ACIT 11(1), MUMBAI vs. S.P. CORPORATION, MUMBAI

6 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 9. Further, on 27.03.1992 the assessee sold the property, Tata House' at Mumbai, to Deutsche Bank subject to the tenancy. In pursuance of separate and independent negotiations between Deutsche Bank and the tenants viz. Ms. Simone Tata, Mr. Ratan Tata and Mr. Jimmy Tata the tenants by a Memorandum of Agreement dated 18.1.1990 agreed to give up their tenancy/occupancy rights in Tata House and hand over to Deutsche bank, vacant possession of the property occupied by them in Tata House on Deutsche Bank agreeing to provide (or making arrangements to provide) alternate accommodation failing which the Bank was to pay to the tenants in lieu of such alternate accommodation the amounts by way of full and final settlement to Ms. Simone Tata ₹.150 lakhs, Mr. Ratan Tata ₹. 90 lakhs and Mr-Jimmy Tata ₹.150 lakhs

7 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 11. Ms. Simone Tata located a flat viz. Apartment No.302, 3rd floor, Bakhtavar Building, Colaba, Bombay - 400 005 (the property under consideration) and entered into an agreement with Ms. Indrani Banerjee (the transferor) for purchase of the said flat subject to the NOC from the Appropriate Authority appointed under the provisions of Chapter XX-C of the Income-tax Act, 1961 and approval by the Reserve Bank of India under Foreign Exchange Regulation Act, 1973 since she was a foreign national. Though the NOC from the Appropriate Authority was granted, Reserve Bank initially did not grant their approval. In view of Ms. Simone N. Tata not receiving the approval from the Reserve Bank of India for acquisition of the flat, she had no option but to opt for the second option, viz., asking the assessee to provide her the flat and accordingly the assessee purchased and provided her a residential flat of her choice vide the tripartite agreement dated 6.4.90 between Ms. Indrani Banerjee - transferor, Ms. Simone N. Tata as confirming party and the assessee as transferee. Accordingly, her part of the tenancy compensation of Rs. 150 lakhs pertaining to the Tata House devolved on the Assessee. Copy of the said tripartite agreement is at pages 30 to 60 of the compilation filed.

9 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Corporation Act are in Pari Materia of Section 23 of the I.T. Act the Hon’ble High Court was inclined to accept the view of the Hon’ble Calcutta High Court in the case of CIT v. Satya Co. Ltd., [140 CTR 569] that in such circumstances the annual value fixed by the Municipal Value can be the rational yardstick.

10 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation property, as nothing has been brought on recorded by the Revenue to establish to the contrary. The Annual rateable value in the case of the assessee for the purpose of computing the income from house property is therefore should be adopted at ₹.7,691/-.

11 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Act. Therefore, the Ld. Counsel for the assessee submitted that Ms. Simone Tata continued to pay the monthly rent of Rs. 600/- and the tenancy in Bakhtavar Building was in continuation/replacement of tenancy held by Ms. Simone Tata in Tata House. The Ld. Counsel for the assessee further submitted that the tenancy of the Tata house was prior to 01st October, 1987 at a rent of ₹.600/- per month. Hence as per the Maharashtra Rent Control Act, 1999 the standard rent is ₹.7,200/- per year. Therefore, it is submitted that Municipal Rateable Value of ₹.7,691/- is higher than the standard rent and therefore the same be considered as Annual rateable value u/s. 23(1) of the Act for the purpose of computation of income from house property.

13 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation evidences the matter should go back to the Assessing Officer. However, it was submitted that the matter be decided without sending back to the A.O.

