ITO 1(1)(2), MUMBAI vs. CYRUS INVESTMENT P.LTD, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER;

1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 87,05,760/- as deemed Annual Lettable Value of flats ?” 2. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the additional disallowance to the tune of Rs. 2,55,72,795/- u/s. 14A r.w.r. 8D of the Act?”

Income under the head „Income from house property‟ w.r.t. both the flats to be Rs.85,296/- while the AO brought to tax Income under the head „Income from house property‟ from these two residential flats to the tune of Rs.87,91,056/- . The assessee relied upon the rateable value computed by municipal authorities which as per the assessee is the expected value for which these flats are expected to be let from year to year , thus satisfying conditions as stipulated u/s 23(1)(a) of the 1961 Act. The amendments were carried out in Section 23(1) by the Taxation Laws (Amendment) Act, 1975 by introduction of clause(b) to Section 23(1)wherein in case property is let and if the actual rent received or receivable by the taxpayer is higher than sum for which the property might reasonably be expected to be let from year to year, the amount so received or receivable shall be deemed to be annual value of the property. The newly inserted clause(b) postulated a situation where the amount of sum for which the property might be expected to be let from year to year could be lower than actual rent received or receivable from the said property by landlord and in that situation actual rent received or receivable shall be deemed to be annual value of the property for bringing the same to tax as income under the head „Income from house property‟. We are concerned with the amended law as year under consideration before us is AY 2012-13. In the instant case, the actual rent received or receivable by the assessee w.r.t. flat no. 8 being higher than municipal rateable value, the assessee has contended that the same is to be accepted and brought to tax under Section 23(1)(b) while for flat no. 3 which was stated to be lying vacant it is contended that only municipal rateable value can be brought to tax under the head „Income from house property‟ within provisions of Section 23(1)(a), which as per assessee culminated into the income chargeable to tax under the head „Income from House Property‟ aggregating to the tune at Rs.85,296/- from both of these flats after availing statutory deductions etc. , which value was infact offered for taxation by the assessee. The AO being in disagreement with the income so computed under the head„income from house property‟ by the assessee of these two flats relied upon recent decision of Hon‟ble Bombay High Court in Tip Top Typography (supra) which was pronounced on 08-08-2014 and observed that municipal rateable valuation of the entire society is very low being Rs. 4,91,804/- for the year 2011-12 and is not indicative of the fair market value at which the flats might be expected to be let from year to year as is contemplated by Section 23(1)(a). The AO observed that municipal rateable value adopted by municipal corporation for the entire society has in- fact fallen to Rs. 4,91,804/- in the year 2011-12 as against Rs. 5,88,985/- for the year 2004-05 which also indicate that the said valuation is not reliable as it is not indicative of prevailing market situation. The AO then proceeded to ascertain prevailing market rental of these flats in the area and after searching on the websites such as magicbrick.com, 99acres.com etc., arrived at a prevailing market rent of these flats to be Rs. 200 per square feet per month at which these flats were expected to be let from year to year during the relevant previous year, which fair rent was adopted by the AO to compute ALV w.r.t. both these flats which led to computing of Income of Rs.87,05,760/- under the head „Income from House Property‟ as against an amount of Rs. 85,296/- computed by the 3 Mum 2017-M/s Cyrus Investments Pvt. Ltd. assessee as an income under the head „Income from House Property‟ w.r.t. both the flats. The matter went in appeal before learned CIT(A) who accepted the contentions of the assessee and granted relief to the assessee based on earlier decisions of ITAT and jurisdictional High Court ruling in assessee‟s favour. This is the background of the entire issue before us. Revenue is in appeal before us challenging the relief granted by learned CIT(A). We have carefully gone through the entire case laws cited before us. The municipal rateable value adopted by the assessee as per computation of income filed in paper book translates into municipal rateable value of Rs. 1.61 per square feet per month which as per municipal valuation is the amount of sum which the property is expected to be let from year to year while the prevailing market rent as per websites of magicbrick.com, 99acres.com etc. comes to Rs. 200 per square feet per month which reflects huge variation between the two valuation. It is pertinent to mention that the assessee has never disputed this market rate of Rs. 200 per square feet per month which the AO derived from websites but the contentions are only raised that this valuations cannot be accepted at law and contentions are advanced to apply municipal rateable value for computing ALV or in case of flat no 8 where the actual rent received or receivable is higher than municipal rateable, to adopt actual rent to compute ALV. It is pertinent to mention that the tenant to whom the flat no. 8 is let out is a Director of the assessee company and he is paying rent of Rs. 10,000 per month for a flat of 3062 square feet in a society situated in a posh South Mumbai area in Walkeshwar Road, Mumbai which translates into rent of Rs. 3.27 per square feet per month as against market rate of Rs. 200 per square feet per month as reflected in websites of magicbrick.com , 99acres.com etc for similar flats in the area. We will like to draw reference to some of the cases to understand how the ALV needs to be Hon‟ble computed. Delhi High Court in the case of CIT v. R Dalmia(decd.)(supra ) observed as under:

