BLUEBERRY TRADING COMPANY P.LTD,MUMBAI vs. DCIT 3(1), MUMBAI

The present appeal filed by the assessee is directed against the order passed by the CIT(A)-8, Mumbai, dated 16.02.2016, which in turns arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short ‘I.T. Act’), dated 28.03.2013. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal :

The appellant submits that the Assessing Officer be directed: (a) to delete the addition made in Annual Ratable Value of property leased out amounting to Rs.3,60,53,444/-. and to modify the assessment in accordance with the provisions of the Act.

The appellant craves liberty to add, to alter and /or amend the grounds of appeal

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating at length on the contentions advanced by the assessee was however not persuaded to subscribe to the same and upheld the order passed by the A.O. in context of the issue under consideration.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The Learned Authorized Representative (for short ‘A.R’) for the assessee at the very outset of the hearing of the appeal took us through the facts of the case. It was submitted by the Ld. A.R that as the actual rent received by the assessee from Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. amounting to Rs. 3,97,84,896/- per annum was higher than the municipal rateable value of the said premises which amounted to Rs. 42,46,735/-, therefore, the assessee had computed the annual letable value on the basis of the actual rent received. It was submitted by the Ld. A.R that the revenue had erred in assessing the ‘annual value’ of the property by taking support of the information available on the P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax website of www.99acres.com and in the backdrop of the same erred in justifying adoption of the rent realized by the assessee from Licencee-2 viz. M/s Ocwen Financial Services Pvt. Ltd as a basis for determining the ‘annual value’ of the office premises let out by the assessee to Licencee-1. It was further submitted by the Ld. A.R that the assessee had let out the office premises to M/s Hutchison 3 Global Services Pvt. Ltd. for a period of 7 year and 8 months viz. 01.03.2004 to 31.10.2011, vide licence agreement dated December, 2004 (as amended by agreement dated April, 2008). It was submitted by him that in the agreement which was modified in April, 2008 the assessee had given additional area to the Licencee-1 on the ground and the first floor and the rent to be paid by them was also proportionately increased. It was further averred by the Ld. A.R that the assessee had entered into two separate agreements with the Licencee-1 for letting out of the property, as well as for rendering of services relating to maintenance of property viz. provision of car parking space and other services for proper enjoyment of the property. As per the aforesaid agreement, the assessee was in receipt of a monthly rent of Rs. 33,15,408/- which comprised of Rs. 16,57,704/- in respect of licence agreement and a similar amount for the service agreement. It was submitted by the Ld. A.R that the A.O on the basis of misconceived facts had wrongly inferred that the ‘annual value’ offered to tax by the assessee in respect of the office premises let out to Licencee-1 was only Rs. 16,57,704/- i.e. Rs. 20.74 per Sq. Ft. per month. It was the contention of the Ld. A.R that if at all a comparison was to be made, it had to be between the amount of Rs. 41.50 per Sq. Ft. per month realized from Licencee-1 and Rs. 80/- per Sq. Ft. per month realized from Licencee-2. It was submitted by the Ld. A.R that the assessee had also let out office premises on the sixth and seventh floor of the same building to M/s Ocwen Financial Solutions Pvt. Ltd. initially for P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax a period of 36 months i.e. from 18.06.2008 to 17.06.2011. However, the said agreement was terminated w.e.f. 08.10.2009 and fresh agreements were entered into with viz. (i) M/s Ocwen Financial Solutions Pvt. Ltd. effective from 16.10.2009 for letting out the sixth floor; and (ii) Altisource Business Solutions Pvt. Ltd. effective from 16.10.2009 for letting out the seventh floor. Insofar rendering of maintenance related services in respect of the property let out to the aforementioned Licencee-2 was concerned, the same formed part of the licence agreement itself and no separate agreement for rendering of such services was entered into with them. The Ld. A.R submitted that the assessee have charged consolidate rent of Rs. 80/- Sq. Ft. per month from the aforementioned Licencee-2. In order to impress upon us that no feasible comparison between the premises let out by the assessee to Licencee-1 and Licencee-2 could be carried out, it was submitted by him that there was a time gap of almost 4 years and 2 ½ months in the