VEGESNA ANANTHANKOTI RAJU,VISAKHAPATNAM vs. DY CIT, (INTERNATIONAL TAXATION), VISKHAPATNAM

आदेश / O R D E R

PER D.S. SUNDER SINGH, Accountant Member:

This appeal filed by the assessee is directed against the order

passed by the Commissioner of Income Tax (Appeals)-10 {CIT(A)},

Hyderabad vide ITA No.0012/CIT(A)-10/2015-16 dated 12.6.2017 for

the assessment year 2012-13.

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP 2. All the grounds of appeal are related to the addition of `

13,11,158/- towards the annual rental value as per fair market rate.

The assessee owns house building in flat No.242/A in Jubilee Hills,

Hyderabad. The assessee admitted rental income of ` 1,14,000/- @ `

9,500/- per month from Shri V. Ananda Raju. Since the rent admitted

by the assessee appeared to be grossly low, the A.O. conducted the

enquiries and found that in the vicinity of Jubilee Hills the similar

properties are fetching the rental income of ` 10.26 ps. to ` 47.13ps.

per sq.ft., hence, the A.O. estimated the fair rental value at ` 20/- per

sq.ft and determined the Annual Let out Value (ALV) at ` 17,40,000/- for

6352 sq.ft. owned by the assessee. The assessee submitted before the

A.O. that the assessee has let out to his house to his brother Mr. V.

Ananda Raju and out of the 6352 sq.ft, 50% of the house was let out

and the remaining 50% was used for his personal purpose and official

purposes during his stay in India. He elaborately given a detailed reply

stating how many days he stayed in India from the financial years

2009-10 to 2011-12. The assessee further submitted in his reply that out

of 6352 sq feet of house consisting four floors lower ground floor

admeasuring 1004 sq feet, Ground floor with 1883 sq feet and second

floor of 1304 Sq feet are under the occupation of the assessee. The

assessee also stated that though the property was given to his brother,

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP and the same property being used by himself, which is transgressing

the privacy of the tenant by using common areas and the stair case.

Since the assessee also needs the house for his personal purposes and

he has to use 50% of the house, the assessee submitted that the

property cannot fetch the normal rent as per the market rates in and

around the area. No other tenant will allow the assessee to enter into

puja room, stair case and common areas in the house if the same is let

out to any other third party. Further, the assessee submitted to the AO

that the impugned property is very valuable property, hence cannot be

let out to any other persons since there is a possibility of entering into

legal disputes at the time of vacating the house. The AO made the

enquiries with nearby houses and collected the information with regard

to the fair rental values and the agreements and supplied the copies of

the rent agreements and called for explanation of the assessee as to

why the market rent should not be considered for income tax purpose.

The assessee filed his explanation and requested for allowing the

assessee for cross examination of the parties but the Ld. AO neither

provided for cross examination of the parties nor being convinced with

the explanation submitted by the assessee, arrived at the gross annual

value at ` 17,40,000/- @ 145000/- per month for plot No.242A and

assessed the same to the tax.

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP 3. Aggrieved by the order of the AO the assessee filed appeal before the

CIT(A) and the Ld.CIT(A) confirmed the order of the AO.

before us. Appearing for the assessee, the Ld. A.R. argued that the

assessee is having valuable property in Jubilee Hills at plot No.242/A.

The said property was given on rent to his brother Mr. V. Ananda Raju.

The assessee is engaged in the various business activities and made the

investments in Sify Technologies and Raju Vegesna Investments and he

is using the same house both for his business as well as for personal

stay during his visits in India. In the process the assessee is using more

than 50% of the house for own purpose. As per the details given in

explanation out of 6352 sq.ft more than house, 50% of the house i.e.

lower ground floor, ground floor, and second floor are under his

occupation. Apart from the above, the assessee is also having access to

the puja room internal stair cases, which normally interfere with the

privacy of the tenant. The assessee has further argued that the house

is a valuable one and it cannot be let out to unknown person and if it is

let out for higher rate on rent, the property may fall into unwanted

hands, which in turn may lead to undesirable consequences.

