acknowledgement of ITR [Pb age no 1]. Further, even the GST registration number held by the company indicates the said office as the Principal office of the company [Pb page no 69]. Further, the fact that such office is the registered office of the company was submitted before ld. AO is not doubted by the ld. AO. Accordingly, being the
ITA No. 3316/D/2017 12
registered office and the sole office of the company, it is submitted that such office has been occupied for the purpose of business and therefore outside the ambit of section 22.
Further, it is also not in dispute that the portion of the property to the tune of 29,500 sq. feet (30,000 sq. feet less 500 sq. feet) on account of which deemed notional income addition has been was not let out throughout the year and was in the possession of the assessee company. The said fact is evident from para 4.5.2 (b) and (d) page 8 and para 4.16.1(c) page no 25 of the order of the ld. CIT(A) wherein such facts are discussed. Further, it has again also been stated at para 4.16.1 page 25 that “the property as admitted is a composite property and only a part is let out.”
In this regard, reliance is placed on the judgment pronounced by the Hon’ble ITAT Delhi in the case of M/S Mission Verdes Estate Pvt. Ltd., Vs ACIT, in ITA No. 4236/Del/2015, wherein the addition made on account of notional rent u/s 23(1)(a) in relation to the property which was the registered office of a company was deleted.
Further, reliance is placed on the judgment of Hon’ble ITAT Delhi in the case of M/S Palos Verdes Estate Pvt. Ltd., versus ACITITA No. 4235/Del/2015, wherein it was held that when assessee filed its return of income by mentioning the address of the said property which has been accepted by the AO, then no addition under on
ITA No. 3316/D/2017 13
account of deemed ALV can be made as the said property is indeed used for the purpose of business.
Further, it is pertinent to note that not carrying on any activity does not absolves the assessee to maintain a registered office in accordance with the Companies Act and carry on with statutory functions to ensure its status as that of an ongoing concern. It has been repeatedly held that the lack of business activity or business income cannot be equated with no business as the same constitutes a narrow view. In this regard, reliance is placed on the following judgments:
Inder Chand Hari Ram Vs CIT, Allahabad High Court, [1953] 23 ITR 437 Arkaaye Builders & Developers Pvt. Ltd. Versus ITO, Ward-2(1), New Delhi, ITAT Delhi, ITA No. 3552/Del/2011 Income-tax Officer v. Mokul Finance (P.) Ltd, [2009] 29 SOT 11 (DELHI)(URO) L.VE. Vairavan Chettiar Versus Commissioner of Income-Tax, Madras. MADRAS High Court, 72 ITR 114
Further, it has also been appreciated in a number of judgments while dealing with the question of allowability of expenses in absence of business income that as long as the company is in existence, it is required to comply with various statutory functions and the cost incurred in relation to the same are duly allowable failing which it’s name will be struck off from the ROC records and the
ITA No. 3316/D/2017 14
same will invite penal consequences. In this regard, reliance is placed on the following judgment:
Mangal Keshav Holdings Ltd. Versus ITO WD 8 (2) (4), Mumbai, ITAT Mumbai, I.T.A. Nos.2273/M/2012, 7254/M/2012, 6779/M/2013 And 6779/M/2014 M/s Kesha Appliances Pvt. Limited C/o S.P. Jain & Associates Versus ITO Ward-14 (3) New Delhi, ITAT Delhi, ITA No. 2715/Del/2016 G.R. Commercial Pvt. Ltd., New Delhi Versus Income Tax Officer, Ward 12 (2) , New Delhi, ITAT Delhi, ITA No.273/Del/2013,ITA No.1134/Del/2013 Income-Tax Officer. Versus Mokul Finance (P) Limited., ITAT Delhi, [2009] 29 SOT 11 (DELHI) (URO) Sai Fragrance & Flavours (P.) Ltd. Versus Assistant Commissioner of Income-tax, Cir. 9 (3), Mumbai, ITAT Mumbai, [2018] 90 taxmann.com 307 (Mumbai - Trib.) M/s Mangilall Estates (P) Ltd. Versus DCIT, Central Circle- 1 (3) , Kolkata, ITAT Kolkatta, ITA No.156/Kol/2015 Commissioner Of Income-Tax Versus New Savan Sugar and Gur Refining Co. Limited, Calcutta High Court, [1990] 185 ITR 564 Commissioner Of Income-Tax Versus Ganga Properties Limited, Calcutta High Court, [1993] 199 ITR 94
Without prejudice to the above and in an alternate, no addition can be made in view of the provisions of section 23(1)(c) of the Act 29. Without prejudice to the above, it is submitted that even if the property is not treated as being used for the purpose of business, no addition can be made in accordance with 23(1)(c) of the Act. Section 23(1)(c) of the Act reads as under:
ITA No. 3316/D/2017 15
“Annual value how determined.