14 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 45] In the above backdrop, the Full Bench held as under: - With this, we revert back to the moot question, viz., how to determine the ‘fair rent” of the property and then to find out as to whether actual rent received is less or more than the “fair rent” so that higher of two is taken as annual letting value under Section 23(1)(b) of the Act. For this purpose, we first discuss the validity of approach taken by the AO, viz., whether it is permissible to add notional interest of interest free security deposit and add the same to the actual rent received for arriving at annual letting value. Even the Division Bench while making reference did not countenance the aforesaid formula adopted by the AO as is clear from Para 12 of the reference order wherein it is observed as under: “12. In this backdrop, the important question which arises for determination is: what is the fair rent of the properties, which were let out in the instant case? The mistake committed by the AO was that he did not address this issue and straightway proceeded to add notional interest on the interest free security deposit. The aforesaid conclusion is correct. We may record that permissibility of adding notional interest into actual market rent received was not approved by the Calcutta High Court in the case of Commissioner of Income Tax Vs. Satya Co. Ltd. [(1997) 140 CTR (Cal) 569] and categorically rejected in the following words: “There is no mandate of law whereby the AO could convert the depression in the rate of rent into money value by assuming the market rate of interest on the deposit as the further rent received by way of benefit of interest free deposit. But s. 23, as already noted, does not permit such calculation of the value of the benefit of interest free deposit as part of the rent. This situation is, however, foreseen by Schedule III to the WT Act and it authorises computation of presumptive interest at the rate of 15 per cent. as an integral part of rent to be added to the ostensible rent. No such provision, however, exists in the Act. That being so, the act of the AO in presuming such notional interest as integral part of the rent is ultra vires the provision of s. 23(1) and is, therefore, unauthorised. Though what has been urged on behalf of the Revenue is not to be brushed aside as irrational, yet the contention is not acceptable as the law itself comes short of tackling such fact situation." This view of the Calcutta High Court has been accepted by a Division Bench of this Court as well in the case of Commissioner of Income Tax Vs. Asian Hotels Limited [(2008) 215 CTR (Del.) 84] holding that the notional interest on refundable security, if deposited, was neither taxable as profit or gain from business or profession under Section 28(iv) of the Act or income from house property under Section 23(1)(a) of the Act. Rationale given in this behalf was as under (page 493): "A plain reading of the provisions indicates that the question of any notional interest on an interest free deposit being added to the income of an assessed on the basis that it may have been earned by the Assessee if placed as a fixed deposit, does not arise. Section 28 (iv) is concerned with business income and is distinct and different from income from house property. It talks of the value of any benefit on perquisite, "whether convertible into money or not" arising from "the business or the exercise of a profession." It has been explained by this Court in Ravinder Singh that Section 28 (iv) can be invoked only where the benefit or perquisite is other than cash and that the term "benefit or amenity or perquisite" cannot relate to cash payments. In the instant case, the AO has determined the monetary value of the benefit stated to have accrued to the assessed by adding a sum that constituted 18% simple interest on the deposit. On the strength of Ravinder Singh, it must be held that this rules out the application of Section 28 (iv) of the Act.

15 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Section 23(1)(a) is relevant for determining the income from house property and concerns determination of the annual letting value of such property. That provision talks of "the sum for which the property might reasonably be expected to let from year to year." This contemplates the possible rent that the property might fetch and not certainly the interest in fixed deposit that may be placed by the tenant with the landlord in connection with the letting out of such property. It must be remembered that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. The attempt by learned counsel for the Revenue to draw an analogy from the Wealth Tax Act, 1957 is also to no avail. It is an admitted position that there is a specific provision in the Wealth Tax Act which provides for considering of a notional interest whereas Section 23(1)(a) contains no such specific provision." We approve the aforesaid view of the Division Bench of this Court and Operative words in Section 23 (1)(a) of the Act are "the sum for which the property might reasonably be expected to let from year to year". These words provide a specific direction to the Revenue for determining the “fair rent”. The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the “fair/market rent” because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at a “fair rent”. The Provisions of Section 23(1)(a) do not mandate this. The Division Bench in Asian Hotels Limited [2010] 323 ITR 490 (Delhi), thus, rightly observed that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of Commissioner of Income Tax Vs. J. K. Investors (Bombay) Ltd., [(2001) 248 ITR 723 (Bom.)] categorically rejected the formula of addition of notional interest while determining the “fair rent”. It is, thus, manifest that various Courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in Asian Hotels Limited [2010] 323 ITR 490 (Delhi). The next question would be as to whether the annual letting value fixed by the Municipal Authorities under the Delhi Municipal Corporation Act can be the basis of adopting annual letting value for the purposes of Section 23 of the Act. This question was answered in affirmative by the Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569 on the ground that the provisions contained in the Delhi Municipal Corporation Act for fixing annual letting value is in pari materia with Section 23 of the Act. The Court opined that the fair rent fixed under the Municipal laws, which takes into consideration everything, would form the basis of arriving at annual value to be determined under Section 23(1)(a) and to be compared with actual rent and notional advantage in the form of notional interest on interest free security deposit could not be taken into consideration. It is clear from the following discussion therein: "6. With regard to question Nos. (5) and (6) which are only for the assessment years 1984-85 and 1985-86 the further issue involved is whether any addition to the annual rental value can be made with reference to any notional interest on the deposit made by the tenant. When the annual value is determined under subclause (a) of sub-section (1) of section 23 with reference to the fair rent then to such value

