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Therefore, aggrieved by the order of ld. CIT(A), the assessee has filed the present appeal before the Tribunal.
We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The ld. AR of the assessee submits the assessee had let out office/shop premises bearing nos. 71 and 50 admeasuring 3,250 sq.ft. to M/s. Marine Container Services (India) Pvt. Ltd. at Rs. 100 per sq.ft. i.e., monthly rent of Rs.3.25.000/- Therefore, the assessee declared the rent received of Rs.39,00,000/- as the Annual Letting Value (ALV) and declared the same under the head ‘Income from house property’. The Assessing officer held that the office premises no. 71 & 50 has been let out for lessor rent and therefore, the ALV is to be determined at the fair rental value. For adopting the fair rental value of Rs.200/- per sq.ft. the Assessing Officer has given the following reasons:
(a) The assessee itself had let out a mezzanine portion admeasuring 370 sq.ft. of the office no.50 to others at Rs.200/- per sq.ft. in the same building to another company.
(b) There was no mention of furnished premises in the agreement for office no.50 on mezzanine floor as claimed by the assessee. Mum 2016 - M/s Marine Container Services (c) Office nos. 71 and 50 were fully air conditioned and there was no mention of office on mezzanine floor being air conditioned.
(d) The assessee had accepted an interest free security deposit of Rs.2.45 crores for the office nos. 71 and 50.
The ld AR for the assessee further submits that the Assessing Officer, adopted the rental value @ Rs.200/- per sq.ft. and determined the ALV of the said office premises at Rs.78,00,000/- and accordingly added Rs.39,00,000/- to the income under the head Income from house property.
The Assessing Officer has made the addition on an ad hoc basis. The Assessing Officer has solely relied on the agreement of the assessee with another company to which the assessee had let out office no. 50 adrneasuring 370 sq.ft. on mezzanine floor at Rs.200/- per sq.ft. The Assessing Officer without making necessary investigation and enquiries estimated the ALV and made the addition. The Assessing Officer failed to appreciate that the office nos. 71 and 50 were different from that of the office no. 50 on the mezzanine floor in various ways. The office nos. 71 and 50 admeasure 3250 sq.ft. whereas the office no. 50 on mezzanine floor admeasures 370 sq.ft. The finding of the AO that the office no.50 on mezzanine floor was not Air Conditioned is incorrect as the entire building is Air Conditioned. It has already been explained to the Assessing Officer that in the Cuffe Parade area of Mumbai city such small office space is rarely available on leave & licence basis except at a high monthly rent. 4 Mum 2016 - M/s Marine Container Services The terms of such premises had been specifically priced considering the non-availability or such small spaces. In support of his submission, the ld. AR of the assessee relied upon the decisions of Vimal R. Ambani vs. DCIT [2015] 375 ITR 66 (Bom HC), DCIT vs. Reclamation Realty India Pvt. Ltd. [Mumbai ITAT-ITA No. 1411 to 1413/Mum/2007] Reclamation Realty India Pvt. Ltd. vs. ACIT [ITA No. 1733 & 1734/Mum/2007 dated 26th November 2020] and decision of Bombay High Court in CIT vs. M/s. Reclamation Properties (I) Pvt. Ltd. (ITA No. 753 of 2012).
On the other hand the ld. DR for the revenue supported the order of the authorities below. The ld. DR for the revenue further submits that during the assessment the assessing officer notice that the assessee had let out office premises no. 71 & 50 for lesser rent than the officer premises let out at mezzanine floor in the same building and the assessing officer determined, the ALV at the fair rental value.
We have considered the rival submissions of the parties and have gone through the orders of the authorities below and the material placed before us. The assessing officer made addition on taking his view that the assessee has let out mezzanine floor office/ premises to third party @ Rs.200/- per sq ft per month, however, the portion of same property is let out to its sister concern @ Rs. 100/-per sq ft per month. The assessing officer further noted that the assessee accepted security deposit of Rs. 245 lakhs from its sister concern while no such security is received from the 5 ITA No. 4158 Mum 2016 - M/s Marine Container Services tenant at mezzanine floor. The ld CIT(A) confirmed the action of the assessing officer on his observation that the assessee admitted about the charging of higher rate of rent for mezzanine floor, thus the premises forming part of shop No.50 &71 are also capable of earning higher rate of rent. We have noted that the assessing officer has not carried out any inquiry about the comparative properties in the locality and added the difference of rate of the two units without bringing contrary material on record. The assessing officer treated the correct discloser of the rate of rent of two different units as the admission of the assessee, without examining the date, size, potential or other factors at the time of letting the two portions of the same building.