assessee is more than the fair rental value fixed by municipal authorities 4

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP i.e. GHMC. As per the municipal rental value, the Fair Rental value was

fixed at ` 58,020/- as against which the admitted income was `

1,14,000/-. Though the A.O. has determined the annual value on

comparative buildings, he has taken up the rate of ` 20/- per sq.ft. even

though there were buildings let out for ` 10/- per sq.ft. Further Ld. A.R.

argued that the A.O. has not considered the factual circumstances on

which 50% of the house was let out, hence, argued that the rental value

admitted by the assessee is reasonable which should be accepted. The

ld.A.R furher submitted that though the Ld.A.O collected the information

with regard to the rents in the locality and supplied the confirmation and

rent agreements of tenants/owners of the locality the A.O. failed to

allow cross examination of the parties and without allowing the parties

for cross examination the evidences collected behind the back of the

assessee should not be used against him. Hence requested to ignore the

evidences collected behind the back of the assessee and consider the

case of the assessee on the facts. The Ld. A.R. also relied on the

decisions of Bombay High Court in the case of CIT Vs. Tiptop

Typography 368 ITR 330, ITAT Mumbai decision in the case of Gagan

Trading Company Vs. DCIT (2012) 34 CCH 0223 and the decision of

Mumbai ‘D’ bench in the case of Reclamation Reality India Pvt. Ltd. Vs.

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP DCIT 10(1) in ITA No.1411/Mum/07 for the assessment year 2004-05

dated 26.11.2010.

available on record and gone through the orders of the

authorities below. The assessee is owning a building in flat

No.242A consisting of cellar, ground floor, first floor and

second floor consisting 6352 sq.ft and let out the house for

an annual rent of ` 1,14,000/- against municipal annual Fair

Rental value of ` 58,020/-. The A.O. was of the view that

the rental income admitted by the assessee is far lower than

the rents admitted by the other owners/tenants in similar

houses in the same area. Therefore, the A.O. caused the

enquiries and collected the information regarding the fair

market rent of the area and observed that the fair Rental

value in the area is ranging from ` 10/- to ` 47.13ps

depending on the nature of tenant and the building. The

higher rents were paid by the commercial organizations

such as State Bank of India, Bank of Baroda, Amar Immune

Diagnostics Pvt. Ltd. whose rental value is more ` 15/- to `

47/- per sqft. Initially the AO proposed for adopting the ALV

@Rs.190000/- for month on considering the objections 6

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP raised by the assessee the AO scaled down the ALV @

Rs.1,45,000/- p.m. The AO rejected the objections raised by

the assessee and determined the ALV@ Rs.1,45,000/- and

accordingly completed the assessment on the basis of the

information collected by the AO. The AO has collected the

information with regard to the market rent in the vicinity

and supplied the copies of rental agreements and

confirmations to the assessee. The assessee has requested

for cross examination of the owners/tenants but the AO

brushed aside the request of the assessee to cross examine

the owners/tenants stating that the same is not valid since

the details of owners/tenants along with the property details

were provided to the assessee. The AO has collected the

information behind the back of the assessee and mere

furnishing of the copies of agreements and the details of the

owners/tenants is not sufficient. We have gone through the

lease agreements and the same were unregistered

agreements. Any agreement with regard to the transaction

of immovable property required to be reduced in writing and

duly registered. Unless the same is registered the same

cannot be taken cognigence off. Further cross examination 7

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP of witness is not mere formality and it is the right of the

assessee and so many things will crop up during the cross

examination. Any evidence collected behind the back of the

assessee cannot be used against the assessee unless the

assessee is allowed cross examination. In the instant case

the assessee has not waived his right to cross examination

and he has requested for cross examination. In these facts

and circumstances the evidence collected by the AO with

regard to ALV from the surrounding areas cannot be used

against him for determining the ALV of the assessee’s

property. In this connection we may refer the decision of ITAT,

Amritsar Bench in Apeejay Education Society v. Assistant

Commissioner of Income-tax, Circle-III, Jalandhar, 2017]