" ......There may ,however, be cases in which the annual value fixed under the municipal law may be unacceptable to the income-tax authorities for good reasons. We have not laid down any general principle that the income-tax authorities must adopt the municipal value as being correct. Normally the value should be accepted but if there is an under-valuation, it is certainly open to the Income-tax Officer to fix the value on his own on the basis of expected reasonable rent. ...." Reference is also drawn to the decision of Hon‟ble Supreme Court in the case of Corporation of Calcutta v. Smt. Padma Debi , AIR 1962 SC 151,152 , wherein the Hon‟ble Supreme Court observed :

"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 upon fraud, emergency, relationship and such other consideration may take it out of the bounds of reasonableness."

Mum 2017-M/s Cyrus Investments Pvt. Ltd.

It is also profitable to refer to the recent decision of Hon‟ble Bombay High Court in the case of Tip Top Typography (supra) wherein Hon‟ble Bombay High Court affirmed the following view taken by Full Bench of Hon‟ble Delhi High Court in the case of CIT v. Mani Kumar Subba (2011) 333 ITR 38(Del HC FB) as under:

" 45.....Thus the rateable value , if correctly determined, under the municipal law can be taken as ALV under Section 23(1)(a) of the Act. To that extent we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value is not binding on the Assessing Officer. If the Assessing Officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/evidence placed on record. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. CIT(1975) 101 ITR 810. The above discussion leads to the following conclusions: (i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances. (ii) An inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness. (iii) Actual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration. (iv) Such ALV, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property. (v) If standard rent has not been fixed by the Rent controller, then it is the duty of the Assessing Officer to determine the standard rent as per the provisions of rent control enactment. (vi) The standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV and not the standard rent. We would like to remark that still the question remains as to how to determine the reasonable /fair rent. It has been indicated by the Supreme Court that extraneous circumstances may inflate/deflate the "fair rent". The question would, therefore, be as to the what would be circumstances which can be taken into consideration by the Assessing Officer while determining the fair rent. It is not necessary for us to give any opinion in this behalf, as we are not called upon to do so in these appeals. However, we may observe that no particular test can be laid down and it would depend on facts of each case. We would do nothing more than to extract the following passage from the Supreme Court judgment in the case of Motichand Hirachand v. Bombay Municipal Corporation , AIR 1968 SC 441, 442: " it is well recognised principle in rating that both gross value and net value are estimated by reference to the rent at which the property might be reasonably be expected to let from year to year. Various methods of valuation are applied in order to arrive at such hypothetical rent, for instance, by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to the profits carried from the property or to the cost of construction. " 5 Mum 2017-M/s Cyrus Investments Pvt. Ltd.

