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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Saktijit Dey & Shri G Manjunatha
Date of hearing 25-01-2018 Date of pronouncement 21-02-2018 O R D E R Per G Manjunatha, AM : These appeals filed by the assessee are directed against separate orders of CIT(A)-41, Mumbai dated 19-11-2015 for the assessment years 2010-11 and 2005-06, respectively. Since facts are identical, these appeals were heard together and are disposed of by this common order, for the sake of convenience.
The assessee has raised the following grounds of appeal:-
1. The Commissioner of Income tax (Appeals) 41, Mumbai, ([CIT(A)], erred in confirming the penalty of Rs.48,3697- levied by the Deputy Commissioner of Income- 2 ITA 456 & 457/Mum/2016 tax, Range 24(2), Mumbai (AO) in respect of claim of depreciation of Rs.1,43,700/- on computer by invoking Explanation 1 of the provisions of section 271(1}(c) of the Act.
2. The appellant submits that, it has neither concealed the particulars of income nor furnished inaccurate particulars of such income.
3. The appellant submits that, the facts in the case of the appellant do not justify levy of penalty u/s.271(1)(c) of the Act, as the AO has not discharged the onus cast on him by law for levy of penalty.”
The brief facts of the case are that the assessee had filed his return of income for the assessment year 2010-11 on 18-10-2010 declaring total income at Rs.1,82,35,396. During the course of assessment proceedings, the AO observed from the statement of house properties filed by the assessee that the assessee owned 4 house properties and claimed two properties as used for his own business. Therefore, he called upon the assessee to explain as to why annual letting value of house property shall not be computed under the provisions of section 23(1) of the Income-tax Act, 1961. In response to show cause notice, the assessee submitted that out of 4 properties, one flat at No.1304, bldg No.9, Man Space, Quiescent House, Malad (W), Mumbai is self occupied property for own residence. In respect of properties situated at Ankur, Goregaon (W), Mumbai and Unit No.218, Linkway Estate Premises Co-operative Society Ltd, Malad, these are used for his own business are not under the name and style of M/s Alliance Media & Entertainment Pvt Ltd, a company in which he is having 99% shareholding. Assessee further submitted that he had computed annual value of house property at 301, Laher CHS Ltd, Malad (W) on the basis
3 ITA 456 & 457/Mum/2016 of municipal valuation. The house properties used for his own business are outside the purview of section 22 of the I.T. Act , therefore, the question of computation of deemed annual letting value does not arise.
The AO, after considering relevant submissions of the assessee observed that the assessee failed to compute deemed let out value of 2 properties even though the properties are owned in his personal name on the ground that those two properties are used for his own business ignoring the fact that the assessee is running the business in the name of a private limited company, which is a distinct separate legal entity and hence, the properties owned in his personal name even though used for his own business, cannot be claimed exempt for the purpose of computation of deemed annual letting value. Insofar as third property, AO observed that even though the assessee has computed deemed let out value of property on the basis of municipal valuation, the value adopted by the AO for computation of annual letting value is not in accordance with provisions of section 23 As the section mandates computation of annual value on the basis of sum for which the property might reasonably be expect to let from year to year. Therefore, rejected computation of annual letting value of property by the assessee and determined annual letting value of all the three properties @8% of investment in properties and re-computed income from house property.
Aggrieved by the assessment order, the assessee preferred appeal
4 ITA 456 & 457/Mum/2016 before the CIT(A). Before the CIT(A), assessee reiterated its submissions made before the AO to argue that the AO was erred in computing annual letting value of two properties used by him for his own business carried out under the name and style of M/s Alliance Media & Entertainment Pvt Ltd wherein he is holding more than 99% shareholding. The assessee further submitted that in respect of deemed let out property, the AO has adopted 8% of the value of the property to determine annual letting value of the property ignoring the fact that the provisions of section 23 mandates computation of annual letting value on the basis of sum for which the property might reasonably be expected to let from year to year or where the property is part of the property let out and the actual rent received or receivable by the owner is in excess of the sum referred to in clause (a), the sum so received or receivable.