16 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation no further addition can be made. The fair rent, takes into consideration everything. The notional interest on the deposit is not any actual rent received or receivable. Under sub-clause (b) of section 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money which is payable by the tenant for use of the premises to the landlord. Any advantage and/or perquisite cannot be treated as rent. Wherever any such perquisite or benefit is sought to be treated as income, specific provisions in that behalf have been made in the Act by including such benefit, etc., in the definition of the income under section 2(24) of the Act. Specific provisions have also been made under different heads for adding such benefits or perquisites as income while computing income under those heads, e.g., salary, business. The computation of the income under the head 'House property' is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefore is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for municipal taxes and repairs are not allowed to the extent they are borne by the tenant. However, even such actual reimbursements for municipal taxes, insurance, repairs or maintenance of common facilities are not considered as part of the rent and added to the annual value. Accordingly, there can be no scope or justification whatsoever for making any addition for any notional interest for determining the annual value. Whatever benefit or advantage which is derived from the deposits - whether by way of saving of interest or of earning interest or making profits by investing such deposit ¬ the same would be reflected in computing the income of the assessee under other heads. In our view there is no scope for making any addition on account of so-called notional interest on the deposit made by the tenant, since there is no provision to this effect in s. 22 or 23 of the IT Act, 1961." In fact, this is the view taken even by the Supreme Court in the case of Mrs. Shiela Kaushish Vs. CIT [1981] 131 ITR 435 on account of similarity of the provisions under the municipal enactments and Section 23 of the Act. It is on this basis that in the present case, the Commissioner of Income Tax (Appeals) gave primacy to the rateable value of the property fixed by the Municipal Corporation of Delhi vide its assessment order dated December 31, 1996 and on this basis, opined that the actual rent was more than the said rateable value and therefore, as per Section 23 (1)(b), the actual rent would be the income from house property and there could not have been any further additions. Since the provisions of fixation of annual rent under the Delhi Municipal Corporation Act are in pari materia of Section 23 of the Act, we are inclined to accept the aforesaid view of the Calcutta High Court in Satya Co. Ltd. [1997] 140 CTR (Cal) 569 that in such circumstances, the annual value fixed by the Municipal Authorities can be a rational yardstick. However, it would be 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. 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, this may not provide a safe yardstick if in the Assessment Year in question when assessment is to be made under Income Tax Act. The property is let-out at a much higher rent. Thus, the Assessing Officer in a given case can ignore the municipal valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the “fair rent” in the market and there is sufficient material on record for taking a different valuation. We may profitably reproduce the following observations of the Supreme Court in the case of Corporation of Calcutta Vs. Smt. Padma Debi, AIR 1962 SC 151, 153.

17 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation "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 considerations may take it out of the bounds of reasonableness." Thus the rateable value, if correctly determined, under the municipal laws 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 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 Vs. Bombay Municipal Corporation, AIR 1968 SC 441, 442 : "It is well-recognized principle in rating that both gross value and net annual value are estimated by reference to the rent at which the property might 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.” 46] We have and after careful reading of the provision in question and the conclusion of the Full Bench of the Delhi High Court concluded that a different view cannot be taken. We respectfully concur with the view taken in this Full Bench decision of the Delhi High Court.