The Hon‟ble Bombay High Court concurred in decision of Tip Top Typography(supra) with the above decision of Full Bench of Hon‟ble Delhi High Court in the case of CIT v. Mani Kumar Subba (supra). The Hon‟ble Bombay High Court held in Tip Top Typography(supra) that when the monthly rental shows a total mismatch or does not reflect the prevailing rent, then AO is not prevented from carrying out necessary investigations and enquiry to find out the going rent of the property in question. The AO must have cogent material/evidences in his possession that parties have concealed the real position. The AO is required to disclose the material in his possession to the tax-payer for rebuttal before proceeding to adopt the prevailing market rent. The AO has to make comparative analysis of the comparable properties of similar nature before applying the prevailing market rent of the property under question. The satisfaction of the AO that the bargains reveal inflated or deflated rent based on fraud, emergency, relationship and other considerations which make it unreasonable must precede the undertaking of above exercise. The Hon‟ble Bombay High Court then held in Tip Top Typography (supra) that the AO has to then comply with the principles of fairness and justice and make the disclosure to the taxpayer so as to obtain taxpayers view. The Hon‟ble Bombay High Court then held that market rate in the locality is an approved method for determining the fair rental value but it is only when the AO is convinced that the case before him is suspicious, determination by parties is doubtful and then the AO can resort to enquire about the prevailing rate in the locality. The Hon‟ble Bombay High Court in the said case held that municipal rateable value may not be binding on the AO in such case. It was also held that the AO cannot brush aside the Rent Control legislation if the same is applicable to premises in question. Then in that event the AO has to undertake the exercise contemplated by the Rent Control Legislation for fixation of standard rent. It was held that either the AO should proceed to determine the standard rent himself in terms of the Maharashtra Rent Control Act, 1999 or leave the parties to determine the same by the Court of Tribunal under that Act. In the instant case before us, the two residential flats owned by the assessee are situated in one of the posh areas of South Mumbai at Walkeshwar Road. The residential flat no. 8 admeasuring 3062 square feet is let out by the assessee to its related party i.e. its Director Mr. Shapoorji Pallonji Mistry at a meagre monthly rent of Rs. 10,000/-. The AO was not satisfied with this monthly rental which was chargeable from its Director as in his opinion the rental were deflated by the assessee deliberately for letting out to its Director. The AO made enquiry from the websites of real estate companies such as magicbrick.com, 99acres.com etc and came to the finding that the prevailing market rental of similar flats in this area is Rs.200/- per square feet per month against which the assessee was charging rent of Rs.3.27 per square feet per month from its Director. The assessee has not disputed this value of Rs. 200 per square feet per month being excessive than prevailing market rate but contentions are advanced that the same can not be accepted as municipal rateable value is binding on the AO to identify the sum for which the property might 6 Mum 2017-M/s Cyrus Investments Pvt. Ltd. be expected to let from year to year as the objective of municipal rateable value by municipal authorities are also same as the language used in the said act is para materia to what is used by the 1961 Act. There is a huge gap between the two rentals i.e. what is charged by the assessee from its Director and the market value per website of real estate companies .The flat in question being flat no. 8 is let out by the assessee to its Director which prima- facie reveals that intentionally rates are deflated due to relationship with its tenant and real position is not reflected in the valuation of rental charged from its Director .The municipal rateable value fixed for the year for the entire society was to the tune of Rs.4,91,804/- for FY 2011-12 while the same was Rs. 5,88,985/- for FY 2004-05. The assessee adopted municipal rateable value of Rs. 5,88,985/- which translates into rateable value of Rs.1.61 per square feet per month, which is also not indicative of the real position of market rental if compared with market rent as per websites of real estate companies which reflect market rent of Rs. 200 per square feet per month for which these flats might reasonably be expected to be let from year to year as is contemplated u/s 23(1)(a). The flat no. 3 is lying vacant and ALV is to be computed as per Section 23(1)(a) on similar lines as to the sum for which the said flat might reasonably be expected to be let on year to year basis. The plea that the municipal rateable value was finally accepted in earlier years while computing ALV u/s 23(1)(a) and since the actual rent of flat no. 8 was higher than the municipal rateable value, the same was adopted while computing ALV as is contemplated u/s 23(1)(b) is of no avail to the assessee as principles of Res judicata are not applicable to the income tax proceedings although we are aware that consistency is required to be maintained. Reference is drawn to the decision of Hon‟ble Supreme Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321(SC). The decisions as is referred to by the assessee cannot be accepted as these decisions in the case of CIT v. Prabhabati Bansali(supra) , M.V Sonavala v. CIT (supra) and Dewan Daulat Rai Kapoor v. NDMC (supra) were duly considered by Hon‟ble Bombay High Court in Tip Top Typography (supra) to arrive at conclusion . The decision of Hon‟ble Supreme Court in the case of Smt. Padma Debi(supra) has also stressed upon finding out 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 upon fraud, emergency, relationship I.T.A. No.6414/Mum/2016 and such other consideration may take it out of the bounds of reasonableness. The reliance of the assessee in the case of CIT v. R. Dalmia(supra) also shall be no avail as in this case the Hon‟ble Delhi High Court has already held that there may be cases in which the annual value fixed under the municipal law may be unacceptable to the income-tax authorities for good reasons. The Hon‟ble Delhi High Court held that they have not laid down any general principle that the income-tax authorities must adopt the municipal value as being correct. Normally the value should be accepted but if there is an under-valuation, it is certainly open to the Income-tax Officer to fix the value on his own on the basis of expected reasonable rent. Reference at this stage is also drawn to decision of Hon‟ble Supreme Court in the case of Joshi Technolgies International Inc. V. UOI reported in (2015) 57 taxmann.com 7 Mum 2017-M/s Cyrus Investments Pvt. Ltd.