81 taxmann.com 289 (Amritsar - Trib.) wherein Hon’ble

ITAT held as under

The AO in her order has stated that assessee was given opportunity by issuing commission to go to Pune and cross examine the witness but the same was not availed by the assessee. It is wrong to say on the part of the AO. From the day one we made request to give us opportunity to cross examine the witness with a condition that he being witness of the department be called to Jalandhar and assessee should not be put to hardship to go to Pune. Being a laws abiding citizen assessee even offered to pay for the expenses of the witness forgetting that he is witness of department and it is for the department to produce him at its own cost. The Honourable Calcutta High Court in 210 ITR 103 has held as under: "As a matter of fact, the right to cross examine a witness adverse to the assessee is an indispensable right and the opportunity of such cross examination is one of the corner- stones of natural justice. Here Shri Sukla is the witness of the department. Therefore, the Department cannot cut short the process of taking oral evidence by merely having 8

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP the examination in chief. It is the necessary requirement of the process of taking evidence that the examination in chief is followed by cross examination and re- examination, if necessary." The AO has rejected the request of the assessee citing the reason that Pune and Amritsar are not having direct flight. Hence it is clear that statement was recorded behind the back of the assessee and no opportunity was given to cross examine that being basic right of the assessee. No addition can be made on the basis of such statement. The Honourable Delhi High Court in CIT v. Dharam Chand Prem Chand Limited 295 ITR 105 has held that: "the Assessing Officer had based his assessment order on the report obtained from the research institute. The correctness of that report itself having been under challenge by the assessee who had not only filed petitions thereto but also sought permission on several occasion to cross examine the analyst even agreeing to pay the necessary expenses, the report could not automatically have been accepted. Since the Assessing Officer did not permit the correctness or otherwise of the report to be tested, there was a clear violation of the principles of natural justice by him in relying upon it to the detriment of the assessee. Even if strict rules of evidence may not apply to assessment proceedings, the basic principles of natural justice would apply to the facts of the case." Honourable ITAT New Delhi 'G', Bench in Income-tax Officer, Ward-9(1), Delhi.v.Softline Creations (P.) Ltd.* [2017] 81 taxmann.com 139 (Delhi - Trib.) held that as under: 9…….. There is no dispute that the statement which was relied upon by the AO was not recorded by the AO in the assessment proceeding but it was pre-existing statement recorded by the Investigating Wing and the same cannot be a sole basis of assessment without conducting a proper enquiry and examination during the assessment proceeding itself. Further despite the specific demand of the assessee for cross examination of Shri Mahesh Garg, the ld. AO has not given any heed to the request of the assessee for affording any opportunity of cross examination and used the statement of Shri Mahesh Garg against the assessee which is not permissible under the law. As it is a case of clear violation of the rule of principal of natural justice and statement which is recorded at the back of the assessee cannot be used against the assessee without giving any opportunity of cross In the instant case the AO has collected the information

with regard to the ALV from the surrounding houses and

furnished the copies of agreements to the assessee but did

allow the assessee to cross examine the owners/tenants. The

information was collected behind the back of the assesse

without allowing cross examination of the parties is against the

principles of natural justice hence the same cannot be used

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP against him. Therefore we hold that the AO cannot adopt the

market value of the rent as collected by him accordingly the

orders of the lower authorities on this issue are set a side.

In the assessee’s case, the assessee is having 6352 sq.ft. of house,

which is used for personal purpose as well as given to his brother Mr.

Ananda Raju on rent. As per the Income Tax provisions annual value of

the property under self-occupation is nil. In the instant case as

admitted by the Ld. A.R. this is partly self-occupied and partly let out.

As stated by the assessee, as and when the assessee is visiting India he

uses the house for personal purposes and accessible to the entire house

including pooja room. 50% of the house was under self-occupation and

the assessee is using pooja room and stair case which is interfering with

the privacy of tenant. In these circumstances, the Ld. A.R. submitted

that because of the peculiar circumstances discussed above, no other

tenant would come forward to take the house which will cause

inconvenience to the tenant. Therefore, there is no case to fetching the

market value for letting out the property. Against the annual municipal

letting value of ` 58,020/-, the assessee had admitted a sum of `

1,14,000/- which is more than annual letting value. Hon’ble Bombay

High Court in the case of CIT Vs. Tip Top Typography (supra) held as

under: 10

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP “48. We are not in agreement with Shri Chhotaray that the municipal rateable value cannot be accepted as a bonafide rental value of the property and it must be discarded straightway in all cases. There cannot be a blanket rejection of the same. If that is taken to be a safe guide, then, to discard it there must be cogent and reliable material. 50. We are of the opinion that market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. We are of the view that municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. It is definitely a safe guide.”

