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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI C.N PRASAD & SHRI RAMIT KOCHAR
Revenue by : Shri Rajat Mittal (DR) Assessee by: Shri Beharilal सुनवाई की तारीख /Date of Hearing : 01.05.2018 घोषणा की तारीख /Date of Pronouncement : 09.05.2018 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the Revenue, being 18.07.2016 passed by learned Commissioner of Income Tax (Appeals)-2, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2012-13, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 25-02-2015 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2012-13.
The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-
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 the deemed annual lettable value of flats?
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.35,07,000/- u/s.68 of the Act being amount of liability shown payable to Mr. Jimmy Parekh.
3. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) is justified in deleting the additional disallowance to the tune of Rs.2,35,62,191 /- u/s. 14A r.w.r.8D of the Act." 3. The brief facts of the case are that the assessee is Non Banking Finance Company (NBFC) registered with RBI under the category of „Investment Company‟. The assessee mainly received income from dividend , property income and profits from partnership firm of which the assessee is partner.
The assessee received dividend income of Rs. 32,57,96,320/- which was claimed as an exempt income .The assessee voluntarily disallowed a sum of Rs. 5,44,975/- as an expenditure incurred in relation to earning of an exempt income under the provisions of Section 14A of the 1961 Act. The working of the said disallowance is also certified by tax-uditors vide Annexure-2(page-63 & 75/pb) to their tax-audit report dated 25-09-2012 in Form No. 3CA read with annexed Form No. 3CD , wherein detailed working for making disallowance of Rs. 5,44,975/- u/s 14A is certified by the auditors. However, Keeping in view provisions of Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 and by relying on the decision of Hon‟ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. 328 ITR 81(Bom), the AO made disallowance of Rs. 2,41,07,023/- vide assessment order dated 25-02-2015 passed by the AO u/s 143(3), as under:-
(Ampunt Sr. Particulars No. in Rs.) 1) The amount of expenditure directly 143 relating to income which does not part of total income (Demat Charges) 0 2) Interest attributable to exempt income
A*B/C A = amount of expenditure by way of interest 0 other than the amount of interest included in 0 clause (i) B = the average of value of investment (Non current investment in Equity Instruments and 482,13,75,977 Current investments in Mutual Fund) C = the average of total assets as appearing in 501,73,82,274 the balance sheet of the assessee, on the first day and the last day of the previous year.
3) 0.5% of average of the value of investment, income from which does not 2,41,06,880 or shall not form part of the total income, as appearing in the balance sheet or the assessee, on the first day and the last day of the previous year Total disallowance u/s. 14A 2,41,07,023
Aggrieved by the assessment order dated 25-02-2015 passed by the AO u/s 143(3), The assessee filed first appeal with learned CIT(A) who accepted the contentions of the assessee and held that disallowance of Rs. 5,44,832/- as was made by the assessee suo motu is sufficient . It was noted by learned CIT(A) that the total expenditure debited to Profit and Loss Account is Rs. 15,03,151/- and hence the disallowance cannot exceed the amount of expenditure debited to Profit and Loss Account . The learned CIT(A) deleted the additions made by the AO by relying on the decision of ITAT,Mumbai 3 dated 21.11.2014 in the case of DCIT v. Graviss Hospitality Ltd. in vide appellate orders passed by learned CIT(A) dated 18- 07-2016.
Aggrieved by the relief granted by learned CIT(A), the Revenue has come in an appeal before the tribunal. 6. The Ld. DR supported the assessment order of the AO and submitted that only 0.5% of the average investment has been disallowed u/s. 14A r.w.r. 8D(2)(iii). The learned DR submitted that Rule 8D(2)(iii) is applicable and the AO has rightly invoked Rule 8D(2)(iii) of the 1962 Rules r.w.s. 14A to the tune of Rs. 2,41,06,880/- which is the main dispute between rival parties.It was submitted that so far as disallowance of Rs. 143/- made by the AO u/r 8D(2)(i) r.w.s 14A of direct expenses incurred in relation to earning of an exempt income, there is no dispute . Similarly, it was submitted that there was no disallowance made of interest expenses incurred or attributable in relation to earning of exempt income u/r 8D(2)(ii) as there was no Interest expenses incurred by the assessee and hence again there is no dispute between the rival parties. Thus, it was submitted that the whole dispute between rival parties revolve around the disallowance u/r 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act.