290(SC) wherein the taxpayer was denied the benefit of Section 42 for the year under consideration as the taxpayer was found to be not entitled for the said benefit, despite the fact that benefit of Section 42 was granted by Revenue to the taxpayers in the earlier years. Thus, under these circumstances keeping in view factual matrix of the case discussed in extenso above and recent decision of Hon‟ble Bombay High Court in the case of Tip Top Typography(supra), we are of the considered view that this matter need to be restored back to the file of the AO for making making denovo assessment after make necessary enquires and investigation in line with decision of Hon‟ble Bombay High Court in the case of Tip Top Typography(supra) and after providing proper and adequate opportunity of being heard to the assessee . The evidences/explanation submitted by the assessee in its defence shall be admitted by the AO and adjudicated on merits in accordance with law. This ground no. 1 of the Revenue is allowed for statistical purposes. We order accordingly.”

6. Ground No.2 relates to deleting the disallowance under section 14A. The ld. AR of the assessee submits that the fact for the year under consideration are similar as of fact for Assessment Year 2012-13 and similar disallowance was made by Assessing Officer which was deleted by ld. CIT(A) and on appeal before the Tribunal, the disallowance was restricted to suo motu disallowance.

7. On the other hand, the ld. DR for the Revenue after going through the decision of Tribunal in Assessment Year 2012-13 fairly conceded that ground no.2 of the appeal is also covered in favour of assessee. Mum 2017-M/s Cyrus Investments Pvt. Ltd.

8. We have considered the rival submission of the parties and have gone through the orders of authorities below. We have noted that similar disallowance was made in Assessment Year 2012-13 and on appeal before the ld. CIT(A), the disallowance was restricted to suo-motu disallowance and on further appeal, the appeal of the Revenue was dismissed by Tribunal with the following observation:

