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Bharat K Sheth, Mumbai vs DCIT | ITAT Mumbai 2020 | BharatTax

BHARAT K SHETH,MUMBAI vs. DCIT RG 5(3), MUMBAI

ITA 4648/MUM/2015Status: DisposedITAT Mumbai17 December 2020AY 2011-1214 pages

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Cases cited in this judgment

Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.

Chainrup Sampatram v. CIT
24 ITR 481 · 1953 · SC
196 citing
CIT v. Tip Top Typography
368 ITR 330 · 2014 · HC
161 citing
CIT v. Sutlej Cotton Mills Supply Agency Ltd.
100 ITR 706 · 1975 · SC
63 citing
Kashi Prasad Kataruka v. CIT
101 ITR 810 · 1975 · HC
33 citing
Karsondass Ranchhoddass v. CIT
83 ITR 1 · 1972 · HC
20 citing
Sakarlal Balabhai v. ITO
100 ITR 97 · 1975 · HC
18 citing
291 ITR 500 (SC) (paras 4, 12) CIT v. Sharma (H. P.)
122 ITR 675 · 1980 · HC
14 citing
Hameed Jaffery v. CIT
227 ITR 724 · 1997 · HC
8 citing

Income Tax Appellate Tribunal, “B” BENCH, MUMBAI

Before: HON’BLE SHRI SAKTIJIT DEY, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM

For Appellant: Shri Percy Pardiwala-Ld.Sr. Counsel

For Respondent: Shri Oommen Thorian -Ld. Sr.DR

आदेश / O R D E R

Per Bench

1.

The assessee is under appeal for various Assessment Years as captioned above whereas the revenue is in appeal for Assessment Year (AY) 1999-2000. The assessment has been framed on different dates which have been adjudicated by Ld. first appellate authority vide separate orders. However, it is admitted position that facts and issues are more or less identical in all the years and adjudication in any year would apply to all the other years also. For the purpose of adjudication, the assessee’s appeal for AY 1998-99 is taken as the lead year which is against the order of Ld. Commissioner of Income Tax (Appeals), Central- 3 Shri Bharat K.Sheth VI, Mumbai order dated 28/02/2002. The effective grounds read as under: -

1. 1. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in redirecting the assessing officer to fix the quantum of rental value of house property by rejecting the claim of the appellant.

2. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in holding that letting out of house property by the appellant is not covered by the Rent Control Act.

3. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.17,01,000/- in respect of trading loss.

4. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not adjudicating ground no.6 before him regarding levy of interest u/s 234A, 234B and 234C of the I.T. Act.

3.

We have carefully heard the arguments and perused the relevant material on record including the orders of lower authorities and the cited decision of the Tribunal in assessee’s own case for AYs 1996-97 & 1997-98. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 4. The material facts are that the assessee being resident individual was assessed for year under consideration u/s 143(3) on 12/03/2001 wherein the returned income of Rs.42.70 Lacs was assessed at Rs.107 Lacs after certain additions / adjustments. One of the disallowance was disallowance of trading loss for Rs.17.01 Lacs and other adjustment was 4 Shri Bharat K.Sheth under the head Income from House Property for Rs.36 Lacs. Both the issues form subject matter of present appeal before us. Issue No.1: Trading Loss of Rs.17.01 Lacs 5.1 The assessee reflected trading loss of Rs.17.01 Lacs in share business stated to be carried out in proprietorship concern namely M/s B.K. Sheth Trading Co. The loss stem from decrease in market value of two stocks i.e. M/s Great Eastern Shipping Co. Ltd & M/s Prime Securities Ltd. held by the assessee on the Balance Sheet date. These scrips were converted into stock-in-trade of the proprietorship concern in earlier AYs 1994-95 & 1995-96. There was no trading in shares but the loss was arising on account of valuation of closing stock at year-end. However, Ld. AO noted that there was no organized or frequent trading activity which was evident that in last 5 years, there were only two transactions of purchase and sale in the concern. During the year, the assessee did not carry out even a single trade in proprietorship concern. Though the assessee carried out sale of shares in individual capacity but the shares held in trading concern were left untouched. Therefore, a conclusion was to be drawn that the assessee had no intention of dealing in the shares held in proprietorship concern. Hence, the trading loss of Rs.17.01 Lacs would not be allowable as held in earlier AYs 1996-97 & 1997-98 as well, 5.2 During appellate proceedings, assessee, inter-alia, drew attention to the favorable first appellate orders for AYs 1996-97 & 1997-98. However, Ld. CIT(A), taking a different view, held that it was not a case of genuine loss. Although the shares were capital investment but the same were given the treatment of stock-in-trade without any basis. Hence, the action of Ld. AO in disallowing the trading loss was to be 5 Shri Bharat K.Sheth upheld. Aggrieved, the assessee is in further appeal before us by way of ground no.3. 6. We find that revenue assailed the order of learned first appellate authority in AYs 1996-97 & 1997-98 in allowing the trading loss. However, the coordinate bench of the Tribunal, vide para-14 of the order, upheld the order of Ld. CIT(A) and dismissed the grounds raised