The Ld. Counsel for the assessee at the outset also submitted that the whole controversy is w.r.t. disallowance of Rs. 2,41,06,880/- made by the AO by invoking Rule 8D(2)(iii) of the 1962 Rules r.w.s. 14A wherein 0.5% of average investments held by the assessee stood disallowed . It was submitted that the assessee did received Rs. 32.58 crores as dividend income which was claimed as an exempt income. The assessee has investments of Rs. 498.65 crores ( both current and non-current investments ) as at 31-03- 2012 and Rs. 503.34 crores ( both current and non-current investments ) as at 31-03-2011 (page 39,46 and 47/pb) while owned funds(share capital + reserves and surplus)(page 39/pb) are to the tune of Rs. 497.58 crores as at 31-03-2012 and Rs. 500.32 crores as at 31-03-2011 , but the assessee did not incur any interest expenses during the year under the consideration as is reflected in Profit & Loss Account (page 40/pb) and hence the AO rightly did not invoke Rule 8D(2)(ii) r.w.s. 14A for making disallowance of interest expenses as there were no interest expenses incurred by the assessee . It was submitted that only dispute is as to invocation of Rule 8D(2)(iii) of the 1962 Rules r.w.s. 14A of the 1961 Act wherein disallowance of 0.5% of average investment held by the assessee was made which led to disallowance of Rs.2,41,06,880/- which is under dispute between rival parties as against voluntary suo motu disallowance of Rs. 5,44,832/- offered by the assessee to that effect. It was submitted that Rs. 143/- was in addition to Rs. 5,44,832/- was offered towards direct expenses incurred in relation to earning of an exempt income , thus total disallowance of Rs. 5,44,975/- was voluntarily offered suo motu keeping in view provisions of Section 14A of the 1961 Act. It was submitted that the total expenses incurred by the assessee and debited to Profit and Loss Account were only to the tune of Rs. 15,03,151/- for the entire year while disallowance of expenditure has been made by the AO to the tune Rs. 2,41,07,023/- which is incomprehensible, unheard of and unprecedented as the disallowance of the expenditure incurred in relation to the exempt income which can be disallowed by invoking provisions of Section 14A can never exceed actual expenditure incurred by the assessee as it does not called for disallowance of notional expenditure which has not at all been incurred by the assessee . It was submitted that there cannot be disallowance of any notional expenses within mandate of Section 14A which was never incurred by the assessee at all. Thus, it was submitted that Rule 8D cannot be applied in an manner to disallow notional expenditure which was never incurred or were never claimed in the Profit and Loss Account as an expenditure as no prejudice is caused to the Revenue as the said notional expenses were never claimed as deduction by the assessee. Our attention was drawn to page no. 75/pb to submit that assessee has suo-motu disallowed certain expenses to the tune of Rs. 4,13,486/- voluntarily out of total expenses of Rs. 15,03,151/- incurred by the assessee and w.r.t. balance remaining expenditure incurred to the tune of Rs. 10,89,665/- , 50% of the said expenses aggregating to Rs. 5,44,975/- were disallowed by the assessee of its own voluntarily suo motu u/s 14A of the Act which is ascertained having regards to the accounts of the assessee. The auditors were also satisfied after seeing the entire spectrum of the expenses vis-a-vis business activities of the assessee that the voluntarily disallowance of Rs. 5,44,975/- is correct disallowance of expenditure u/s 14A which will meet end of justice and the auditors certified the said disallowance in tax-audit report signed by them in Form no. 3CA r.w. Form 3CD dated 25-09-2012 (refer page 63 and 75/pb) . It was also submitted that the AO had not come to any satisfaction recorded in its assessment order as to why the disallowance offered by the assessee cannot be relied upon and needs to be discarded rather the AO merely proceeded to apply Rule 8D of the 1962 Rules read with Section 14A of the 1961 Act in an mechanical manner.