18 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 47] We are of the view that where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements. These are usually for fixed periods and renewable. In such cases as well, the conceded position is that the Annual Letting Value will have to be determined on the same basis as noted above. In the event and as urged before us, the security deposit collected and refundable interest free and the monthly compensation shows a total mismatch or does not reflect the prevailing rate or the attempt is to deflate or inflate the rent by such methods, then, as held by the Delhi High Court, the Assessing Officer is not prevented from carrying out the necessary investigation and enquiry. He must have cogent and satisfactory material in his possession and which will indicate that the parties have concealed the real position. He must not make a guess work or act on conjectures and surmises. There must be definite and positive material to indicate that the parties have suppressed the prevailing rate. Then, the enquiries that the Assessing Officer can make, would be for ascertaining the going rate. He can make a comparative study and make a analysis. In that regard, transactions of identical or similar nature can be ascertained by obtaining the requisite details. However, there also the Assessing Officer must safeguard against adopting the rate stated therein straightway. He must find out as to whether the property which has been let out or given on leave and license basis is of a similar nature, namely, commercial or residential. 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, for example, because of the area, the measurement, the location, the use to which the property has been put, the access thereto and the special advantages or benefits. It is possible that in a high rise building because of special advantages and benefits an office or a block on the upper floor may fetch higher returns or vice versa. Therefore, there is no magic formula and everything depends upon the facts and circumstances in each case. However, we emphasize that before the Assessing Officer determines the rate by the above exercise or similar permissible process he is bound to disclose the material in his possession to the parties. He must not proceed to rely upon the material in his possession and disbelieve the parties. The satisfaction of the Assessing Officer that the bargain reveals an inflated or deflated rate based on fraud, emergency, relationship and other considerations makes it unreasonable must precede the undertaking of the above exercise. After the above ascertainment is done by the Officer he must, then, comply with the principles of fairness and justice and make the disclosure to the Assessee so as to obtain his view. 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. 49] 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. 50] We have broadly agreed with the view taken by the Full Bench of the Delhi High Court. Hence, the issue of determination of the “fair rental value” in respect of properties not covered by or covered by the Rent Control Act is to be undertaken in terms of the law laid down in the Full Bench decision of the Delhi High Court.

19 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 51] We quite see the force in the arguments of Ms. Vissanjee that ordinarily the license fee agreed between the willing licensor or a willing licensee uninfluenced by any extraneous circumstances would afford reliable evidence of what the landlord might reasonably be expect to get from a hypothetical tenant. She has in making this submission, answered the issue and summed up the conclusion as well. Then, it is but natural and logical that in the event, the transaction is influenced by any extraneous circumstances or vitiated by fraud, or the like that the Assessing Officer can adopt a “fair rent” based on the opinion obtained from reliable sources. There as well, we do not see as to how we can uphold the submissions of Mr. Chhotaray that the notional rent on the security deposit can be taken into account and consideration for the determination. If the transaction itself does not reflect any of the aforestated aspects, then, merely because a security deposit which is refundable and interest free has been obtained, the Assessing Officer should not presume that this sum or the interest derived therefrom at Bank rate is the income of the assessee till the determination or conclusion of the transaction. The Assessing Officer ought to be aware of several aspects and matters involved in such transactions. It is not necessary that if the license is for three years that it will operative and continuing till the end. There are terms and conditions on which the leave and license agreement is executed by parties. These terms and conditions are willingly accepted. They enable the license to be determined even before the stated period expires. Equally, the licensee can opt out of the deal. A leave and license does not create any interest in the property. Therefore, it is not as if the security deposit being made, it will be necessarily refundable after the third year and not otherwise. Everything depends upon the facts and circumstances in each case and the nature of the deal or transaction. These are not matters which abide by any fixed formula and which can be universally applied. Today, it may be commercially unviable to enter into a lease and, therefore, this mode of inducting a 'third party' in the premises is adopted. This may not be the trend tomorrow, therefore, we do not wish to conclude the matter by evolving any rigid test. 52] We have also noted the submissions of Shri Ahuja. We are of the opinion that even in the cases and matters brought by him to our notice, it is evident that the Assessing Officer cannot brush aside the rent control legislation, in the event, it is applicable to the premises in question. Then, the Assessing Officer has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. The attempt by the Assessing Officer to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the Appellate authority. The Assessing Officer either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999 if the same is applicable or leave the parties to have it determined by the Court or Tribunal under that Act. Until, then, he may not be justified in applying any other formula or method and determine the “fair rent” by abiding with the same. If he desires to undertake the determination himself, he will have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the Assessing Officer. Once again having respectfully concurred with the judgment of the Full Bench of the Delhi High Court, we need not say anything more on this issue. 53] Thus, apart from the three aspects namely of a municipal valuation, of obtaining interest free security deposit and the properties being covered by the Maharashtra Rent Control Act but no standard rent thereunder is fixed, our attention has not been invited to any other case. Suffice it to hold that in those cases and to which our attention is not invited the principles laid down in the decisions of the Hon'ble Supreme Court and referred to by the Full Bench of the Delhi High Court would govern the enquiry.”