“8. We have considered rival contentions and perused the material on record including orders of authorities below and paper book filed by the assesseee. We have observed that the assessee is an RBI registered (NBFC) Investment company. The assessee has received Dividend of Rs. 32.57 crores which was claimed as an exempt income. The assessee suo-motu disallowed expenditure of Rs. 5,44,975/- of its own voluntarily u/s 14A of the 1961 Act being incurred in relation to earning of an exempt income, which included direct expenses of Rs. 143/- and balance Rs. 5,44,832/- towards indirect expenses which were disallowed by the assessee voluntarily suo-motu u/s 14A. The AO invoked provision of section 14A r.w.r. 8D and disallowed Rs. 2,41,07,023/- mainly by invoking Rule 8D(2)(iii) r.w.s. 14A of the 1961 Act despite the fact that the assessee has incurred total expenses of Rs. 15.03 lac during the entire year which is reflected in Profit and Loss Account, out of which Rs. 4,13,486/- was voluntarily disallowed by the assessee and never claimed as business deduction, while out of the balance remaining expenses to the tune of Rs. 10,89,665/- , 50% of the said expenses aggregating to Rs. 5,44,832/- were disallowed by the assessee voluntarily u/s 14A of the 1961 Act while rest 50% of the expenses were claimed by the assessee as an business expenses/deduction .(refer page 8- 17/pb) . The assessee also disallowed Rs. 143/- towards demat charges being direct expenses for earning an exempt income which is not a matter of dispute between rival parties. The total disallowance of expenditure of Rs. 5,44,975/- u/s 14A is also certified by tax- auditors in their tax audit report to be correct disallowance of expenditure u/s 14A incurred in relation to earning of exempt income (refer page 63 and 75/pb). We have observed from the perusal of the Balance sheet that the assessee has investments in properties as well as in shares, debentures, partnership firms, mutual funds, and income is arising from these activities. The AO has not recorded any satisfaction u/s 14A(2) as to why disallowance offered by the assessee suo motu voluntarily is not a correct disallowance u/s 14A and the same needs to be discarded . The AO mechanically applied Rule 8D and arrived at disallowance of Rs. 9 Mum 2017-M/s Cyrus Investments Pvt. Ltd.

2,41,07,023/- u/s 14A r.w.r. 8D notwithstanding that the assessee has incurred total expenses of Rs. 15,03,151/- during relevant year which was claimed as an expenses in profit and Loss Account (pb/page

40). Out of these total expenses of Rs. 15,03,151/- , the assessee voluntarily disallowed Rs. 4,13,486/- and never claimed the same as business deduction , while out of the balance remaining expenses of Rs. 10,89,665 , the assessee computed disallowance of Rs. 5,44,832/ u/s 14A towards indirect expenses relatable to earning of an exempt income while also the assessee voluntarily additional disallowed an expenditure of Rs. 143/- directly relatable to an exempt income, thus total disallowance of expenditure to the tune of Rs. 5,44,975/- was offered by the assessee suo motu voluntarily u/s 14A to have been incurred for earning an exempt income. The AO did not recorded any satisfaction u/s 14A(2) as to why disallowance offered by the assessee to the tune of Rs. 5,44,975/- u/s 14A which was worked out by the assessee having regards to its accounts is not a correct working of disallowance of expenditure in relation to earning of an exempt income having regards to accounts of the assessee and the same needed to be discarded and Rule 8D is to be applied instead. The said working of the assessee was also approved by tax-auditors of the assessee in their tax audit report submitted which is part of paper book(page 63 and 75). The AO has not recorded any reasoning for discarding the working submitted by the assessee as to disallowance of expenditure of Rs. 5,44,975/- u/s 14A. The AO mechanically applied Rule 8D and made disallowance to the tune of Rs. 2.14 crores without understanding that Section 14A clearly speaks of disallowance of the expenditure incurred by the assessee in relation to earning of an exempt income and no notional expenditure can be disallowed u/s 14A which had not even been incurred at all by the assessee. Also there is no allegation or incriminating material on record that the assessee incurred any expenditure out of books of accounts which was not recorded in books of accounts warranting any additions to income to bring to tax the said unrecorded expenditure. Under these facts situation keeping in view totality of the circumstances and suo motu disallowance of 50% expenses offered by the assessee and non recording of satisfaction by the AO u/s 14A(2) before invoking Rule 8D, we are of the considered view that the appellate order of learned CIT(A) needs to be upheld/sustained which we sustain and hence the disallowance offered by the assessee u/s 14A suo-motu voluntarily to the tune of Rs. 5,44,975/- stood accepted. Revenue fails on this ground and hence ground no. 3 is adjudicated against Revenue. We order accordingly.

Mum 2017-M/s Cyrus Investments Pvt. Ltd.

Order pronounced in the open court on 26/09/2018.