respective dates on which the rent agreements with the said parties had been entered. It was the claim of the Ld. A.R that the assessee in order to bind the Licencee-1 as a tenant for a longer period viz. 7 years and 8 months, had thus keeping in view the said fact let out the property at the rates as were then so prevailing. Apart there from, it was the claim of the Ld. A.R that the rent which was being charged by the assessee from Licencee-1 was found to be at arms length by the revenue for all the years i.e. A.Y. 2004-05 upto A.Y. 2012-13. It was submitted by him that the said rent had been accepted by the revenue in the respective assessments framed u/s 143(3) in the case of the assessee for the immediately preceding and succeeding years viz. A.Y. 2009-10 and A.Y. 2011-12. The Ld. A.R assailing the reliance placed by the A.O on the judgment of the Hon’ble Supreme Court in the case of DIT Vs. Transmarine Corp. [SLP(C) No. 8999/2010] submitted that as the said judgment was in P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax context of addition of notional interest in respect of interest free security deposit, therefore, it was not applicable to the case of the assessee. It was further submitted by the Ld. A.R that ‘annual value’ for Sec. 23(1)(a) has to be the Municipal rateable value or Standard rent, whichever is lower. The Ld. A.R taking support of the judgment of the Hon’ble High Court of Calcutta in CIT Vs. Prabhabati Bansali (1983) 141 ITR 419 (Cal) submitted that the Hon’ble High Court had observed that there was a similarity between the definition of ‘annual value’ as per Sec. 23(1) of the I.T. Act and the definition of the same in the relevant Municipal Corporation Act. The Ld. A.R taking support of the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Tip Top Typography (2014) 368 ITR 330 (Bom) submitted that the Hon’ble High Court had approved that municipal rateable value is a safe guide for computation of ‘annual value’ as per Sec. 23(1)(a) of the I.T. Act, and have also accepted that notional interest on interest free security deposit cannot form part of the ‘annual value’ whether as per Sec. 23(1)(a) or Sec. 23(1)(b) of the I.T. Act. It was further submitted by the Ld. A.R that though the Hon’ble High Court had observed that municipal rateable value cannot be taken as a basis for determination of ‘annual value’ in certain specified circumstances, however, in the present case it was not the case of the A.O that any such specified circumstances did exist. The Ld. A.R assailed the observations of the A.O that municipal rateable value would have no relevance for determining the ‘annual value’ of the property under Sec. 23(1)(a) of the I.T. Act. Apart there from, it was submitted by him that in case the A.O desired to make a comparison between the property under consideration and other properties in the immediate vicinity, then such comparison ought to have been between the municipal rateable values of the aforesaid properties. In sum and substance, it was averred by the Ld. A.R that the A.O had erred in determining the P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax ‘annual value’ of the office premises let out by the assessee to Licencee-1 by comparing the municipal rateable value of the same with the rent actually fetched by other properties. It was further averred by the Ld. A.R that the Hon’ble High Court of Bombay in CIT-1 Vs. M/s Surge Enterprises Ltd. (ITA No. 1316 of 2011, dated 14.08.2014) while upholding the order of the Tribunal had observed that where there is nothing on record to dispute the municipal valuation and the revenue is merely aggrieved and agitated by the fact that it will have to abide by the municipal valuation, then, the revenues appeal cannot be entertained. The Ld. A.R also assailed the support drawn by the A.O on the website of www.99acres.com for determining the ‘annual value’ of the property. It was submitted by the Ld. A.R that as the information available on the said website revealed proposals from the landlords who intended to lease their property and did not reflect the actual value at which the transaction would have happened, therefore, the same could not have been adopted as a basis for arriving at the ‘annual value’ of the office premises leased by the assessee to Licencee-1. Alternatively, it was submitted by the Ld. A.R that as the assessee had let out the property to Licencee-1 way back in the year 2004 for a long term of 7 years and 8 months at a rent of Rs. 41.50 per Sq. Ft. per month, which was not influenced by consideration like frauds, emergency or relationship, therefore, keeping in view the fact that it was not possible for the assessee to change the lease rent during the continuance of the aforesaid lease period, that the ‘annual value’ of the premises during the year under consideration was to be determined.