the case of Gagan Trading Company Ltd. . ACIT reported in (2012) 34

CCH 223 (Mum) held as under:

“We modify the impugned order of the learned CIT(Appeals) on this issue and direct the A.O. to accept the income from house property declared by the assessee adopting the municipal ratable value as annual letting value of its property.” 8. ITAT, Mumbai ‘D’ Bench in ITA No.1411/Mum/07 dated

26.11.2010 on the similar facts and circumstances held as under:

“46. We have considered the rival submissions. In the case of Akshay Textiles (supra), the facts before the Hon'ble Bombay High Court was that A owner of the property let out the same to B. B sub-let the property to C. While determining the annual value of the property in the case of A, the AO substituted the rent paid by C to B because the rent paid by B to A was less compared to the rent paid by C to B. The Hon'ble Bombay high Court held that annual value is the actual rent received or receivable by the owner from the tenant irrespective whether tenant on such letting has received higher rent. We are also of the view that the expression used in Sec. 23(1 )(b) is the rent received or receivable. The expression receivable cannot mean anything more than what is actually received. The CIT(A) in our view has overlooked this aspect in substituting the actual rent received by this Assessee by the rent actually received by M/S.Reclamation Real Estate company India (P) Ltd., from J.P. Morgan Chase Bank. We therefore hold that the annual value has to be adopted at the annual rent actually received by the Assessee from ICICI Ltd., viz., Rs.1 ,12,64,400/-.”

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP 9. Since the facts are similar in the case laws cited (supra) and due

to the peculiar circumstances narrated in the submissions of the

assessee we hold that the rent admitted by the assessee is reasonable

and accordingly, we set aside the order of the Ld. CIT(A) and allow the

appeal of the assessee.

of the building in plot No.215, Jubilee Hills, Hyderabad. The A.O.

estimated the annual letting value at ` 75,000/- per month for 2 months

in June and July, 2011 and brought to tax ` 1,50,000/- as income from

property. The Ld. D.R. supported the order of the lower authorities.

The assessee’s A.R. stated during the appeal hearing that this building

was sold during the previous year in the month of August, 2011. The

assessee further submitted that the building was incomplete, hence not

ready for occupation by the end of May, 2011. The A.O. has not

brought any evidence to show that the building was ready for

occupation. Hence, submitted that the A.O. is not justified in subjecting

to tax the annual value of the building @ ` 75,000/- per month for the

months of June & July, 2011.

on record and gone through the orders of the authorities below. In this

case, it is observed from the assessment order that the municipal 12

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP assessment was done for this building in the year 2008. Though certain

repair works are carried out by the assessee, such as external painting,

etc. it is for the assessee to establish that building is not ready for

occupation after the municipal assessment was completed. Having done

the municipal assessment, we are unable to agree with the contention of

the assessee that the building was not ready for occupation. It is for the

assessee to bring the evidence to prove that the building was not ready

for occupation. With regard to the determination of fair market rent, as

per the detailed discussion made in this order with regard to the plot

No.242, we hold that the A.O. cannot adopt the fair market value

without allowing the cross examination of the owners or tenants by the

assessee. In this case, the assessee submitted that the building was not

let out and not ready for occupation. Therefore, we direct the A.O. to

adopt the fair market value determined by the municipal authorities

(GHMS) as the fair rental value and assess the same for income tax

purpose.

Sd/- Sd/- (वी. दुगा�राव) ( ड.एस. . . . सु�दर "संह) (V. DURGA RAO) (D.S. SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER 13

ITA No.528/Vizag/2017 Sri Vegesna Ananthakoti Raju, VSKP #वशाखापटणम /Visakhapatnam: 'दनांक /Dated : 04.04.2018 VG/SPS

आदेश क� ��त)ल#प अ*े#षत/Copy of the order forwarded to:-