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. 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.
The ground no. 1 is with respect to computing Annual Lettable Value(ALV) of the two residential flats owned by the assessee bearing flat no. 3 (2170 square feet) and flat no. 8 (3062 square feet) both situated in Sterling Bay Co-operative Housing Society Limited , 103, Walkeshwar Road, Mumbai-400 006 , under the head „Income from House Property‟. The flat no. 8 was let out by assessee to its Director , Mr. Shapoorji Pallonji Mistry who is stated to be residing in the said flat since 01-03-1990 and paying monthly rental of Rs. 10,000/- to the assessee company, while flat no. 3 owned by the assessee was stated to be lying vacant. The AO made enquiries from various real estate websites such as magicbricks.com, 99acres.com etc to come to conclusion that the prevailing market rent of these flats is Rs. 200 per square feet per month which should be taken as ALV of these residential flats for computing income under the head „Income from House Property‟. The assessee relied upon the orders of ITAT, Mumbai in for AY 2004-05 in assessee‟s own case wherein annual value as declared by the assessee in its return of income was accepted by ITAT. The AO observed that ITAT,Mumbai in AY 2004-05 followed its own order for AY 2003-04 in ITA no. 1228/Mum/2009 vide orders dated 18-05- 2009 , which were concerning flat no. 8 which was let out by the assessee to its Director Mr. Shapoorji Pallonji Mistry, while ALV of flat no. 3 was never an issue before ITAT. The AO thus observed the assessee cannot be granted benefit of earlier orders of the ITAT as ALV of flat no. 3 was never an issue before the tribunal. The AO observed that the assessee has taken municipal valuation for computing ALV and since actual rent was higher than municipal rateable value, the actual rent was considered for computing income under the head „Income from House Property‟ so far as flat no. 8 which was let out by the assessee is concerned and for the other flat no. 3 which was lying vacant municipal rateable value was adopted for computing ALV under the 1961 Act, But the AO adopted prevailing market rate of rent of Rs. 200 per square feet per month to compute ALV for bringing to tax income from house property with respect to both the flats. The AO observed that municipal valuation is only for fixation of municipal taxes and is not relevant for determining ALV under the 1961 Act. The AO referred to provisions of Section 23(1)(a) of the 1961 Act wherein expected lettable value is to be adopted for computing income under the head „ income from house property‟. The AO observed that just because municipal authorities did not revise municipal valuation, the same cannot be relied upon and benchmarked for computing income under the head „income from house property‟ under the 1961 Act. The AO relied upon recent decision dated 08- 08-2014 of Hon‟ble Bombay High Court in the case of CIT v. Tip Top Typography (2014) 48 taxmann.com 191 (Bom) and computed ALV for both the flats by relying upon the websites of 99acres.com, magicbricks.com etc wherein the monthly rental was stated to be of Rs. 200 per square feet per month for similar flats in this area, vide assessment order dated 25-02-2015 passed by the AO u/s 143(3) of the 1961 Act.
The assessee went in appeal before learned CIT(A) who granted relief to the assessee and deleted the additions as were made by the AO by following the decision of the ITAT, Mumbai for AY 2004-05 in 09-07-2009 in assessee‟s own case and Hon‟ble Bombay High Court decision, vide appellate orders dated 18-07-2016 passed by learned CIT(A). However, learned CIT(A) did not refer to recent decision of Hon‟ble Bombay High Court in the case of Tip Top Typography (supra) relied upon by the AO , while adjudicating the appeal of the assessee.