(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 reasonably be expected to let from year to year; or ….. (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 :”
Section 23(1)(c) provides that 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 deemed annual letting value under section 23(1)(a), then such value received or receivable should be taken as the annual letting value of the property.
Thus, in order to attract section 23(l)(c), the following requirements must be fulfilled
(i) the property, or any part thereof, must be let; and (ii) it should have been vacant during the whole or any part of the previous year ; and (iii) owing to such vacancy the actual rent received or receivable by the owner in respect thereof should be less than the sum referred to in clause 9.1
In the case in hand, undisputedly, assessee owns a single composite property. Part of such property is let
ITA No. 3316/D/2017 16
while another part of the property is vacant. This has been accepted by the ld. CIT(A) at para 4.8 page 11 of the order where it has been stated that “a part of the property is in occupation by the tenants for the full year and the other part is vacant throughout”. Further, it has again been stated at para 4.10 page 19 of its order where it has been stated that “we see that a part of the property was never let out throughout the year while other portion was let out throughout the year.”. Further, it has again been stated at para 4.16.1 page 25 that “the property as admitted is a composite property and only a part is let out.”.
Accordingly, part of the property is let and part is vacant. Further, it is only owing to vacancy of the vacant portion that the actual rent received is less that deemed annual value as per section 23(1)(a). In view of the same, section 23(1)(c) will be applicable.
Ld. CIT(A) observed that no relief on account of section 23(1)(c) can be given by placing reliance on the judgment of Hon’ble High Court in the case of Vivek Jain Vs. ACIT [2011] 14 taxmann.com 146 (AP). In this regard, it is submitted that the said case is not applicable since the facts of the case are different. In the said case, the entire property remained vacant throughout the year. The same is evident from para 2 of the said judgment which reads as under:
“2. The appellant, a practicing advocate, filed his return of income for the assessment year 2002-03 on August 6, 2002 declaring a total income of Rs. 3,01,610. His case was taken up for scrutiny under section 143(2) of the
ITA No. 3316/D/2017 17
Act. A notice dated March 11, 2005, was issued calling upon him to show cause why the annual value, in respect of the flat, should not be included in the computation of his income from house property. The appellant, vide letter dated March 23, 2005, contended that, as per section 23(l)(c) of the Act, the annual value of the flat was nil and, hence, he was not liable to tax. The assessing authority, in his order of assessment dated March 28, 2005, held that section 23(1)(c) would apply only when the property was let out what could be seen from the computation of income was that this property was not let out during the accounting year the question of allowing any deduction on account of vacancy would, therefore, not arise ; in the earlier year also, i.e., the accounting year relevant to the assessment year 2001- 02, the property was let out only for a period of 15 days; and hence the annual value must be taken in terms of section 23(1)(a) of the Act. The annual value was thus estimated at Rs. 1,44,000.”