20 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 19. As could be seen from the above the Hon’ble High Court considered various decisions and it has been held that actual rent received in normal circumstances would be the reliable evidence unless the rent is inflated/deflated by reason of extraneous considerations of such ALV however, cannot exceed the standard rent as per the Rent Control Act applicable to the property. It has been held that if standard rent is not 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. It was also held that 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. The Hon’ble High court also observed that if the property is governed by Rent Control Act then the Standard rent under the said Act can be treated as fair rent in view of various judgments.

21 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 21. In the case of M.V. Sonavala v. CIT [177 ITR 246] the Jurisdictional High Court held as under:

“4. 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. It 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.” 22. As per the provisions of Maharashtra Rent Control Act, 1999 standard rent is determined as per section 7(14) which reads as under:

(14) "standard rent", in relation to any premises means: - (a) where the standard rent is fixed by fixed by the court or as the case may be, the Controller under the Bombay Rent Restrictions Act, 1939, or the Bombay Rents, Hotel Rates and Rates (Control) Act, 1944 or the Bombay Rents, Hotel and Lodging House Rates Control Act, 1947, or the Central provinces and Berar Letting of Houses and Rent Control Order, 1949 issued under the Central Provinces and Berar Regulations of Letting of Accommodation Act, 1946, or the Hyderabad Houses (Rent Eviction and Lease) Control Act, 1954, such rent plus an increase of 5 per cent, in the rent so fixed; or (b) where the standard rent or fair rent is not so fixed, then subject to the provisions of sections 6 and 8, (i) the rent at which the premises were let on the 01st day of October 1987: or (ii) where the premises were not let on the 01st day of October 1987, or the rent at which they were last let before that day, plus an increase of 5 per cent, in the rent of the premises let before the 1st day of October, 1987 or in any of the cases specified in section 8, the rent fixed by the court.” (c)

As could be seen from the above, the standard rent in relation to any premises shall be as fixed by the court or as the case may be plus an increase of 5% in the rent was fixed. In this case admittedly the standard rent is not fixed by court. If the standard rent or fair rent is not so fixed the standard rent will be the rent at which the premises were let on the 01st Oct, 1987 or where the premises was not let on the first day of October

22 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation the rent at which the property was last let before that day plus the increase of 5% in the rent of the premises let before the first day of October, 1987 and subject to the provisions of the section 6 and 8 of the Rent Control Act. The Assessing Officer has not done any exercise to find out the rent as on the first date of October, 1987 or subsequently to fix the standard rent. As laid by the Hon’ble Jurisdictional High Court and various other courts when the property is covered under Rent Control Act the ALV should not exceed the standard rent. Therefore, unless the standard rent and fair rent is determined no other method should be applied to arrive at the ALV of the property in view of the decision of the Hon'ble High Court in the case of CIT v. Tip Top Typography (supra).

23 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation rent receivable and that would be the safest guide for this purpose and the rent actually received would be of no relevance. Therefore, Assessing Officer has to determine the income from house property which might reasonably be expected to let from year to year with an annual municipal value provided such value should not exceed standard rent. It was also observed by the Hon’ble High court that the rent actually received would not be of any reliance at all. Therefore, Assessing Officer is bound to determine the standard rent and also fair rent, so as to arrive at ALV of the property when the property is governed under Rent Control Act.

25 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation from its boat given on hire and also incurred expenditure of ₹.24,67,691/- towards fuel, insurance, depreciation etc., The assessee was asked to justify the expenditure as the assessee received very low rentals from boat hiring business. It was submitted before the Assessing Officer that the boat was given on hire on exclusive occasions. It was also submitted that a register was maintained noting the boat hiring’s. On examination of the register the Assessing Officer was of the view that the boat hire charges accounted did not also match with the dates on which the boat supposed to have been hired as per register and therefore he came to the conclusion that the assessee has not maintained proper account of the boat hiring business. He also observed that the receipts are low and expenditure incurred is high and there is disparity between the receipts and expenditure. Therefore, he was of the view that the boat is almost like a personal asset to the family of Mr. Noel Tata and Mr. Pallonji Mistry. Therefore, he treated the Luxury boat as personal asset and since the assessee company accounted for boat hire charges of ₹.8,42,105/- the expenditure to that extent was allowed and the remaining expenses of ₹.16,25,594/- out of total expenses of ₹.24,67,691/- debited was disallowed as excessive and unreasonable.