The Hon’ble Jurisdictional High Court in Vimal R. Ambani Vs DCIT [2015] 375 ITR 66 (Bom) held that while determining annual letting value in respect of properties which are subject to rent control legislation and in cases where standard rent has not been fixed, assessing officer shall determine same in accordance with relevant rent control legislation.
The Hon’ble Delhi High Court in CIT Vs Moni Kumar Subha (333 ITR 38) (Delhi FB) held that notional interest cannot be added to rental income to determine fair/market rental value of property without making necessary enquiries about fair/market rental income or Annual Letting Value of property. The coordinate bench of Tribunal in DCIT Vs Mum 2016 - M/s Marine Container Services Reclamation Reality India Pvt Ltd (ITA No. 141 to 1413/M/2007) while considering the issue of fair rental value has held as under:
“ 17. We have considered the rival submissions. Originally provisions of section 23 of the Act provided for determination of annual value of house property only on the basis of sum for which, the property might reasonably be expected to be let from year to year. The actual receipt of rent was irrelevant. By the Taxation Laws (Amendment) Act, 1975 w.e.f. 1.4.1976, Section 23(1)(b) was introduced, whereby it was provided that if the actual rent received by an assessee is in excess of the sum for which, the property might reasonably be expected to let from year to year, annual value will be the rent received. While explaining the aforesaid amendment, CBDT in Circular 204 dated 24.7.1976 in paragraph 9 has stated as follows :-
"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 the 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".
From the aforesaid Circular, it is clear that the law prior to introduction of section 23(1)(b) was that annual value was equal to Municipal Valuation of the property. The above circular gives an indication as to how the expression "the sum for which, the property might reasonably be expected to let from year to year" used in section 23(1)(a) hast to be interpreted.
In the case of Diwan Daulat Kappor Vs. New Delhi Municipal Committee, 122 ITR 700 (SC), the question before the Hon'ble Supreme Court was as to what should be the basis of determining the annual value for the purpose of levy of property tax. The expression "Annual Value" as defined in the Delhi Municipal Corporation Act, 1957 and Punjab Municipal Act, 1911 was "Gross annual rent at which such house of building may reasonably be expected to let from year to year". The Hon'ble Supreme Court held that the annual value is always rent realizable by landlord and that actual rent is only an indicator what the landlord might reasonably expect to get from a hypothetical tenant. The 7 Mum 2016 - M/s Marine Container Services
Honourable Court further held that where tenancy is subject to rent control legislatation, Standard rent would be a proper measure and in any event, annual value cannot exceed such standard rent. In the case of Mrs. Sheila Kaushish Vs. CIT, 131 ITR 435 (Sc), the question arose in the context of provisions of section 23 of the I.T. Act. The Hon'ble Supreme Court applying the decision of Hon'ble Supreme Court in the case of Dewan Daulat Rai Kapoor (supra) observed as follows :-
"Now this was a definition given on the interpretation of the definition of "Annual value" in the Delhi Municipal Corporation Act, 1957, and the Punjab Municipal Act, 1911, for the purpose of levy of house tax, but it would be eqully applicable in interpreting the definition of 'annual value' in sub-section (1) of section 23 of the I.T. Act, 1961, because these definitions are in identical terms and it was impossible to distinguish the definition of 'annual value' in sub- section (1) of section 23 of the I.T. Act, 1961, from the definition of that term in the Delhi Municipal Corporation Act, 1957 and the Punjab Municipal Act, 1911. We must, therefore, hold on an identical line of reasoning, that even if the standard rent of a building has not been fixed by the Controller under section 9 of the Rent Act and the period of limitation prescribed by section 12 of the Rent Act for making an application for fixation of the standard rent having expired, it is no longer competent to the tenant to have the standard rent of the building fixed, the annual value of the building according to the definition given in sub-section (1) of section 23 of the I.T. Act, 1961, must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant. This interpretation which we are placing on the language of sub-section (1) of Sec.23 of the IT Act,1961, may be regarded as having received legislative approval, for, we find that Sec.6 of the Taxation Laws (Amendment) Act, 1975 sub-section (1) has been amended and it has now been made clear by the introduction of clause(b) in that sub-section that where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to the annual value of the property. The newly added cl.(b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant".