In the case in hand, part of the property is admittedly let out. Accordingly, the facts are distinguishable. Further, the ratio held by the Hon’ble High Court in para 11 of the said judgment in fact helps the assessee’s case. Para 11 of the judgment reads as under:
“11. In order to attract section 23(l)(c), the following requirements must be fulfilled (i) the property, or any part thereof, must be let; and (ii) it should have been vacant during the whole or any part of the previous year ; and (iii) owing to such vacancy the actual rent received or receivable by the owner in respect thereof should be less than the sum referred to in clause (a ). It is only if these three conditions are satisfied would clause (c) of section 23(1) apply in which event the amount received or receivable, in terms of clause (c) of section 23(1), shall be deemed to be the annual value of the property. Clause (c) does not apply to situations where the property has either not been let out at all during the previous year or, even if let out, was not vacant during the whole or any part of the previous year. Under the Explanation to section 23(1), for the purposes of clause
ITA No. 3316/D/2017 18
(b) or (c), the amount actually received or receivable by the owner shall not include the amount of rent which the owner cannot realize. Self-occupation by the owner of a house would require the annual value of such house, or part of the house, to be taken as nil under section 23(2)(a) and, where the house cannot actually be occupied by the owner on account of his employment, business or profession, as nil under section 23(2)(b) provided that, in terms of section 23(3)(a), the house or part of the house had not actually been let during the whole or any part of the previous year. As a legal fiction is created the word "actually", as used in section 23(3)(c), does not find mention in section 23(1) of the Act.”
As highlighted above, the three conditions as pointed out by the Hon’ble High Court are fulfilled in the case in hand. Part of the property is let, another part is vacant and it is owing to such vacancy that the actual rent received is less than deemed annual value as per section 23(1)(a), thus, no addition can be made by virtue of section 23(1)(c) of the Act.
Further, ld. CIT(A) held at para 4.16.1 page 25 that “there are three distinctly lettable portions, two wholly let out during the year and rest part vacant throughout.”. In this regard, it is submitted that the ld. CIT(A) erred in considering the provision of section 23(1)(c) for let out and vacant portion separately. The property is one composite property with one entry gate and cannot be divided into different parts. The same was submitted before ld. CIT(A) and is on record at para 4.4 page 5 of its order. The property cannot be divided in n number of components based on the whims and fancies of the ld. AO/ld. CIT(A). The property is a composite one and should be treated as one. The act of ld. CIT(A) in treating
ITA No. 3316/D/2017 19
the portion not let out as a separate property is bad in law and against the facts of the case.
In view of the above, no disallowance can be made in view of section 23(1)(c) of the Act. Without prejudice to the above and in an alternate, the deemed rent is to be computed basis the Municipal rateable valuation 39. Without prejudice to the above and in an alternate, it is submitted that the deemed ALV should be computed basis the Municipal Rateable Valuation. That the municipal rateable value of the property as evident from the copy of self-assessment property tax form [Pb page no 53-55] is Rs. 24,08,832/- and accordingly the annual expected rent in no way can exceed such amount.
The ld. CIT(A) has considered the average rate at which property is let out to Luxor Fashion and to Luxor Writing Instruments (P) Ltd. The ld. CIT(A) has taken the average as 46 per sq. feet (23,000/500).
In this regard, it is respectfully submitted that the said act on the part of ld. CIT(A) to adopt the average rent received for other let out portions for the purpose of determining the reasonable rent and ignore the municipal valuation for the same is against the settled legal position.
That it is not in dispute that the portion of the property to the tune of 29,500 sq. feet (30,000 sq. feet less 500 sq. feet) on account of which deemed notional income addition has been was not let out throughout the
ITA No. 3316/D/2017 20
year and was in the possession of the assessee company. The said fact is evident from para 4.5.2 (b) and (d) page 8 and para 4.16.1(c) page no 25 of the order of the ld. CIT(A) wherein such facts are discussed. Accordingly, the valuation of said property is to be determined in accordance with section 23(1)(a) of the Act.
As per Section 23(1)(a) of the Act, the procedure to be followed for determining the annual value requires to determine the ‘sum for which the property might reasonably be expected to let from year to year’. It is relevant to mention that the property taxes under The Delhi Municipal Corporation Act, 1957 is to be paid at the rateable value of the property. Section 116 of the Delhi Municipal Corporation Act provides the manner for determination of rateable value. The said provision provides that the rateable value of any land or building assessable to property taxes shall be the annual rent at which such land or building might reasonably be expected to let from year to year.