11 Being aggrieved by decision of learned CIT(A), the Revenue has now filed an appeal before the tribunal. The learned DR submitted that the assessee erred in adopting municipal rateable value for computing ALV under the provisions of the 1961 Act. It was submitted that municipal valuation is for paying municipal taxes which is altogether different concept than computation of an ALV for purposes of charging tax under the head „Income from House Property‟ within provisions of 1961 Act. It was submitted that if municipal authorities do not revise rateable value for municipal taxes in tune with market rent , then same will loose its relevance altogether for the purposes of computing ALV under the provisions of 1961 Act , as for computing ALV , it is the sum for which the property might reasonably be expected to be let from year to year is fair value or if the actual rent received is more than this fair value as computed u/s 23(1)(a), then the said rent so received or receivable has to be brought to tax u/s 23(1)(b) . The learned DR strongly placed reliance on the decision of Hon‟ble Bombay High Court in the case of Tip Top Typography (supra) which was pronounced on 08-08- 2014 and it was submitted that all decisions so relied upon by the assessee are prior to this decision of Hon‟ble Bombay High Court and hence ratio of decision in the case of Tip Top Typography(supra) was rightly followed by the AO while computing ALV . The learned DR also strongly contended that there is no finding of learned CIT(A) as to computation of ALV and the appellate order of learned CITA(A) needs to be set aside on this ground . Thus, it was strongly pleaded that the assessment order of the AO be confirmed while the appellate order of learned CIT(A) be set aside.
The Ld Counsel for the assessee on the other hand submitted that municipal rateable valuation is to be taken into account for computing ALV under provisions of the 1961 Act . It was submitted that since actual rent received of Rs. 10,000/- per month w.r.t. flat no. 8 was higher, the same was adopted for computing ALV of flat no. 8 under the provisions of Section 23(1)(b) of the 1961 Act while for flat no. 3 which was lying vacant, the municipal valuation was rightly adopted by the assessee for computing ALV which is the sum for which the property was reasonably expected to be let from year to year within provisions of Section 23(1)(a) . He drew our attention to page 10-11 of paper book wherein detailed computation for computing income chargeable to tax under the head „Income from House Property‟ is placed w.r.t. both the flats. The learned counsel for the assessee submitted that the AO erred in adopting market value of rent being Rs. 200 per square feet per month of the similar property in the area based on website information as downloaded from magicbricks.com , 99acres.com etc. for computing ALV under the 1961 Act. The learned counsel for the assessee relied upon the decision of tribunal for earlier years in assessee‟s own case which are placed in paper book wherein municipal valuation was adopted to compute ALV but since the actual rent received was higher than the said municipal valuation w.r.t. flat no. 8, actual rent received or receivable of flat no. 8 was brought to tax under the head „income from house property‟. Our attention was drawn to tribunal decision dated 09.07.2009 for AY 2004-05 in in assessee‟s own which followed the decision of the tribunal for AY 2003-04 in dated 18-05-2009 wherein actual rent received or receivable was brought to tax and the contentions of the assessee were accepted. It was also submitted that tribunal has for AY 1995-96 vide orders dated 17-09-2003 in the case of JCIT v. Shapoorji & Co.(Rajkot) Private Limited in ITA no. 40/Mum/1999 has come to the conclusion that ALV has to be computed based on standard rent determined in accordance with the Rent Control Act, annual municipal value which if available could be ALV and if the actual rent received or receivable is more than standard rent or annual municipal value, then the actual rent is to be taken as ALV of the property for the purposes of computing income under the head „Income from House Property‟ (page 111- 113/pb). It was submitted that the said decision of the tribunal for AY 1995- 96 was approved by Hon‟ble Bombay High Court in ITA no. 752 of 2004 vide orders dated 26-09-2007 in the case of CIT v. Shapoorji & Co. It was submitted that in these cases , the reference was to flat no. 3 which was taken over by the assessee in AY 2009-10 from Shapoorji & Co.(Rajkot) Limited. The learned counsel for the assessee also relied upon the decision(s) of Hon‟ble Calcutta High Court in the case of CIT v. Prabhabati Bansali reported in (1983)141 ITR 419(Cal.), Hon‟ble Bombay High Court decision in the case of M.V Sonavala v. CIT (1989)177 ITR 246(Bom.) , Hon‟ble Delhi High Court decision in the case of CIT v. R. Dalmia(deceased-through LR) (1987)163 ITR 525(Delhi) , decision of Hon‟ble Supreme Court in the case of Dewan Daulat Rai Kapoor v. NDMC (1980) 122 ITR 700(SC) and decision of ITAT, Mumbai in the case of DCIT v. Shripal S. Morakhia (2006) 7 SOT 0609(Mum-trib.) .