He had computed annual letting value of the property on the basis of municipal valuation which is in accordance with the law and also supported by the decision of jurisdictional High Court in the case of M.V.
Sonawala vs CIT 177 ITR 246 wherein it was categorically held that municipal valuation is one of the basis for computation of annual letting value of deemed let out of properties. The CIT(A), after considering relevant submissions of the assessee and also relying upon certain judicial precedents observed that as per the provisions of section 23 annual value of sum for which the property might reasonably be 5 ITA 456 & 457/Mum/2016 expected to let out from year to year but not on the basis of municipal valuation. The CIT(A) further observed that income offered on the basis of municipal valuation of the year 2002 does not reflect updated and correct annual value, therefore, the AO was right in determining the annual letting value of the property on the basis of cost of construction / acquisition / investment value to determine annual letting value of the property. Insofar as two properties used by the assessee for his own business, the CIT(A) observed that the properties are in the name of the assessee whereas business is carried out in the name of the company As per section 22, portions of property, if occupied for the purpose of any business or profession carried out by him is only exempt. The company is a separate entity and hence, premises used for running the business of the company are not outside the scope of section 22 of the Act. With these observations, upheld the findings of the AO in computing annual value of the property @ 8% of investment value of 2 flats. Aggrieved by the order of CIT(A), assessee is in appeal before us.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The assessee has owned 4 properties out of which two properties are used for his own business running under the name and style of M/s Alliance Media & Entertainment Pvt Ltd, where he holds more than 99% shares. One property is used for his self-occupation. For the fourth property, the 6 ITA 456 & 457/Mum/2016 assessee has computed deemed annual letting value on the basis of municipal valuation of the property determined in the year 2002. The AO recomputed annual letting value of the two properties used by the assessee for his own business on the ground that the assessee is eligible for exemption u/s 22 in respect of properties which are used for his own business in his name but not in the name of the company. If the business is carried out in the name of the company, it cannot be considered that the assessee is carrying out the business in his own name which is coming within the purview of section 22 of the Act. In respect of third property, the AO rejected annual letting value computed by the assessee by holding that the value fixed by the municipal authorities for the year 2002 does not reflect updated and correct annual letting value of the property. Accordingly determined annual letting value of the three properties @8% of value of investment in properties.
The provisions of section 23 prescribe the procedure for determination of annual value of properties as per which the sum for which the property might reasonably be expected to let from year to year or where the property or part of the property is let, then the annual rent received or receivable by the owner in respect thereto, is in excess of the sum referred to in clause (a), the amount so received or receivable.
Admittedly, in this case, all the three properties are not let out by the assessee. The assessee claims that 2 properties are used for his own