It is a settled law now that since the determination of rateable value of land assessable to property taxes under the Municipal laws and the annual letting value under section 23(1)(a) are both based on annual rent at which such land and building might reasonably be expected to let from year to year, accordingly, said rateable value will hold good in pari-materia under the Income Tax Laws while determining the annual letting value in respect of a property which has not been let out and thus the ALV is to be computed with reference to the
ITA No. 3316/D/2017 21
municipal rateable valuation. In this regard, reliance is placed on the following judgments:
ITAT MUMBAI in the case of Shri Moti Govind Bhatia versus DCIT, No.- ITA no.2020/Mum./2016, Dated.- June 21, 2019:
“4. As regards the property at sl. no.1 in the table, it is the contention of the assessee that his children are using it as residence, therefore, the assessee has offered the municipal ratable value as house property income. It is to be noted that the Assessing Officer has determined the ALV of the property by adopting the value at which another flat in the same building was let out. When the assessee has not let out the property, in such circumstances the Assessing Officer cannot determine the ALV by applying the market rate but he can do so only on the basis of ratable value assessed by the Municipal Corporation. The decisions relied upon by the learned Authorized Representative, including the decisions of the Hon'ble Jurisdictional High Court, clearly support this view. Therefore, the Assessing Officer is directed to verify whether the ALV shown by the assessee is as per ratable value determined by the Municipal Corporation and if it is not so, the Assessing Officer is directed to determine the ALV on the basis of ratable value of Municipal Corporation.”
Bombay High Court in the case of THE PR. CIT VERSUS Laxmi Jain Income Tax Appeal No. 1285 OF 2015, Dated: - 16 April 2018
ITA No. 3316/D/2017 22
“2 Revenue urges the following question of law, for our consideration:
“ Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in law in holding that rateable value under Section 23(1)(a) of the Act of a property has to be determined as determined by the Municipal Authorities under the Corporation Act”?
3 It is an admitted position that the property has not been let out. The impugned order of the Tribunal dismissed the Revenue's appeal by holding that, the issue raised herein, stands concluded by the decision of the jurisdictional High Court in Smt. Smitaben Ambani v/s. Commissioner of Wealth Tax 323 ITR 104.
4 In view of the above, the question as framed does not give rise to any substantial question of law. Thus, not entertained.”
Bombay High Court in the case of The PR. CIT versus Shri Harsh Jain, No.- ITA NO.1438 OF 2016, Dated.- February 5, 2019
Bombay High Court in the case of SMT. Smitaben N. Ambani versus Commissioner Of Wealth-Tax, [2010] 323 ITR 104 (Bom)
Hon’ble Madhya Padesh High Court dated 03.01.2019 in the case of CIT Versus Prem Motors, I.T.A.No.78/2018,
Park Paper Industries (P.) Ltd. Versus Income-Tax Officer 7(1) (3), Mumbai, IT APPEAL NOS. 1239 TO 1242 (MUM.) OF 2008, (ITAT Mumbai)
Further, in this regard, reliance is also placed on CBDT Circular 204 dated 24-07-1976, which discusses the amendments made vide Taxation Laws (Amendment)
ITA No. 3316/D/2017 23
Act, 1975. The circular provides the following in relation to amendment made to section 23:
“TAXATION LAWS (AMENDMENT) ACT, 1975-III
Determination of annual value where the rent received exceeds the municipal valuation - Section 23(1)
Hitherto, the annual value of house property chargeable to income-tax under the head Income from house property was deemed to be the sum for which the property might reasonably be expected to let from year to year. In many cases, however, the actual rent received or receivable in a year exceeds the municipal valuation of the property. Sub-section (1) of section 23 has been amended to provide that where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property. Where the property is let out only for a part of the previous year the annual rent for this purpose will be the rent received or receivable for a period of twelve months calculated on the basis of the average rent received or receivable for the period the property was actually let out. This amendment has come into force with effect from 1-4-1976 and is, accordingly, applicable in relation to the assessment year 1976-77 and subsequent years.”
The then amendment made to section 23(1) to provide that in case the actual rent received is more than
ITA No. 3316/D/2017 24
the municipal value, then the actual rent received should be considered as ALV, by inserting clause (b) in section 23 makes it clear that annual letting value as per section 23(1)(a) is to be taken as Municipal Rateable Value.
Thus, in view of the above, the ALV is to be computed with reference to Municpal Rateable Value.