We have carefully considered rival contentions and perused the material on record including orders of the authorities below and case laws cited by rival parties before the Bench. We have observed that the assessee is undisputedly owner of two residential flats bearing flat no. 3 (2170 square feet) and flat no. 8 (3062 square feet) both situated in Sterling Bay Co- operative Housing Society Limited , 103, Walkeshwar Road, Mumbai- 400006. The residential flat no. 8 admeasuring 3062 square feet situated in a residential housing society „Sterling Bay Co-operative Housing Society Limited ‟ at Walkeshwar Road, Mumbai is let out by assessee to its Director namely Mr. Shapoorji Pallonji Mistry at a monthly rent of Rs. 10,000/- , while flat no. 3 situated in the same residential society is stated to be lying vacant. The assessee computed 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 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 computed. Hon‟ble 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.” 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. ” 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 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 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 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.
The ground no. 2 is with respect to the amount of liability shown payable to Mr. Jimmy J. Parekh of Rs. 35.07 lacs which was added to the income of the assessee on the grounds that he is no longer employee of the assessee and not even his salary was claimed to have been payable to him. The AO observed that the said gratuity which was shown to be payable is transferred from another group company . The AO observed that the said gratuity payable is not an expense of the current year and secondly the same was charged as an expense in the transferor company and hence the same cannot be claimed as an expenses once again. This led AO to a belief that unless the said amount of gratuity payable which was transferred from another group company on transfer of employee to assessee company is brought to tax as unexplained cash credit u/s 68, the assessee may claim this expense payable as an expenses in the following year, which finally led to an addition to the income of the assessee for the impugned AY 2012-13 made by the AO to the tune of Rs. 35,07,000/- as an unexplained cash credit u/s 68 of the 1961 Act , vide assessment order dated 25-02-2015 passed by the AO u/s 143(3) of the 1961 Act.
Aggrieved by the assessment order dated 25-02-2015 passed by the AO u/s 143(3) of the 1961 Act, the assessee filed first appeal with learned CIT(A). The assessee submitted before learned CIT(A) that Mr Jimmy J. Parekh was an employee of its group company namely M/s Sterling Investment Corporation Private Limited from 01-01-1983 to 30-11-2008 and he was employee of the assessee from 01-01-2009 to 31-03-2011. It was submitted that gratuity and leave salary payable to him by Sterling Investment Corporation Private Limited amounting to Rs. 67,94,590/- was transferred during financial year 2008-09 to the assessee along with cheque of the same amount. It was submitted that employees salary and incentive had fallen in the current year to Rs. 5.15 lacs from Rs. 371.04 lacs in preceding year on account of reduction of employees from two employees namely Mr Vikas Pansare , Company Secretary –Cum-Manager and Mr Jimmy J. Parakh during financial year 2010-11 to one employee namely Mr Vikas Pansare , Company Secretary –Cum-Manager during financial year 2011-12. The details of personnel expenses for both the years were enclosed. It was submitted that employee benefit payable has increased from Rs. 103.65 lacs to Rs. 138.72 lacs on account of transfer from Sterling Investment Corporation Private Limited of gratuity payable and leave salary payable to Mr Jimmy J. Parakh. It was explained that gratuity and leave salary payable to Mr Jimmy J Parakh to the tune of Rs. 1,38,72,840/- was transferred from sundry creditors to employee benefits payable in the Balance Sheet in F.Y.2011-12. The assessee submitted before learned CIT(A) that these facts were duly explained to the AO but the AO erred in making additions. The learned CIT(A) accepted the contentions of the assessee and granted relief to the assessee vide appellate order dated 18-07-2016 passed by learned CIT(A).