26 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 27. On appeal the Ld. CIT(A) deleted the disallowance of ₹.13,38,632/- since the boat was used for business purposes and out of the balance amount he restricted the disallowance to 20% for non-business purposes as reasonable.

28 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation without verifying the fact of ownership of the boat was apparently on the basis of his own presumptions. Referring to the details of the boat hire charges Ld. Counsel for the assessee submitted that, the boat has been taken on hire by various corporates Pan India Parayatan Ltd., Mukund Ltd., Hindustan Construction Ltd., Etc., and various other shipping concerns like Transworld Shipping, Albatross Marine services, etc., It is submitted that, if it was a personal asset of the family of Mr. Noel Tata and Mr. Pallonji Mistry then it would never have been offered for hire to various other persons for use, neither outsiders would have taken it on hire. It is also submitted that even when Mr. Noel Tata has used the boat, he has been charged the same market rate as charged to other parties. If it was his personal asset no amount would have been charged to him. Therefore, it is submitted that the billable occupancy has been 78% establishing that the boat is for the use of the business of boat hiring and not for personal use. Therefore, it is submitted that the boat is an asset of M/s. S.P Corporation (the assessee) and cannot be termed as personal asset of the families of Mr. Noel Tata and Mr. Pallonji Mistry as contended by the Assessing Officer and hence the entire expenditure is allowable. It is also submitted that higher expenditure and lower rental is not a ground for disallowance. Reliance is placed on the decisions of CIT v. Rajendra

29 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Prasad Moody. [115 ITR 519 (SC)] and Eastern Investments Ltd. v. CIT [20 ITR 1 (SC)].

30 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation during the entire year and therefore expenditure is not an allowable expenditure since boat cannot be given on hire throughout the year. The contention of the Assessing Officer that the expenditure is not allowable as the assessee received low rentals is not a ground for disallowance. Once it is established that the boat is used in hiring business, the expenditure incurred by the assessee has to be allowed irrespective of the receipts on hiring charges. There may be various reasons for earning less rentals especially in boat hiring business as the boat cannot be hired during the monsoon season. Taking all the facts into consideration, we are of the view that the Assessing Officer is not justified in disallowing the boat hire charges accounted for by the assessee. The Ld. CIT(A) though allowed depreciation on such boat, he restricted the disallowance to 20%, in our view even restricting the expenditure to 20% is not justified. In the circumstances explained above, we delete the disallowance restricted by the Ld. CIT(A) on boat hiring charges. Ground No.2 is allowed.

31 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 33. Briefly stated the facts are that, the Assessing Officer while completing the Assessment noticed that the assessee debited ₹.2,07,123/- towards business promotion expenses. On examining the vouchers and bills, Assessing Officer noticed that there were personal Credit Card Payment of Mr. Noel Tata and therefore the entire expenditure debited of ₹.2,07,123/- was treated as personal expenditure of Mr. Noel Tata and is disallowed. On appeal the Ld. CIT(A) restricted the said disallowance to 20% observing that “the nature of expenses are such that personal element cannot be ruled out”.

32 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation compared to the gross receipts of the assessee firm for the business which is about ₹.3.5 Crores and the type of business [entertainment business] the assessee is in viz., Theatre, Restaurant, running of excursion boats, etc., It is submitted that expenses towards entertainment of clients in hotels and provisions of gifts are a very integral part of the business activity and a normal business practice without which it will be extremely difficult to carry on the business. It is submitted that the expenditure has been incurred on the existing customers and clients to maintain relations and on the prospective clients/customers to get additional business. Therefore, it is submitted that these expenditures have to be incurred by some person belonging to the assessee firm. In this case it has been incurred by Mr. Noel Tata, who is the authorized signatory for the cheques and takes part in the operations of the assessee’s business.