As regards the observation of the ld. CIT(A) at para III page 27 that the higher of actual rent or municipal valuation is to be taken for computing ALV, it is submitted that the same is erroneous. In this regard, it is submitted that the ‘actual rent’ in case as considered by ld. CIT(A) is not the rent actually received. The portion of property is vacant as highlighted earlier. No actual rent has been received in respect thereof. It is the rate which has been received in respect of let out portion which has been considered by the ld. CIT(A).
The higher of two sums are to be considered when the property is let out. However, in case the property is not let out at all, the only way to determine the ALV is by making a reference to section 23(1)(a) of the Act which provides the same to be a sum for which property might be reasonably be expected to be let from year to year. Accordingly, such argument is unsustainable in the eyes of law.
Further, ld. CIT(A) has also placed reliance on the judgment of Hon’ble Delhi High Court in the case of John Tinson & Co. (P) Ltd. vs CIT [2006] 157 Taxman 410 (Delhi) to support its contention. In this regard, it is
ITA No. 3316/D/2017 25
submitted that in the said case, the property was let out as evident from para 2 of the judgment. Accordingly, in such circumstances, the higher of the two sums may be considered as held by the Hon’ble High Court.
In view of the above, without prejudice to the fact that the addition is unwarranted owing to the premises being used for the purpose of business, the Annual Letting Value should be computed with reference to Municipal rateable value i.e. Rs. 24,08,832/- in the case in hand, as evident from the copy of self-assessment property tax form [Pb page no 53-55]
Without prejudice to the above and in an alternate, the rent and area considered by ld. AO and ld. CIT(A) is incorrect
Rent to be considered
Without prejudice to the above, it is submitted that the average of Rs. 46 as adopted by ld. CIT(A) is bad in law. 100 sq. feet was leased out to Luxor Fashion for Rs. 30 per sq. feet per month (3,000 per month for 100 sq. feet) and 400 sq. feet was leased out to Luxor Writing Instruments (P) Ltd. for Rs. 50 per sq. feet per month (20,000 per month for 400 sq. feet). Accordingly, assumption of ld. CIT(A) that assessee will fetch the average of Rs. 46 per sq. feet (23,000/500) is highly injudicious and unwarranted.
The property is an old production hall without any amenities as such and accordingly cannot fetch such high rate. The said fact has been repeatedly submitted before
ITA No. 3316/D/2017 26
the authorities. Accordingly, reasonable rent may be adopted as against such high value of rent.
Area to be considered 54. The total area as considered by the ld. AO and ld. CIT(A) for the purpose of making deemed notional rent addition is 48,770 sq. feet as against the correct area i.e. 30,000 sq. feet.
Ld. AO for the purpose of considering the area of 48,770 sq. feet placed reliance on the correspondence that took place between the assessee and M/s Architects Bureau [Copy placed at PB page no 56-57] wherein as per ld. AO it is stated by the assessee that the total estimated covered area of ground floor, other floors and basement is 48,770 sq. feet. This has been discussed by the ld. AO at para 2 page 3 of the assessment order.
In this regard, it is pertinent to note that the purpose of the correspondence was to indicate the total area that was proposed to be built on the land as a part of ongoing talks with the said company to make the building of use to assessee and such area did not reflect the actual built up area. The said fact is evident from copy of such letter placed at PB page no 56-57 wherein it has been stated that that “we are pleased to award the Architectural Design and Engineering Consultancy Works for our premises”. Further, the term used is “estimated” area. Further, it is also relevant to draw your honor’s attention towards point number 19 of reply dated 07.01.2015 [PB page no 40] wherein it has been submitted before ld .AO that a new building plan/project
ITA No. 3316/D/2017 27
was being entered into for which M/s Architects Bureau was hired.
It is relevant to mention that the said plan did not materialize. The same is evident from the perusal of fixed asset schedule forming part of financial statements placed at Pg. no 13 as per which no addition can be noted apart from such amount paid to the architect.
Further, it is pertinent to mention that the said communication reflected area for three floors, however, the said property comprises of only two floors. The said fact is even accepted by the ld. AO which is evident from para 1 page 2 of assessment order wherein it has been stated that as “per local enquiry, the said premise is a huge double story building”. However, ld. AO placed reliance on the correspondence without even appreciating its intent and even chose to ignore the result of its own enquiry.