Hon'ble Calcutta High Court in the case of CIT Vs. Prabhabati Bansali, 141 ITR 419 had to deal with a case of a property in Mumbai, where the dispute was with regard to determination of its annual value u/s. 23 of the Act. Hon'ble Calcutta High Court after making reference the decision of Hon'ble Supreme Court in the case of Dewan Daulat Rai Kapoor (supra) and Mrs. Sheila Kaushish (supra) held as follows :-
Mum 2016 - M/s Marine Container Services
"Therefore, in case where the actual rent received is higher than that for which the property might reasonably be expected to let from year to year in respect of an income accruing subsequent to the amendment different considerations might arise. But, we are not concerned with such situation in the instant case. Therefore, in view of that position and the municipal law and in view of the decision of the Supreme Court, it appears to us that the income from house property must be computed on the basis of the sum which might reasonably be expected to let from year to year and with the annual municipal value provided such a value is not above the standard rent receivable and that would be the safest guide for this purpose and the rent actually received would not be of any relevance".
The Court in the aforesaid decision also relied on the provisions of section 154 of the Bombay Municipal Corporation Act, wherein the manner of determination of rateable value has been laid down. The said provisions also speak of "annual rent for which, the property might reasonably be expected to let from year to year". Thus, the Court concluded that the Municipal valuation and the annual value u/s. 23(1)(a) are one of the same. The decision of Hon'ble Calcutta High Court has been followed by Hon'ble Bombay High Court in the case of M.V. Sonavala Vs. CIT, 177 ITR 246 (Bom); wherein Hon'ble Bombay High Court has observed as follows :-
"However, the questions posed to us are not whether the annual value of the property for the purpose of section 23(1)(a) should be taken at the actual compensation received or on the basis of standard rent. The question is whether the annual value should be taken at the amount which is actual compensation received or at the amount fixed as municipal rateable value. Obviously, Municipal rateable value cannot be equated to standard rent.
In this context, it may be desirable to refer to the Calcutta High Court's decision in the case of CIT Vs. Prabhabati Bansali, (1983) 141 ITR 419. One of the questions involved in that case was whether the Tribunal was justified in directing the Income Tax Officer to re-determine the annual value of the property under section 23(1) afresh with reference to its rateable value as determined by the Municipal Corporation. The question was answered in the affirmative and the court held that the income from house property had to be computed on the basis of the sum for which the property might reasonably be let from year to year and the annual municipal value.
Following the Calcutta High Court decision (1983) 141 ITR 419, which we think, has taken the right view, we answer the questions in the negative and against the department with a direction that the annual value of Mum 2016 - M/s Marine Container Services different properties will now be determined by the Tribunal in accordance with the directions set out above. No order as to costs".
The Hon'ble Bombay High Court in the case of Smitaben N. Ambani Vs. CWT 323 ITR 104 (Bom) in the context of Rule 1BB to the Wealth Tax Rules, which uses the same expression "the sum for which the property might be reasonably expected to let from year to year" as is found in Sec.23(1)(a) of the Act, held that rateable value as determined by the Municipal authorities shall be the yardstick. The Learned counsel for the assessee relied on several other judicial pronouncements in support of his contention that the Municipal value should be the basis of determining the annual value. We are not making reference to those decisions, since, in our opinion the aforesaid pronouncement of Hon'ble Bombay High Court considers the decisions of Hon'ble Calcutta High Court which in turn has considered the law laid down by the Hon'ble Apex Court on the issue. It is clear from the aforesaid exposition of law that charge u/s. 22 is not on the market rent; but is on the annual value and in the case of property which is not let out, municipal value would be a proper yardstick for determining the annual value. If the property is subject to rent control laws and the fair rent determined in accordance with such law is less than the municipal valuation then only that can be substituted by the municipal value. The decision in the case of Mrs. Sheila Kaushish (supra) mentions standard rent under the Rent Control Act as one of the yardsticks. We also find from the decision of Hon'ble Calcutta High Court in the case of Smt. Prabhabati Bansali (supra) that standard rent, if it does not exceed the municipal valuation alone can be adopted in place of municipal valuation.