33 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation personal savings account and debited to his drawings and reflected in his Income Tax Returns. During the relevant year Mr. Noel Tata paid an amount of ₹.12.76 lakhs from his two credit cards and debited to his drawings. A certificate from Mr. Noel Tata confirming the said amount of ₹.12.76 lakhs is attached in the paper book at Page No.197. It is submitted that the amount of ₹.2.07 lakhs which is under consideration is insignificant compared to ₹.12.76 lakhs. Thus, wherever the credit card has been used for the purpose of personal expenditure of Mr. Noel Tata it has been debited and paid from his personal account. Therefore, in view of the above submissions it was contended that expenditure incurred by the assessee towards Restaurant bills, gift items and settled by Mr. Noel Tata is a fully allowable expenditure and the disallowance is not justified. Ld. DR vehemently supported the orders of the Assessing Officer.

34 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation may be some personal element in the expenditure incurred. Before us, Ld. Counsel for the assessee submitted that wherever the expenditure incurred by Mr. Noel Tata for the assessee firm it has been debited only to assessee firm and wherever Mr. Noel Tata incurred on his personal credit cards it has been debited to his account and reflected in his Income Tax Returns. It is also submitted that the expenditure towards business promotions when compared to the income rendered by the assessee from business is insignificant and it is a customary practice that the assessee which is in the entertainment business has to incur certain expenditure for the customers/clients to keep good relations. We find considerable merit in the submissions of the assessee. In the circumstances, accepting the submissions of the assessee we delete the disallowance made towards business promotion. Ground No.4 is allowed.

35 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 39. Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that assessee earned exempt income of ₹.47,37,841/- and also incurred various expenses towards employee’s remuneration and other expenses etc., The assessing Officer estimated 10% of the exempt income i.e. ₹.47,37,841/- as the amount ascribable to the indirect expenses debited by the assessee as expenses attributable for earning exempt income. On appeal Ld. CIT(A) following the decision of the Mumbai Tribunal in the case of Daga Capital Management in ITA.No. 8057/Mum/03-04, dated 20/10/08 directed the Assessing Officer to recomputed the allocable expenses under Rule 8D of the I.T. Rules.

36 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation and are applicable only from the Assessment year 2008-09 onwards. Thus, the direction of the Ld. CIT(A) to apply Rule 8D is reversed. At the same time disallowance of expenditure attributable for earning dividend income estimated at 10% is in our view excessive. In the case of CIT v. Godrej Agronet Ltd., in I.T. Appeal No. 934 of 2011 dated 08.01.2013 the Jurisdictional High Court affirmed the order of the Tribunal in estimating the expenditure attributable for earning dividend income at 2% of dividend income when the provisions of Rule 8D are not applicable i.e., prior to Assessment Year 2008-09. Respectfully, following the said decision, we direct the Assessing Officer to restrict the disallowance to 2% of dividend income earned by the assessee as attributable for earning such exempt income.

ITA.NO. 1464/MUM/2009 (A.Y: 2005-06) – DEPARTMENT APPEAL 42. Ground No.1 of the appeal of the Revenue is in respect of disallowance of depreciation and restricting the disallowance of expenses on Boat hiring charges. As we have already deleted the disallowance of expenses on boat hire charges while adjudicating the appeal of the assessee, for the same reasons this ground of appeal of the Revenue is dismissed.

37 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 43. Ground No.2 of the appeal of the Revenue is in respect of deleting the disallowance by restricting the business promotion expenses @20%. As we have already deleted the entire disallowance made towards business promotional expenses while adjudicating the assessee’s appeal for the Assessment Year 2005-06 for the reasons mentioned therein, we dismiss this ground of appeal of the Revenue.

ITA.NO. 2594/MUM/2011 (A.Y: 2003-04) 44. Ground No.1 is relating to confirming the Action of the Assessing Officer in invoking the provisions of Section 147 of the Act and reopening the assessment. No arguments have been advance on this ground and therefore the action of the lower authorities is confirmed.

ITA.No. 2595/MUM/2011 (A.Y: 2004-05) 49. Ground No.1: This ground is relating to confirming the action of the Assessing Officer in invoking the provisions of Section 147 of the Act and reopening the assessment. No arguments have been advance on this ground and therefore the action of the lower authorities is confirmed.

53. Ground Nos. 5 & 6: These grounds are in respect of confirming the disallowance of 20% of business promotion expenses claimed by the assessee and was treated as personal in nature by the Assessing Officer.