Per Contra, the Learned Departmental Representative (for short ‘D.R’) relied on the orders passed by the lower authorities. It was submitted by the Ld. D.R that as the assessee had let out office

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material and the judicial pronouncements relied upon by them. We find that our indulgence in the present case has been sought by the assessee for adjudicating as to whether the CIT(A) is right in law and facts of the case in determining the ‘annual value’ of the premises let out to Licencee-1 viz. Hutchison 3 Global Services Pvt. Ltd. @ Rs. 80/- per Sq. Ft. per month. It is the case of the assessee before us that as the municipal rateable value of the office premises let out to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. i.e. Rs. 42,46,735/- was lower than the actual yearly rent of Rs. 3,97,84,896/- received by the assessee from the aforesaid licencee, therefore, it had rightly determined the ‘annual value’ of the said premises under Sec. 23(1)(b) and offered the amount of actual rent received under the head ‘Income from House Property’. However, the A.O observing that the assessee by receiving an interest free security deposit of Rs. 3,14,04,240/- from the aforesaid Licencee-1 had given the office premises at a rent of Rs.

Insofar the determination of the ‘annual value’ of a property on the basis of its municipal rateable value is concerned, we are of the considered view that though the A.O while determining the ‘annual value’ is not bound by the same, however, the same also cannot be discarded straightway in all cases. In fact, in a case where the A.O is of the view that the rental income derived by the assessee is not in tune or par with the prevailing market rate, in such cases it is open for him to determine the ‘annual value’ under Sec. 23(1)(a) of the I.T. Act. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT-12 Vs. Tip Top Typography (2014) 48 taxmann.com 191 (Bom). A similar view had also been taken by the Hon’ble High Court of Bombay in the case of CIT-1 Vs. M/s Surge Enterprises Ltd., wherein the Hon’ble High Court while dismissing the appeal of the revenue had observed that where there is nothing on P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax record to dispute the municipal valuation and the revenue is merely aggrieved and agitated by the fact that it will have to abide by the municipal valuation, then, the revenues appeal cannot be entertained. In the case before us, it is the claim of the assessee that as the rent of Rs. 3,97,84,896/- per annum received by it from letting out the office premises to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. and shown as the ‘annual value’ of the property under consideration was more than the municipal rateable value of Rs. 42,46,735/- of the said property, therefore, no adverse inferences in respect of the ‘annual value’ that was determined under Sec. 23(1)(b) was liable to be drawn. We are unable to persuade ourselves to subscribe to the aforesaid claim of the assessee. A perusal of the documents placed on record by the assessee (Page 159) of the assesses ‘Paper book’ (for short ‘APB’) reveals that the municipal rateable value of Rs. 42,46,735/- relied upon by the Ld. A.R was determined way back in the year 2002, which thus keeping in view the wide time gap of 7 years (approx.) in context of the year under consideration viz. F.Y. 2009-10 under consideration cannot be relied and acted upon. Our aforesaid view is fortified by the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Tip Top Typography (2014) 368 ITR 330 (Bom). The Hon’ble High Court in the aforesaid case had after referring to the view taken by the Hon’ble High Court of Calcutta in CIT vs. Satya Co. Ltd. (1997) 140 CTR 569 (Cal) had observed that ‘annual value’ fixed by the municipal authorities can be adopted as a rational yardstick, 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. It was further observed that 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, the P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax same may not provide a safe yardstick for determining the ‘annual value’ under the Income Tax Act for the said year. In the backdrop of our aforesaid observations, we are of a strong conviction that the claim of the assessee that the rent received from the Licencee-1 in respect of the property under consideration was substantially higher than the municipal rateable value cannot be accepted keeping in view the substantial time gap of 7 years (approx.) between the aforesaid date of determination of the municipal value and the year under consideration viz. F.Y. 2009-10.

As regards the support drawn by the A.O on the information gathered from the website of www.99acres.com for concluding that the rental value of the office premises let out by the assessee to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. was found to be substantially suppressed, we are unable to persuade ourselves to subscribe to the said observations. In our considered view there is substantial force in the contention advanced by the Ld. A.R that as the information available on the aforesaid website only revealed the proposals from the landlords about the rental rate at which they intended to lease their properties, thus the same cannot be adopted as a basis for determining the actual value at which the properties in the said locality had actually been let out by them. In sum and substance, the rent which a landlord expects from a prospective tenant cannot be construed as the actual rent received from letting out of the property under consideration. Apart there from, we are also not impressed with the estimation of the ‘annual value’ on the basis of discounting/reverse indexing of the average fair market rent of Rs. 100.4 per Sq. Ft. per month worked out by the A.O on the basis of information available on the internet, therein leading to determination of the Fair market rent of Rs. 74.47 per Sq. Ft. per month in respect of P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax the property under consideration. In our considered view the aforesaid methodology of discounting/reverse indexing of the average fair market rent adopted by the A.O would give distorted results. In fact, the fallacy in the aforesaid method can safely be gathered from the fact that if the ‘annual value’ of the property as determined by the A.O in A.Y. 2012-13 of Rs. 100.4 per Sq. Ft. per month is on the aforesaid basis of discounting/reverse indexing related back to the year 2004 i.e. the year in which the assessee had let out the property to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd., then the ‘annual value’ as per the said methodology would work out at Rs. 54.56 Sq. Ft. per month in the year 2004 as against Rs. 41.50 per Sq. Ft. per month at which the same was let out by the assessee. Be that as it may, in our considered view the determination of the sum for which a property as per Sec. 23(1)(a) might reasonably be expected to let from year to year cannot be safely arrived at on the basis of the discounting/reverse indexing method adopted by the A.O. We thus in terms of our aforesaid observations reject the very basis as per which the A.O had worked out the average fair market rent in respect of the property under consideration at Rs. 74.47 per Sq. Ft. per month.