As far as decisions relied upon by the learned D.R. in the case of Baker Technical Services (P) Ltd. (supra), we find that the same is based on the decision of the ITAT Mumbai bench in the case of ITO Vs. Makrupa Chemicals (P) Ltd. 108 ITD 95 (Mumbai). In the case of Makrupa Chemicals, in para-14 of the decision it has been clearly held that rateable value, if correctly determined under the municipal laws can be taken as ALV u/s.23(1)(a) of the Act and in this regard the decision of the Hon'ble Supreme Court in the case of Sheila Kaushish(supra) has been followed. It has further been observed that the rateable value is not binding on the AO, if the AO can show that rateable value under the municipal law does not represent the correct fair rent. In coming to the above conclusion, the Bench has followed the decision of the Patna High Court in the case of Kashi Prasad Katarvka Vs. CIT 101 ITR 810 (Patna). We find that the Bombay High Court which is the jurisdictional High Court has held that the rateable value under the municipal law has to be adopted as annual value u/s.23(1)(a) of the Act and therefore the decision in the case f Makrupa Chemicals (supra) to the contrary cannot be Mum 2016 - M/s Marine Container Services
followed. Further In para-13 of its decision in the case of Makrupa Chemicals, the Tribunal has very categorically held that if ratable value is less than the standard rent (where the property is subject to rent control laws) then only standard rent has to be taken. In coming to the above conclusion the Tribunal has followed the decision of the Hon'ble Supreme Court in the case of Dewan Daulat Rai kapoor (supra). Thus the decision in the case of Baker Technical Services (P) Ltd. (supra) being contrary to the decision of the Hon'ble Bombay High court in our view cannot be followed.
The decision relied upon by the learned D.R. in the case of Fizz Drinks Ltd.(supra), are distinguishable on facts. The facts in that case were that the agreed rent was Re.1/- per month and interest free security deposit of Rs.1,62,36,000/- was taken by the owner. It was this factor which weighed in the mind of the Tribunal as is evident from the observations in para-8 of its order where they have held that any fair judicial administration would not allow such things to happen. The decision in the case of Tivoli Investment & Trading Co. (P) Ltd. (supra) is again distinguishable because it was a case where there was no rent and only a huge interest free security deposit was taken by the owner.
For the reasons given above, we hold that the annual value (also referred to as municipal valuation/ rateable value) adopted by the municipal authorities in respect of the property at Rs.27,50,835 should be the determining factor for applying the provisions of Sec.23(1)(a) of the Act. Since the rent received by the Assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act. Notional interest on interest free security deposit/rent received in advance should not be added to the same in view of the decision of the Hon'ble Bombay High Court in the case of J.K.Investors (Bombay) Ltd. (supra). We hold accordingly. The appeal of the revenue is dismissed.”
We have seen that decision in DCIT Vs Reclamation Reality India Pvt Ltd (supra) has been affirmed by Hon’ble Bombay High Court by dismissing the appeal filed by revenue vide of 2011 dated 08.08.2014.
In view of the above factual and legal discussions, we are of the view that the assessing officer has not adopted the ratio of law laid down by Mum 2016 - M/s Marine Container Services jurisdictional High Court and the decisions of Tribunal. Therefore, the issue is restored back to the file of assessing officer to decided the issue afresh in accordance with law after granting sufficient opportunity to the assessee. In the result this ground of appeal is allowed for statistical purpose.
In the result, appeal of assessee is allowed for statistical purpose.