7 ITA 456 & 457/Mum/2016 business in the name of M/s Alliance Media & Entertainment Pvt Ltd.
The AO has not disputed the fact that two properties are used by the assessee for his own business; however, rejected the explanation of the assessee for the reason that the assessee owned properties in his individual capacity whereas the business is run in the name of the company which is a distinct and separate legal entity. Insofar as third property, the AO has disputed annual letting value determined by the assessee on the basis of municipal valuation by holding that municipal value fixed in the year 2002 does not reflect correct value of the property. We do not find any merit in the findings of the AO for the reason that determination of annual letting value of the property on the basis of value of the property is not a correct method for determination of annual letting value as per the provisions of section 23 of the Income-tax Act, 1961. As per the provisions of section 23(1)(a), the annual letting value of property should be determined on the basis of the sum for which the property might reasonably be expected to let from year to year or where the property or part of the property is let out and the actual rent received or receivable by the owner in excess of the sum referred to in clause (a). In this case, clause (b) is not applicable because the properties have not been let out through out the year. As per clause (a), the annual letting value of the property shall be determined on the basis of the sum for which the property might reasonably be expected to let
8 ITA 456 & 457/Mum/2016 from year to year which means the prevailing market rent of the property has to be considered for the purpose of determination of annual letting value. The Hon’ble Bombay High Court in the case of M.V. Sonawala v CIT (supra) observed that municipal valuation should be the basis of determining annual value of the properties. In yet another case, the Hon’ble Bombay High Court in the case of CIT vs Tip Top typography 368 ITR 330 (Bom) observed that in order to determine annual letting value, municipal rateable value may not be binding on assessing officer, but that is only in cases where he is convinced that interest free security deposit and monthly compensation did not reflect prevailing rate. In such a case, the AO can himself resort to enquired about the prevailing rate in the locality. The sum and substance of the ratio of the Hon’ble Bombay High Court is that to determine the annual letting value of properties, the AO has to find out the correct fair rent of the property in the locality. In this case, the AO has followed adhoc method of estimation of 8% on total value of the property to determine the annual letting value. Therefore, we are of the considered view that the annual letting value determined by the AO is not in accordance with the provisions of section 23(1)(a) and also against the settled legal proposition laid down by jurisdictional High Court. Hence, we set aside the issue to the file of the AO and direct him to determine the annual value of the property on the basis of prevailing rate in the locality after
9 ITA 456 & 457/Mum/2016 affording a reasonable opportunity of being heard to the assessee.
Insofar as determination of annual value of two properties used by the assesse for his own business, we find that the AO has rejected the arguments of the assessee that two properties are used for his own business run in the name & style M/s Alliance Media & Entertainment Pvt Ltd on the ground that company is a separate legal entity and hence properties used for the business are outside the purview of section 22 of the I.T. Act. We do not find any merit in the arguments of the assessee for the reason that the assessee has used premises to run his own business in the name and style of M/s Alliance Media & Entertainment Pvt Ltd, a company in which he is having 99% shareholding. Whether the business is run in his individual capacity or in the name of a company / firm hence the premises are used for his own business are certainly outside the purview of section 22 of the Income-tax Act for deemed let out. Therefore, we direct the AO to delete addition made towards deemed let out of two properties for assessee’s own business.
In the result, appeal filed by the assessee is partly allowed, for statistical purpose. ITA 457/Mum/2016
The brief facts of the case are that the assessee had filed return of income on 31-10-2005 declaring total income of Rs.3,45,32,892. The assessment was completed u/s 143(3) on 28-12-2007 determining total
10 ITA 456 & 457/Mum/2016 income at Rs.3,61,45,052 by making various additions including addition towards disallowance of depreciation on computer for Rs.1,43,700.
Thereafter AO initiated penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income in respect of depreciation claimed on computer purchased and put to use on 31-03-2005 and asked the assessee as to why penalty shall not be levied for furnishing inaccurate particulars of income. In response to notice assessee submitted that he had purchased computers from M/s PCSS Solutions Pvt Ltd vide invoice No.224 dated 31-03-2005 and also filed confirmation from the supplier confirming that the system had been delivered and installed on 3 1-03- 2005. The assessee further submitted that its claim of depreciation on computer is in accordance with law and hence, the question of levy of penalty u/s 271(1)(c) for disallowance of depreciation does not arise.
The AO, after considering relevant submissions of the assessee and also relying upon certain judicial precedents observed that wherever there is a difference between the returned and assessed income, there is an inference of concealment as a rule of law. The responsibility for rebutting such inference is squarely on the taxpayer. The assessee is expected to offer the explanation for the difference. If the assessee fails to offer any explanation, then a general presumption is drawn that the assessee has furnished inaccurate particulars of income which warrants levy of penalty u/s 271(1)(c); accordingly levied penalty u/s 271(1)(c) in 11 ITA 456 & 457/Mum/2016 respect of disallowance of depreciation on computers. Aggrieved by the penalty order, assessee preferred appeal before the CIT(A). Before the CIT(A) assessee has reiterated his submissions made before the AO.