24. ITR 481 while arriving at such a conclusion. The bench held that an inactivity or lull in the business of the assessee for some years cannot conclusively dislodge the claim of the assessee that it was carrying on the business of trading in shares. Further, the valuation of stock-in-trade was in conformity with the method of valuation of stock in trade that was consistently followed by the assessee. Therefore, the claim on account of fall in value of scrips was well in order. We find that similar are the facts in this year. There being nothing contrary on record, respectfully following the earlier view of Tribunal, we hold that the trading loss of Rs.17.01 Lacs on account of fall in value of scrips was an allowable trading loss. Ground No. 3 stands allowed. Issue No.2: Income from House Property 7.1 The addition under Income from House Property stem from the fact the assessee purchased one residential property situated at 7B, Manek, L.D. Ruparel Marg, Mumbai from one individual namely Dr. Saraiya vide an agreement dated 15/02/1996. However, he leased back the said property on the same very day to the seller Dr. Saraiya vide a leave and 6 Shri Bharat K.Sheth license agreement on a monthly license fees of Rs.5,000/-. The said income was offered to tax during the year after deduction of municipal taxes as well as statutory deduction of 20%. However, as per the terms of leave & license agreement, the assessee received interest free deposit of Rs.3 Crores as security deposits from the licensee i.e. Dr. Saraiya which led Ld. AO re-determine rental income in the hands of the assessee against this property. 7.2 As per terms of license agreement, the municipal taxes were to be borne by the assessor licensor. The quarterly outgoing in the shape of municipal taxes and maintenance charges amounted to Rs.19,390/- and therefore, a conclusion was drawn that the monthly license amount of Rs.5,000/- as received by the assessee was nothing but reimbursement of municipal taxes & maintenance charges etc. In other words, the assessee did not show any rent in lieu of the leased property. Accordingly, in terms of Section 23(1)(a) of the Act, the annual value of the property would be the sum for which the property might reasonably be expected to be let out from year to year. The test of reasonableness in terms of the decision of Hon’ble Apex Court in Corporation of Calcutta Vs Smt. Padmadevi AIR 1962 SC 151 would be – a bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based on fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness. 7.3 In assessee’s case, such other consideration exists and therefore a reasonable rent of the property was to be determined. The same was estimated as 12% of interest free deposit of Rs.3 Crores received by the 7 Shri Bharat K.Sheth assessee. Accordingly, an amount of Rs.36 Lacs was to be added to the income of the assessee as rental income. However, the same was to be added on protective basis since it was held that the asset was never acquired by the assessee. 7.4 During appellate proceedings, the assessee has relied upon the favorable first appellate orders for AYs 1996-97 & 1997-98. However, Ld. CIT(A) chose to differ from the same by observing as under: - 6.1 I have carefully considered the facts of the case, order of assessment and the submission of the learned representative of the appellant. The basic issue involved is the computation of income under the head 'Income from House Property' in terms of section 23(1) of the I.T. Act. The Assessing Officer has taken into account the interest attributable on the amount of Rs.3 crores for the purpose of computing the annual value of the house property. My learned predecessor had allowed relief to the appellant relying on the various decisions cited by the appellant's A/R which are mentioned above. My learned predecessor has allowed the relief mainly on the grounds that notional interest cannot be included in the rental value of a house, that where the Rent Control Act is applicable only the standard rent can be adopted as Annual Rental Value, that the Assessing Officer was bound to fix the Annual letting Value based on the Municipal Valuation unless the same was lower than the actual rent received, that the notional interest on the deposit is not an actual rent received or receivable , that there is no corresponding provision in sections 22 and 23 of the I.T. Act with the Schedule III of the W.T, Act 1957. My learned predecessor had also held that the appellant is owner of the residential house. With due respect to my learned predecessor, I beg to differ with him on certain issues being relevant to computation of ALV of the property. I agree with him that notional interest worked out on the deposit of Rs.3 crores in itself cannot be adopted as the ALV of the House Property. To this extent, I agree with the view of my learned predecessor. However, the issue needs to be viewed in its total perspective for the purpose of computing Annual Value of the House Property. It has been argued by the learned representative of the appellant that the property has neither been rented out nor been leased out. It has been claimed that it is an arrangement of leave and licence. It is clear from the submission of the appellant that the appellant denies the applicability of Rent Control Act in its case. It has been emphatically submitted that the appellant has not leased out the said premises. It has been submitted that the appellant has only been granted the licence to use the premises to Dr. Saraiya on payment of certain compensation. By this submission, it is clear that the receipt of Rs.5,000/- p.m. is not treated by the appellant either as rent in its simple term or in the nature of lease rent. The appellant has termed it as Licence fee. As the arrangement is not governed by the prevalent Rent Control Act, the standard rent as per the Municipal valuation, in my considered opinion, cannot be held to be the sum for which the property might reasonably be expected to let from year to year. Such sum, in view of the peculiar facts of the case, can be determined considering the various factors which govern the reasonableness of a sum which can be expected in the open market. The governing factors are the following :