We shall now advert to the feasibility of the comparison of the rental rate of Rs. 41.50 per Sq. Ft. per month for which the office premises had been let out by the assessee to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. as against the rental rate of Rs. 80/- per Sq. Ft. per month for which the office premises in the same building had been let out by the assessee to the Licencee-2. We may herein observe that the assessee had vide agreement dated December, 2004 (as amended by April, 2008) let out the office premises to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. for a long period of 7 years and 8 months i.e. from 01.03.2004 to 31.10.2011. In P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax our considered view there is substantial force in the contention advanced by the Ld. A.R that keeping in view the substantial period of lease of 7 years and 8 months, it was not possible from either side to change the lease rent during the continuance of the lease period. In fact, we are in agreement with the contention advanced by the Ld. A.R that the assessee in order to protect itself from a miserable situation in the forthcoming period wherein the property would had remained vacant or witnessed a downward fall in the rent, would have let out the property at the then prevailing rents, therein binding itself as well as the tenant for the lease period. In nutshell, as the property under consideration was let out by the assessee as per the terms of the licence agreement dated December, 2004 for a period of 7 years and 8 months i.e. from 01.03.2004 to 31.10.2011, thus during the said period the property under consideration could not reasonably be expected to have been let out at an amount higher than that agreed upon as per the licence agreement. Insofar the observation of the A.O that while for the assessee had let out the office premises to Licencee- 1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. @ of 20.74 per Sq. Ft. per month, the office premises in the same building was let out to Licencee-2 @ Rs. 80/- per Sq. Ft. per month is concerned, we are unable to accept the same. We are in agreement with the contention of the Ld. A.R that as the assessee had entered into two separate agreements with Licencee-1 for letting out of property as well as rendering of services relating to maintenance of property viz. provision of car parking space and other services for proper enjoyment of the said property for an amount aggregating to Rs. 41.50 per Sq. Ft. per month, therefore, if at all a comparison was to be made with the property let out by the assessee to Licencee-2 @ Rs. 80 per Sq. Ft. per month, it had to be between the about of Rs. 41.50 per Sq. Ft. per

We are also not impressed with the straightway adoption of the rate at which the assessee had let out office premises to Licencee-2 i.e. @ Rs. 80/- per Sq. Ft. per month for determining the Fair rental value of the office premises let out by the assessee to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. In fact, as observed by the Hon’ble High Court of Bombay in the case of CIT-12 Vs. Tip Top Typography (2014) 48 taxmann.com 191 (Bom) that in a case where the A.O is of the view that the assessee had suppressed the prevailing rate of rent, then for ascertaining the going rate the A.O shall make a comparative study and carry out an analysis of transactions of identical and similar nature by obtaining the requisite details. As a word of caution, it was observed by the Hon’ble High Court that the A.O must safeguard against adopting the rate stated therein straightway. In fact, he must find out as to whether the property which has been let out or given on leave and licence basis is of similar nature, namely commercial and residential. Apart there from, 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 on account of various factors viz. area of the property, measurement, location, use to which the property has been put, the access thereto and the special advantages and benefits which the said properties enjoyed. The Hon’ble High Court in its aforesaid judgment had observed that in case of a high rise building because of special advantages and benefits an office and a block on the upper floor may fetch higher returns or vice versa. In the case before us, we find that the A.O without resorting to the needful exercise as regards the feasibility of the P a g e | Blueberry Trading Company Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax comparison between the property let out by the assessee to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. as against that let out to the Licencee-2, had straightway substituted the rent paid by the latter for determining the ‘annual value’ of the property that was let out by the assessee to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. In the backdrop of the aforesaid settled position of law, we are of the considered view that the failure on the part of the A.O in not carrying out a comparative study between the aforementioned properties would in no way justify straightway adoption of the rent paid by the Licencee-2 i.e. @ Rs. 80/- per Sq. Ft. per month for determining the ‘annual value’ of the property let out by the assessee to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. On the basis of our aforesaid observations, we vacate the determination of the ‘annual value’ of the office premises let out by the assessee to the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. i.e. @ Rs. 80/- per Sq. Ft. per month.

We thus in terms of our aforesaid observations are of the considered view that the basis adopted by the A.O for working out/justifying the adoption of the ‘annual value’ of the office premises let out by the assessee to Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. @ Rs. 80/- per Sq. Ft. per month viz. (i) on the basis of information gathered from internet; and (ii) straightway adoption of the rent rate of the property let out by the assessee to the Licencee-2, cannot be accepted for the aforesaid reasons. However, we are also not oblivious of the fact that the assessee had also failed to substantiate on the basis of cogent material that the annual rent of Rs. 3,97,84,896/- received by the assessee during the year from the Licencee-1 viz. M/s Hutchison 3 Global Services Pvt. Ltd. was higher than the municipal rateable value of the property which could safely

The appeal of the assessee is allowed for statistical purposes.