DCIT 2(1)(1), MUMBAI vs. CENTRAL DEPOSITORY SERVICES (I) LTD, MUMBAI

We shall first take up assessee’s appeal in wherein following Grounds of appeal have been raised:

The brief facts of the case are that the assessee M/s. Central Depository Services (India) Ltd., is a public limited company jointed promoted by BSE Ltd. and other leading financial institutions such as SBI and other nationalized banks. The assessee filed its return of income for A.Y. 2012-13 on 28.09.2012, declaring total income of ` 56,81,37,750/-. The case was selected for scrutiny and notices u/s. 143(2) and 142(1) were issued and served on the assessee. During the course of assessment proceedings, the Assessing Officer noticed that as per the Wealth Tax return filed for A.Y. 2012-13, the assessee has shown residential flat at Prabhadevi valuing ` 1,73,76,753/- as a taxable asset u/s. 2(ea) of Wealth Tax Act, 1957. However, it had not offered any income from it under the head ‘Income from House Property’. Therefore, the assessee was asked to explain as to why the Annual Letting Value (ALV) of this property should not be assessed as per the provisions of section 22 of the Income tax Act, 1961. In response to notice, the assessee vide letter dated 01.12.2014, submitted that the said property is used for the purpose of business in the form of guest house, wherein the outstation Directors can come and stay for the Board meetings held by the assessee as per the statutory requirements for deciding day to day business issues. Since the property is used for business purpose, it was under the bona fide belief that the ALV of the property need not be computed as per the provisions of section 22 of the Income tax Act, 1961. The Assessing Officer after considering the relevant submissions of the assessee observed that the assessee itself contradicted from its submissions, where on one side assessee pleads that residential property is taxable u/s. 2(ea) of the Wealth Tax Act 1957, and on the other side claims that the said property is used for business purpose and, hence, no income is assessable u/s. 22 of the Income tax Act, 1961. The Assessing Officer further observed that even though the assessee claims to have used the said premises for business purpose in the form of guest house for out station employees, no details have been filed including guest log book to prove its employees were using the guest house for official purpose. Accordingly, the Assessing Officer computed the ALV @ 8% of the cost of the property to determine the ‘Income from House Property’ assessable at ` 9,73,098/-. Similarly, the Assessing Officer has disallowed the expenses claimed on said property being depreciation on the flat & furniture/equipments in the flat, maintenance expenses and electricity expenses and added it to the total income of the assessee. Aggrieved, by the assessment order the assessee preferred appeal before the CIT(A).

Before the CIT(A) the assessee reiterated its submissions made before the Assessing Officer to argue that residential property owned by the company has been used as guest house to accommodate outstation Directors, who come for company’s Board meetings. Therefore, even though the said asset has been considered as taxable u/s. 2(ea) of the Wealth Tax Act, 1957, income from the said property is not assessable u/s. 22 of the Income Tax Act, 1961. The assessee further claims that alternatively, the ALV of the property may be considered at ` 4,776/-. In so far as disallowance of expenses towards said property, it was submitted that the assessee has incurred expenses towards maintenance of guest house wholly and exclusively for its business, which is evident from the fact that the said flat has been used as guest house to accommodate outstation employees of the assessee. Therefore, the question of disallowance of expenses incurred to maintain said guest house does not arise. The learned CIT(A) after considering the relevant submissions of the assessee held that the assessee has admittedly shown residential flat at Prabhadevi in the Wealth Tax return, which is taxable u/s. 2(ea) of the Wealth Tax Act, 1957. Moreover, the assessee has used the said premises for the purpose accommodating their Directors/employees stationed outside and visiting Mumbai for Board meetings. Even if the assessee used the residential property for commercial purpose, which has been shown as taxable asset u/s 2(ea) of the Wealth Tax Act, attract ALV to be assessed as ‘Income from House Property’. The Assessing Officer, considering the location and the area, has taken a conservative estimate of ALV @8% of the cost of the property and, therefore, there is no reason to interfere with the determination of the ALV by the Assessing Officer. The CIT(A) further held that since the Assessing Officer has determined the ALV of the property and computed income after allowing standard deduction as provided u/s. 24 of the Income tax Act, no further expenses/expenditure incurred on the said property is allowable and, therefore, the Assessing Officer has rightly disallowed the expenses claimed on the said property to the extent of ` 5,75,550/-. Aggrieved by the order of the CIT(A), the assessee is in appeal before us.