In this regard, attention is also drawn towards the copy of the self-assessment property tax form [Copy placed at PB page no 54] placed on record before the ld. AO as well as ld. CIT(A). Perusal of the same clearly reveals that the total area of property as 2788 sq. meter [30,000 sq. feet (2788 sq. meter X 10.7639)].
Further, it is relevant to highlight that at para 4.52 page 8 of the order of ld. CIT(A), certain undisputed facts have been stated. Point (f) of para 4.5.2 page 8 of such order reveals that ld. CIT(A) is in agreement with the total area as he has stated that the “built up area is seen to be 1394 sq. meter (100%) as seen from para 8 of the
ITA No. 3316/D/2017 28
Municipal Self Assessment Property Tax form filed before me’ .
However, while making the final determination, ld. CIT(A) at para 4.16 page 25 of its order took the total area as 48,770 sq. feet without giving any reasoning. This is despite the fact that the property tax form was brought on record and it was submitted that the correspondence only revealed the estimated area vide the submission placed at PB Pg. 61.
In view of the above, the total area of the property to be considered is 30,000 as against as against 48,770 sq. feet.
In view of the above submissions, it is prayed before your honor that the addition be deleted and such relief as deemed fit be granted to the assessee.”
It was submitted by the Ld. AR that the addition made by the AO and the further enhancement by the CIT(A) is unsustainable both on facts and law. It was submitted that the assessee company has its registered office at 17, Okhla Industrial Estate, Phase – III, New Delhi, 110020. The said office property is an old property acquired in 1992 and is the sole property held by the assessee company. The property is a double story building and the total area of the said property is 30,000 sq. feet not 48770 sq. Feet as considered by the AO and CIT (A). The assessee company has continued to hold the same to continue its existence as an ongoing concern with an intention to identify a suitable business to carry on the said office property. During the year under consideration, assessee
ITA No. 3316/D/2017 29
let out 100 sq. feet of the office property to Luxor Fashion for Rs. 3,000 per month and 400 sq. feet of the office property to Luxor Writing Instruments (P) Ltd. for Rs. 20,000 per month. The remaining area i.e. 29,500 sq. feet was in possession of the assessee. Assessee used the said premises as its registered office to comply with various statutory functions and to ensure its existence as an ongoing concern. During the course of assessment proceedings, the assessee in response to the show- cause notice issued by the AO submitted a reply dated 25.03.2015 placed at PB page 52 whereby it was clarified only part of the said property (registered office) was let out while the remaining property was in its possession throughout the year as its registered office and accordingly no addition can be made. However, the AO rejecting the reply of the assessee made addition of Rs. 1,62,39,728/- by taking deemed rental rate of 40 per sq. feet without there being any basis thereof. Further, the area of 48,770 sq.ft. considered by the AO for the purpose of computing annual letting value was wrong. It was clarified that the increased area of 48,770 sq.ft. considered based on the reply dated 27.03.2015 from Architects Bureau in response to notice under section 133(6) was incorrect as the Architect in the said letter has stated the area which could be built but not what is actually built as can be seen from the said letter placed at PB page 56-57. It was submitted that the communication between assessee and Architechts Bureau only referred to the total area that could be built when assessee was contemplating during the year to demolish and construct the said building again (with two floors and one basement) to make the building of utility to the business and the said area cannot be considered as actual area as is evident from PB page no. 61. It was submitted that since the area was not let-out and was in
ITA No. 3316/D/2017 30
possession of the assessee company for its own office, no addition can be made.
3.1 On the contrary, the Ld. DR placed reliance on the order passed by the authorities below. He invited our attention towards the provisions of section 23 of the Act which were amended by the Finance Act, 2001 where a property or any part of the property was vacant during the whole or any part of the previous year then the AO is entitled to compute the actual rent on the basis of the annual letting value. The Ld. DR also invited our attention to the judgment passed by the Andhra Pradesh High Court in the case of Vivek Jain vs. ACIT (2011) 14 taxmann.com 146 (AP) whereby it has been held that provisions of section 23(1)(c) of the Act are applicable in respect of a vacant property. The Ld. DR also our invited attention to the observations of the Ld. CIT(A) whereby he, after considering the various submissions of the assessee has even enhanced the income. Hence, he requested to uphold the order of the Ld. CIT(A) and dismiss the appeal of the assessee.