40 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 54. This issue is similar to the issue raised in the Ground No.4 & 5 for the A.Y. 2005-06 by the assessee and the decision given therein applies mutatis Mutandis to the issue for the A.Y. 2004-05 also. Assessing Officer is directed to follow the order passed for the A.Y.2005-06 on this issue. Hence, following the same we allow Ground No.5. Since we allowed the Ground. No.5 the contentions raised in Ground No. 6 will not survive and hence dismissed.

ITA.NO. 2747/MUM/2011 (A.Y: 2004-05) – DEPARTMENTAL APPEAL 55. The only issue in the appeal of the Revenue is in respect of disallowance of depreciation and restricting the disallowance of expenses on Boat hiring charges to 20%. As we have already deleted the entire expenses which was disallowed by the Assessing Officer on boat hiring charges in the A.Y. 2005-06, for the same reasons this ground of appeal is dismissed.

ITA.NO. 2596/MUM/2011 (A.Y: 2006-07) 56. Ground No.1: The first issue in the appeal of the assessee is against confirming the action of the Assessing Officer in rejecting the assessee’s claim for considering Municipal Rateable value as annual letting value of the House property instead considering 10% of the original cost of acquisition as the annual letting value.

41 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 57. This issue has been dealt with by us for the A.Y. 2005-06 and the decision rendered therein applies Mutatis Mutandis to the A.Y. 2006-07. Therefore, we direct the Assessing Officer to follow our observations and decision given for the Assessment Year 2005-06 and decide the issue accordingly.

59. Ground Nos. 4 & 5: These grounds are in respect of confirming the disallowance of 20% of business promotion expenses claimed by the assessee and was treated as personal in nature by the Assessing Officer.

60. This issue is similar to the issue raised in the Ground No.4 & 5 for the A.Y. 2005-06 by the assessee and the decision given therein applies mutatis Mutandis to the issue for the A.Y. 2004-05 also. Assessing Officer is directed to follow the order passed for the A.Y.2006-07 on this issue.

42 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Hence, following the same we allow Ground No.4. Since we allowed the Ground. No.4 the contentions raised in Ground No. 5 will not survive and hence dismissed.

ITA.NO. 6857/MUM/2011 (A.Y: 2007-08) 63. Ground No.1: The first issue in the appeal of the assessee is against confirming the action of the Assessing Officer in rejecting the assessee’s claim for considering Municipal Rateable value as annual

43 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation letting value of the House property instead considering 10% of the original cost of acquisition as the annual letting value.

44 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 67. Ground No. 4: The issue in the appeal of the assessee is relating to the disallowance of expenditure attributable to earning exempt income u/s. 14A of the Act.

ITA.NO. 2626/MUM/2012 (A.Y. 2008-09) 69. Ground No. 1: The first issue in the appeal of the assessee is against confirming the action of the Assessing Officer in rejecting the assessee’s claim for considering Municipal Rateable value as annual letting value of the House property instead considering 10% of the original cost of acquisition as the annual letting value.

45 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation Therefore, we direct the Assessing Officer to follow our observations and decision given for the Assessment Year 2005-06 and decide the issue accordingly.

46 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation on average investment under rule 8D2(iii) at ₹.3,15,091/-. On appeal Ld. CIT(A) sustained the disallowance made by the Assessing Officer.

47 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation 76. Ld. DR supported the orders of the Authorities below.

48 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation ITA.NO. 6298/MUM/2012 (A.Y: 2009-10) 78. Ground No.1: The first issue in the appeal of the assessee is against confirming the action of the Assessing Officer in rejecting the assessee’s claim for considering Municipal Rateable value as annual letting value of the House property instead considering 10% of the original cost of acquisition as the annual letting value.

49 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation No.2 the contentions raised in Ground Nos. 3 will not survive and hence dismissed.

50 ITA.No. 1865 & 1464 /MUM/2009 ITA.No. 2594 TO 2596, 6857 & 2747/MUM/2011 ITA.No. 6298 & 2626/MUM/2012 M/s. S.P. Corporation much more than the investments made and therefore no part of the interest is disallowable in view of the decision of the Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [313 ITR 340] and CIT v. HDFC Bank [366 ITR 505]. Ld. Counsel for the assessee further submitted that in so far as the disallowance under Rule 8D 2(iii) it was submitted that no expenditure is allocable to attain of exempt dividend income; and in any event the disallowance computed at ₹. 2,88,542/- is arbitrary and grossly excessive.

Order pronounced in the open court on the 16th May, 2018.