We have heard both the parties and perused the material available on record. The fact with regard to ownership of residential property at Prabhadevi, Mumbai, is not disputed by the assessee. It is also an admitted fact that the assessee has included the said flat within the meaning of asset as defined u/s. 2(ea) of the Wealth Tax Act, 1957, which is taxable under the Wealth Tax Act. The Assessing Officer computed ALV of the property @8% of total investment in the property on the ground that the assessee owns a residential property but not computed ALV as per the provisions of section 22 of the Income tax Act, 1961. According to the Assessing Officer, the assessee itself has admitted the fact that residential property is taxable u/s. 2(ea) of the Wealth Tax Act, 1957. If at all the said property has been used as guest house for the business purpose of the assessee as claimed, the assessee would not have included the same in the taxable wealth u/s. 2(ea) of the Wealth Tax Act, 1957. The Assessing Officer further observed that the assessee has not furnished any evidence to prove that the said property is used as guest house for the purpose of business of the assessee i.e. for its outstation employees. It is the contention of the assessee that though the property has been considered as taxable under the Wealth tax Act, 1957, fact remains that the said property has been used as guest house for the purpose of its employees who come on regular visit to Mumbai on official visit and, hence, the question of computing ALV as per provisions of section 22 of the Income Tax Act does not arise.

Having heard both the sides and considering the material on record, we do not find any merit in the arguments of the assessee for the reason that the assessee never disputed the fact that the said property has been included in the taxable wealth u/s. 2(ea) of the Wealth Tax Act, 1957. The assessee has also not filed any evidence to prove that the said property has been used as guest house by its employees for business purpose. If at all the property has been used as guest house for business purpose, the assessee would have incurred certain expenses to maintain the guest house. In this case, except the claim of depreciation on the building, electricity and maintenance expenses, no other expenses have been incurred to maintain guest house. From this it is abundantly clear that there is no merit in the claim of the assessee that the said property has been used as guest house for its business purpose. Although, the assessee has filed log book maintained for the guest house to prove that it has been used by the assessee’s directors, the evidence filed by the assessee pertains to subsequent period therefore based on such evidence it cannot be concluded that the said property has been used for the purpose of guest house for the impugned assessment year. Therefore, we are of the considered view that the Assessing Officer was right in computing ALV of the property as per the provisions of section 22 of the Income tax Act.

Having said so, let us examine the method of determination of ALV by the Assessing Officer. The Assessing Officer has determined ALV of the property @8% of the cost of the asset. According to him the ALV determined by the assessee of ` 4,776/- is not acceptable, therefore, he proceeded on to determine the property on adhoc basis by estimating 8% of the total cost of the asset. It is the contention of the assessee that in case of deemed let out properties, the annual value shall be determined on the basis of some for which the property might reasonably be expected to let from year to year or where the property or any part of the property is let and the actual rent received or receivable by the assessee in respect thereof is in excess of the sum referred to in clause (a), it is the amount so received or receivable. Since the property has not been let out, the ALV of the property should be determined based on the fair rent of the property, whereas the Assessing Officer has determined ALV of the property on adhoc basis, which is incorrect. The Assessing Officer has determined the ALV of the property @ 8% of the cost of the asset without assigning any reasons for not considering fair rent of the property. The Assessing Officer also has not given any reasons as to how the ALV determined @8% reflects the fair rent considering the location and area of the flat. There are several methods for determining the ALV of the flat and one such method is municipal rateable value. Although, municipal rateable value many not be binding on the Assessing Officer, but that is only in cases where he is convinced that the interest free security deposit and monthly compensation do not reflect prevailing rate of property. In this case, the Assessing Officer has not made any effort to ascertain fair rental value of the property considering the location and area. In so far as the case laws relied upon by the assessee of the Hon’ble Delhi High Court in the case of CIT vs. Modi Industries Ltd. (supra), we find that in said case the facts were clear in as much as the property has been used for business purpose of the assessee. In this case, the assessee failed to prove with any evidence that the said property has been used for its business as guest house. Therefore, the case law relied upon by the assessee is not considered. Thus, we are of the view that the issue needs to be reconsidered by the Assessing Officer in the light of the decision of Hon’ble Bombay High Court in the case of Tip Top Typography (2014) [368 ITR 330], wherein it was held that if the premises is controlled by Rent Control Act, then the Assessing Officer must undertake the determination of rent himself in terms of the said Act or determine it according to the prevailing rate in the locality. Hence, we set aside the issue to the file of Assessing Officer and direct him to re-consider the issue in the light of our discussion herein above.