8 Shri Bharat K.Sheth i) Area of the flat. The present flat is about 2400 sq.ft. It consists of 3 bed rooms with attached bath and toilets, a dining hall, a sitting room, a kitchen and a servant quarter with attached toilet. It also has two covered car parking space. ii) Location of the property. The property is located in one of the prestigious area of the city i.e. Malabar Hill near the Nepean Sea Road. The building is sea facing. iii) The cost of the property. As can be seen from the agreement, the cost of the property at the time of purchase by the assessee was of more than Rs.6 crores. iv) It cannot be ignored that the amount of Rs.3 crores received by the appellant has direct connection with letting out of the property. In normal course, nobody would give such huge amount interest free. While determining the Annual Value this aspect also needs to be considered. The arrangement also proves that the property was let out on the basis of simple terms but a circumventing scheme was made by which the appellant though received nominal rent, however, enabled itself to enjoy substantial funds without paying any interest. The arrangement does not confirm to the normal commercial or prudential norms. 6.2 It has been held by the Patna High Court (101 ITR 810) that Municipal Valuation affords an indication as to the reasonable Annual Letting Value of a building but the same can be rebutted on the basis of other materials on record. In such a case, the Annual Value may be determined either at a reduced or enhanced figure than that of Municipal Valuation. Similarly, Delhi High Court, in the case of CIT vs. H.P. Sharma 122 ITR 675 has held that the municipal valuation is only a piece of evidence and it cannot override the figure of actual rent as the basis for determination of Annual Value. Gujarat High Court (100 ITR 97) has held that in absence of any better way of estimating rent, the rate of interest on cost, or on capital value, of building and land may provide a reasonable basis for determining the ALV of a properly. The decisions of the Hon'ble Supreme Court, while holding that standard rent may be considered as a sum for which the property might reasonably be expected to let from year to year, was not seized with the cases of the nature identical to the nature of the present case. In the present case a nominal rent has been fixed and a benefit has been derived by way of enjoying interest free deposits and the rent fixed is not in conformity with the area of the flat, its location, its capital value etc. The concept of standard rent, in my considered opinion, cannot be applied in such cases. 6.3 It is an undisputed fact in the present case that the amount of Rs.5,000/- was not fixed in accordance with the Rent Control Act. The AO is therefore, directed to get the necessary information about the prevailing rent in the area for a similar building. The Assessing officer, for this purpose, may also consider the market rent fixed by CPWD for its properties allotted to the Govt. Servants. The quantum of rental value needs to be fixed considering all the above factors. In my considered opinion, the action of the AO in determining the annual value at Rs.36 lakhs per annum purely on the basis of the amount of interest free deposit is not justified. At the same time, I beg to differ with my learned predecessor that the amount declared by the appellant can be accepted as a sum for which the property might reasonably be expected to let from year to year. Ground of appeal No. l of the appellant is therefore, rejected. The Assessing Officer is directed to fix the quantum considering the above factors and the principles discussed above.