The assessee also relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Reliance Petroproducts Pvt Ltd 322 ITR 158 (SC) to argue that mere disallowance of certain expenses does not tantamount to furnishing of inaccurate particulars of income so as to levy penalty u/s 271(1)(c) of the Act. The CIT(A), after considering relevant submissions of the assessee and also relying upon certain other judicial precedents observed that the assessee has failed to offer any explanations for claiming depreciation which is otherwise not allowable on computers purchased and installed on 31-03-2005. Though the assessee claims to have installed computer on 31-03-2005, failed to file any evidence to substantiate its claim that computers were put to use on 31-03-2015.
Thus, the assessee’s case clearly falls within the ambit of provisions of section 271(1)(c) of the Act as the assessee has failed to discharge the onus cast on him and the claim is patently wrong and inadmissible, and therefore, levy of penalty is justified. Aggrieved, assessee is in appeal before us.
The Ld.AR for the assessee submitted that the Ld.CIT(A) erred in confirming penalty of Rs.48,369 levied by the AO in respect of claim of depreciation on computer by invoking Explanation 1 of section 271(1)(c)
12 ITA 456 & 457/Mum/2016 of the Act despite the assessee furnished necessary evidences to prove that computer is purchased and put to use on 31-03-2005. The Ld.AR further submitted that the AO was erred in levying penalty on disallowance of depreciation as mere disallowance of certain expenses or claim of deduction does not tantamount to furnishing of inaccurate particulars of income so as to levy penalty for furnishing inaccurate particulars of income.
On the other hand, the Ld.DR strongly supported the order of the CIT(A).
We have heard both the sides and perused the material available on record. The AO levied penalty u/s 271(1)(c) in respect of disallowance of depreciation on computer on the ground that the assessee has furnished inaccurate particulars of income. According to the AO, wherever there is a difference between the returned income and assessed income, there is an inference of concealment as a result of law and it is the responsibility of the assessee to rebut such inference with necessary evidences. Though the assessee has filed bill for purchase of computer, failed to file any evidence of installation and put to use computer on 31-03-2005; therefore, the AO opined that the assessee has made a claim of depreciation which is patently incorrect and not allowable under the Act. It is the contention of the assessee that mere disallowance of certain claim of expenditure or deduction would not 13 ITA 456 & 457/Mum/2016 tantamount to furnishing of inaccurate particulars of income so as to levy penalty u/s 271(1)(c) of the Act.
Having heard both the sides and considered material on record we find merit in the argument of the assessee for the reason that the Hon’ble Supreme Court in the case of CIT vs Reliance Petroproducts Pvt Ltd (supra) observed that merely because the assessee had claimed the expenditure which claim was not accepted or was not acceptable to the revenue, that by itself would not attract the penalty u/s 271(1)(c) of the Act. If the contention of the revenue were accepted, then in case of every return where the claim made was not accepted by the AO for any reason, the assessee would invite penalty u/s 271(1)(c), i.e. clearly, not the intention of the legislature. In this case, the assessee has claimed depreciation on computer which was purchased and put to use on 31- 03-2005. The assessee furnished separate bill for purchase of computer and also report of the technician for installation and put to use computer on 31-03-2005. The assessee has furnished necessary facts before the AO in respect of computation of its income. Merely because the AO has disallowed certain expenses or not accepted explanation offered by the assessee that by itself would not be a ground for levy of penalty for furnishing inaccurate particulars of income. Therefore, we are of the considered view that the AO was incorrect in levying penalty u/s 271(1)(c) in respect of disallowance of depreciation on computer. The 14 ITA 456 & 457/Mum/2016 CIT(A), without appreciating the facts has simply confirmed the penalty levied by the AO, hence we set aside the order of the CIT(A) confirming penalty levied by the AO and direct the AO to delete the penalty levied u/s 271(1)(c). 14. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 21st February, 2018.