ACIT-3(1)(1), MUMBAI vs. GENTEX MERCHANTS PVT. LTD., MUMBAI

Ground No. 5 & 6: In this ground the appellant is challenging the disallowance of business loss/business expenditure claimed against service charges declared as income from business and profession in its Return of Income amounting to Rs.79,02,258/-. This issue is also no longer res-integra as it has been raised in the case of the appellant in the assessment year 2010-11. The Ld. CIT (Appeals) VIII, Kolkata vide order dated 04.03.2014 has allowed the appeal of the appellant on this issue. In the appeal filed by the department against the said order of the Ld. CIT (Appeals), the jurisdictional bench of the Hon’ble ITAT has upheld the view of the Ld. CIT (Appeals) and dismissed the appeal of the department on this ground. In view of the same, respectfully following the orders of my predecessor Ld. CIT (Appeals) and the order of the Hon’ble ITAT, Kolkata Bench the appeal on this ground is allowed.

For the present appeal, what is relevant are the provisions of Sec.23(1)(a) and 23(1)(b) of the Act. The greater of the sums referred to Sec.23(1)(a) and 23(1)(b) has to be adopted as the annual value. Originally provisions of section 23 of the Act provided for determination of annual value of house property only on the basis of sum for which, the property might reasonably be expected to be let from year to year. The actual receipt of rent was irrelevant. By the Taxation Laws (Amendment) Act, 1975 w.e.f. 1.4.1976, Section 23(1)(b) was introduced, whereby it was provided that if the actual rent received by an assessee is in excess of the sum for which, the property might reasonably be expected to let from year to year, annual value will be the rent received. While explaining the aforesaid amendment, CBDT in Circular 204 dated 24.7.1976 in paragraph 9 has stated as follows :- "Hitherto, the annual value of house property, chargeable to income tax under the head 'income from house property was deemed to be the sum for which the property might reasonably be expected to let from year to year. In many cases, however, the actual rent received or receivable in a year exceeds the municipal valuation of the property. Sub section (1) of section 23 has been amended to provide that the where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property". 27. From the aforesaid Circular, it is clear that the law prior to introduction of section 23(1)(b)was that annual value was equal to Municipal Valuation of the property. The above circular gives an indication as to how the expression "the sum for which, the property might reasonably be expected to let from year to year" used in section 23(1)(a) hast to be interpreted. 28. The Hon'ble Calcutta High Court in the case of Satya & Co. Ltd 146 CTR 569, CIT Vs Bhaskar Mitter 73 Taxman 437, CIT Vs Poddar Bros. Pvt Ltd 240 ITR 925, CIT Vs Prabhavati Bhansali 141 ITR 419 has consistently held that the annual value of a House Property under Section 23 is to be assessed at higher of the actual rent or the annual value determined by the municipal/local authority. The Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra) in principle accepted the ratio laid down by the Calcutta High Court and held that in arriving at the annual value of the property the annual value determined by the municipal authorities is the relevant factor provided however assessment by the local authority was contemporaneous and reflected true annual value.

In the present case the facts as it transpired before CIT(A) shows that the Municipal Valuation determined by the NDMC for the relevant previous year was a sum of Rs.1,16,83,790. The determination of annual valuation by NDMC happened by an order dated 27.9.2012 much after the AY 2010-11. Based on the revision in the Municipal Valuation, the Assessee and Mr.L.N.Mittal revised the terms of the lease and the tenant revised annual rent to Rs.1,17,00,000/-. The higher of the municipal valuation or the actual rent received has to be adopted as the annual value for the purpose of Sec.23(1)(b) of the Act. Therefore the annual value of the property in question has to be adopted at Rs.1,17,00,000/-. The conclusions of the CIT(A) in this regard are correct and does not call for any interference. 30. The facts as it transpired further show that the revision in the annual rent by agreement between the parties was made after the end of the relevant previous year relevant to AY 2010-11 and was applicable retrospectively from AY 2006- 07. The arrears of rent consequent to revision in the annual rent between the parties amounting to Rs.3,54,31,400/- was offered as income of the assessee in AY 2013-14 in conformity. Sec.25B of the Act, provides as follows: "Special provision for arrears of rent received. 25B. Where the assessee-- (a) is the owner of any property consisting of any buildings or lands appurtenant thereto which has been let to a tenant; and (b) has received any amount, by way of arrears of rent from such property, not charged to income-tax for any previous year, the amount so received, after deducting a sum equal to thirty per cent of such amount], shall be deemed to be the income chargeable under the head "Income from house property" and accordingly charged to income-tax as the income of that previous year in which such rent is received, whether the assessee is the owner of that property in that year or not." Thus ultimately the entire annual value as determined by NDMC amounting to Rs.1,17,00,000/- has suffered tax in AYs 2010-11 & 2013-14. The conclusion of the CIT(A) that no further adjustment to the disclosed annual value was necessary in the assessment for AY 2010-11, in our view is fully justified and calls for no interference. The CIT(A)'s conclusion directing the AO to assess the income from house property at 22, Aurangzeb Road, New Delhi taking its annual value at Rs.60 lacs and re- compute the assessee's income under the head "House Property" is therefore upheld. 31. On the question whether in a case where interest free advance are given by the tenant could notional interest on such advance be taken for the purpose of arriving at the Annual Value of the property, the CIT(A) held that notional

On the question whether the parties have arranged their affairs in such a manner that the taxes payable are avoided and therefore all arrangements have to be ignored and on the question whether income from providing services charges have to be assessed under the head "Income from Business" or should form part of the "income from house property", we are of the view that the issue as to whether income by way of service charges 'is assessable under the head "Business" was no longer res integra. It is not in dispute that in the first year of the lease the AO had disputed assessee's classification of such income under the head "Business". On appeal however the first appellate authority held that service charges collected separately from the tenant were assessable under the head "Business" and the decision of the appellate authority was accepted by the Revenue. In the circumstances, the issue was rightly held by the CIT(A) to have attained finality in the case of the Assessee. The CIT(A) was therefore right in concluding that income by way of service charges was chargeable under the' "Profits & Gains from Business".