16. Aggrieved by the appellate order dated 18-07-2016 passed by learned CIT(A), the Revenue has filed an appeal with the tribunal. The learned DR explained that an addition to the tune of Rs. 35.07 lacs was made by invoking provisions of Section 68 as an unexplained cash credit as the employee benefit payable increased from Rs.103.65 lacs to Rs. 138.72 lacs, while employee benefit expenses debited to Profit and Loss Account is merely Rs. 5.58 lacs and the assessee may claim these increased amount payable in subsequent years as an expenses. The learned counsel for the assessee reiterated the stand of the assessee which was taken before the authorities below which has been discussed by us in extenso in this order. After hearing both the parties , we donot found any justification for upholding the addition as was made by the AO and we find that learned CIT(A) has rightly deleted additions of Rs. 35.07 lacs as was made by the AO . The learned DR could not point out any defect/ error in the contentions/pleadings of the assessee taken before the authorities below and also before us no such defect/errors in the pleadings/submissions of the assessee could be pointed but rather reliance is placed by learned DR on assessment order passed by the AO. One Mr Jimmy J Parakh was an employee of group company of the assessee namely Sterling Investments Corporation Limited from 01-01-1983 to 30-11- 2008. The said employee stood transferred to the assessee company w.e.f. 01-01-2009. On being transferred to the assessee company, his gratuity and leave encashment standing to his credit in the books of Sterling Investment Corporation as on 30-11-2008 aggregating to Rs. 67,94,590/- was also transferred to assessee company during FY 2008-09 along with cheque of the like amount issued by Sterling Investments Corporation Limited in favour of the assessee company. The said employee continue to work with the assessee company from 01-01-2009 to 31-03-2011 and retired on 31-03- 2011. His terminal benefits being gratuity and leave encashment aggregated to Rs. 1,38,72,840/- which was lying under „Short Term Provisions‟ in Balance Sheet Schedule -7 being „Provision for Employee Benefit‟ –Gratuity Rs. 1,18,45,385 and Leave Encashment-Rs.20,27,455/- as on 31-03-2011 was taken off from Schedule-7 to Schedule-6 being „Other Current Liabilities‟ under the head „Employee benefits payable‟ –Rs.1,38,72,840/- in the Balance Sheet as at 31-30-2012. Thus, this is inter-adjustment of the classification of heads under which liability is reflected as is required under the Companies Act, 1956 wherein liability was taken off from provisions and transferred to current liabilities. The said Jimmy J Parakh retired on 31-03- 2011 and the provisions so created for his terminal benefits got converted into „current liability‟ payable to said Jimmy J Parekh but since the same was not paid till 31-03-2012 although due for payment on his retirement is correctly reflected by the assessee under the head „Current Liabilities‟ in the Balance Sheet as at 31-03-2012 after taking it off from the head „Provisions‟ under which it was reflected in the Balance Sheet as at 31-03-2011 . The learned DR could not explain before us as to how the learned CIT(A) appellate order is perverse and which of the contention of the assessee is untrue . Mere suspicion on part of the AO that the assessee may claim this expenses of Rs. 35.07 lacs in some future distant point of time is not sufficient to fasten tax-liability merely on basis of suspicion of the AO that some event may happen in future at some point of time which is unknown wherein the assessee may try to claim these expenses which it has not claimed now as deduction , and the same will cause prejudice to the Revenue at that unknown distant point of time. This is too far-fetched and have no legs to stand to fasten tax-liability on the assessee as these are baseless suspicions . In any case 1961 Act is a living and robust statute which is capable of taking care of such contingent events if at all and when they happens. We confirm the appellate order of learned CIT(A) and sustain the deletion of the addition as was made by learned CIT(A). The Revenue fails on this ground. The ground no. 2 is adjudicated against Revenue. We order accordingly.
In the result , appeal of the Revenue is partly allowed as indicated above. Order pronounced in the open court on 09.05.2018 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 09.05.2018 को की गई । Sd/- Sd/- (C.N. PRASAD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, dated: 09.05.2018 21