Coming to the disallowance of expenses incurred in relation to residential property. The assessee has claimed expenses being depreciation on building, furniture & equipments, maintenance charges and electricity expenses. The Assessing Officer has disallowed expenses incurred on the ground that once standard deduction as provided u/s. 24 is allowed against rental income/ALV, then no other expenses/expenditure incurred on the said property is allowable. We find that the Assessing Officer has allowed Standard Deduction u/s. 24 of the Income tax Act, 1961, against ALV determined from the property to compute ‘Income from House Property’. Once standard deduction is allowed, then no further deductions can be allowed towards any expenditure incurred on said property, whether or not such expenses are incurred in the course of carrying out business of the assessee. The expenses, we are of the considered view that the Assessing Officer was right in disallowing expenses towards property. The learned CIT(A) after considering relevant submissions has upheld the additions made by the Assessing Officer. We do not find any error in the order of the CIT(A), hence we are inclined to affirm the findings of the CIT(A) and reject the ground taken by the assessee.

We shall now take up the Revenue’s appeal in , wherein, following grounds have been raised:

At the time of hearing, the learned AR for the assessee submitted that the issue is squarely covered in favour of the assessee by the decision of the ITAT, ‘D’ Bench, Mumbai, for A.Y. 2011-12 in wherein on similar set of facts, the Tribunal has directed the Assessing Officer to determine disallowance contemplated u/s. 14A read with Rule 8D(2)(iii) after excluding the investments which are capable of earning taxable income. On the other hand, learned DR submitted that though the issue has been considered by the ITAT in earlier year, the fact remains that the learned CIT(A) erred in allowing the exclusion of investment of Mutual Funds while calculating the disallowance u/s. 14A without appreciating the fact that Mutual Funds Growth Option generate Long term capital gains, which is also exempt from tax.

We have heard both the parties and perused the material available on record. The fact with regard to earning exempt income and applicability of provisions of section 14A read with Rule 8D is not disputed by both the parties. In fact, the assessee itself has suo moto disallowed a sum of ` 49,80,383/- u/s. 14A of the Act. The AO determined the disallowance of ` 1,24,26,845/- @0.5% of average value of investment, which includes investments in Mutual Fund Growth Option. We find that the co-ordinate Bench of ITAT, Mumbai, ‘D’ Bench, in for A.Y. 2011-12 has considered similar issue and after analysing facts of the case held that for the purpose of computing average value of investments, investments in Mutual Fund Growth Option, which are capable of earning taxable income shall be excluded. The relevant portion of the said Tribunal order is extracted below:

Facts remain unchanged. The Revenue fails to bring on record any contrary decision to counter the findings of fact recorded by the ITAT. Therefore, being consistency with the view taken by the co-ordinate bench, we direct the Assessing Officer to exclude investment in Mutual Fund Growth Option for the purpose of determining of average value of investments. Further, the assessee has filed a working of disallowance u/s. 14A as per which suo moto disallowance made by the assessee works out to ` 51,05,383/-, whereas as per the assessment order the Assessing Officer has taken the suo moto disallowance at ` 49,80,383/-. Therefore, we set aside the issue to the file of the AO for the limited purpose of verification of fact with regard to the suo moto disallowance made by the assessee to ascertain whether it is ` 49,80,383/- or ` 51,05,383/-. Hence, we set aside the issue to the file of the Assessing officer and direct him to make necessary enquiries in light of computation filed by the assessee. We ordered accordingly. Thus, the appeal is partly allowed for statistical purpose.