We have heard both the parties and perused the records especially the orders of the authorities below. On going through the facts, we find that the only issue in dispute is relating to addition made on account of the notional rent computed in respect of the property no. 17, Okhla Industrial Estate, Phase – III, New Delhi, 110 020 owned by the assessee company. The contention of the AO is that notional rent needs to be computed in respect of this property considering the same as vacant property. As against this, the contention of the assessee is that the notional rent cannot be computed as this is not a vacant property but a property occupied by the company as its registered office. Thus, the first issue is whether this
ITA No. 3316/D/2017 31
contention of the assessee is correct or not. On going through the facts, we note that this office is the sole office owned by the assessee company. All the regulatory compliances are being made from this premises. The assessee company does not have any other property. This fact has been submitted by the assessee company in various replies submitted to the AO and the submissions made before the Ld. CIT(A). All the official correspondence in the name of the company is to this office only. Various notices and Assessment Orders have also been issued and addressed on this property address as is evident from various notices issued under section 142(1) of the Act and 143(2) of the Act etc. placed in the Paper Book. This address is also stated on the return of income filed before the AO itself. The Tax registration of the company is also at this address. The registered office of the company is also at this address. The company does not have any other office or address. In the light of these facts, it is established that this property is occupied by the assessee company for its own purpose. In these circumstances, it cannot be said that the property was vacant during the year. Both AO and Ld. CIT(A) have gone with the presumption that the property is vacant and hence, income on the basis of notional rent needs to be added under section 23(1)(c) of the Act. We are of the view that the company having occupied the property for its own purposes, no notional rent can be added. It may be germane to mention here that this is the only property owned and occupied by the assessee as its registered office. It is not the case of the AO that the assessee company was having some other premises to have its office. A company having been incorporated is legally required to have its registered office irrespective of the fact whether during the year it has carried on any activity or not. There is a statutory requirement under
ITA No. 3316/D/2017 32
the Companies Act to have a registered office. We are also in agreement with the contention of the Ld. AR for the assessee that the cost incurred by the company in order to comply with various statutory functions is allowable even in the absence of any business income. In case, a company does not have its own premises then such company will be required to take a premises on rent for its registered office and rent so paid being towards meeting statutory obligation will be allowable expenditure. As against this, a company which owns its own premises and uses such premises for its registered office, it cannot be said that such premises was vacant so as to charge notional rent as its income under section 23(1) of the Act. This view is fortified by the judgment of Coordinate Bench of the ITAT Delhi in the case of M/S Palos Verdes Estate Pvt. Ltd., versus ACIT ITA No. 4235/Del/2015, wherein it was held that when assessee filed its return of income by mentioning the address of the said property which has been accepted by the AO, then no addition under on account of deemed ALV can be made as the said property is indeed used for the purpose of business. We further note that similar view has been taken by the ITAT Delhi in the case of M/s Mission Verdes Estate Pvt. Ltd., Vs ACIT, in ITA No. 4236/Del/2015, wherein the addition made on account of notional rent u/s 23 of the Act in relation to the property which was the registered office of a company was deleted. Further, we are of the view that there is no restriction or condition about the size of the registered office. Thus, merely on the basis of the area of the office being large, the same cannot be said to be vacant property so as to attract the provision of section 23 of the Act. Further in the preceding assessment years and succeeding years there is no such addition has been made despite there being no change in facts. This property is owned since beginning and being used as
ITA No. 3316/D/2017 33
registered office. In view of these facts, we are of the view that AO and Ld. CIT(A) were not justified in treating the office occupied by the assessee as vacant property and taxing the notional rent in the hands of the assessee company. Accordingly, we direct to delete the entire addition made and enhanced on this account by the AO as well as by the CIT (A) respectively. In view of above, we need not adjudicate the various other grounds and contentions raised by the assessee being academic. 5. In the result, appeal of the assessee is allowed. Order pronounced on 13-08-2019
Sd/- Sd/-
(DR. B.R.R. KUMAR) (H.S. SIDHU) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 13/08/2019
*Kavita/SRB