DCIT, CIR-6(1), KOLKATA, KOLKATA vs. M/S INDIA CITY PROPERTIES LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH ‘A’, KOLKATA [Before Shri P.M. Jagtap, AM and Shri S.S. Viswanethra Ravi, JM] I.T.A. Nos. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-2011 & 2011-12 DCIT, Circle – 6(1), Kolkata..............................…………………………………..Appellant Aayakar Bhawan, 6th Floor, Room No. 6/17, P-7, Chowringhee Square, Kolkata - 700069 M/s. Indian City Properties Ltd. ………………………………………………...............Respondent 25, Brabourne Road, Kolkata – 700 001 [PAN : AACCI5534L] Appearances by: Shri Sourav Kumar, Addl. CIT, appearing on behalf of the Revenue. Shri D.S. Damle, AR appearing on behalf of the Assessee. Date of concluding the hearing : October 26, 2017 Date of pronouncing the order : November 29, 2017 ORDER Per P.M. Jagtap, AM These three appeals are preferred by the revenue against three separate orders passed by the Ld. CIT(A) – 2, Kolkata all dated 23.06.2015 for A.Y. 2009-10, 2010-11 and 2011-12 and since the issues involved therein are common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience. 2. First we shall take up the revenue’s appeal for A.Y. 2009-10 being ITA No. 1183/Kol/2015. In ground no 1 raised in this appeal, the revenue has challenged the action of the Ld. CIT(A) in holding that the service charges received by the assessee from tenants are not an

2 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. integral part of the rental income and the same are assassable under the head “business income” instead of “income from house property”. 3. The assessee in the present case is a real estate company with its principal business being collection of rent from the properties let out. The return of income for the year under consideration i.e. A.Y. 2009-10 was filed by it on 29.09.2009 declaring a total income of Rs. 13,39,22,690/-. During the year under consideration, service charges of Rs. 32,61,829/- were earned by the assessee from the tenants and after claiming expenses against the same, net loss of Rs. 72,66,056/- was claimed by the assessee as business loss. According to the A.O., service charges received by the assessee were an integral part of rental income and it, therefore, could not be said that the assessee was carrying on the business of rendering services. In this regard, he placed reliance on the decision of Hon’ble Kolkata High Court in the case of CIT vs Shambhu Investment Pvt. Ltd. 249 ITR 47 and held that the service charges received by the assessee were chargeable to tax in its hand under the head “income from house property”. Accordingly, the claim of the assessee for business loss was disallowed by him and after allowing standard deduction of 30%, net income of Rs. 22,83,278/- on account of service charges was brought to tax by him in the hands of the assessee. 4. The action of the A.O. in treating the service charges as income from house property instead of business income was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) accepted the claim of the

3 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. assessee and treated the service charges as taxable under the head business income for the following reasons given in his impugned order: “I have gone through the submissions of the appellant and the observations of the AO. I have also gone through the decisions referred by the appellant as well as AO on this particular issue. The appellant is engaged in the business of letting out of properties and rendering contractual services and amenities in the said properties to its tenants. The appellant charges rent from the tenants towards the use of the property let out to them. Additionally, the appellant is also providing contractual services like gas, electricity, water, lift air conditioning, maintenance services, security, plumber, staff members etc. in the building/s for which it receives service charges from the appellant. Both rent and service charges are charged separately from the tenants. I note that the fundamental characteristic of the two receipts are totally different. Section 23 only seeks to tax rent and/or income earned from letting out or allowing use of house property, building etc. It does not cover the fees or income received by the landlord for rendering services and providing amenities in the premises. I therefore find merit in the contention of the appellant that the service charges received from the tenants are not towards the use/let-out of the property but are received in the course of rendering contractual services & amenities to its tenants and is therefore not covered under the provisions of Section 23 of the Act. The appellant has further submitted that this particular issue had been dealt with by the Inspecting Appellate Commissioner (IAC) in its own case for AY 1978-79; copy of which was placed on record. In that year the AO had taxed the service charges received from tenants under the head “house property” along with the rent treating it to be composite instead of “business income”. The Ld. IAC after giving due consideration of facts and referring to the decision of the Apex Court in the case of Karnani Properties Ltd. vs CIT (82 ITR 547) held that the rental income simplicitor is assessable under the head “House Property” but service charges received from rendering services in a continuous and organized manner was assessable as “Business Income”. The appellant submitted that the said appellate order of the IAC was accepted to the Department and in all the subsequent assessments which were framed u/s 143(3), the services charges were assessed as business income. The appellant particularly referred to the assessment order for AY 2007-08 wherein the AO had specifically observed that service charges were assessed as “business

4 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. income”. I therefore find force in the submissions of the appellant that this particular issue had already been settled by the Ld. IAC in its own case which had been accepted by the Department in the earlier years. The AO in his order had however relied upon the decision of the Calcutta High Court in the case of CIT vs Shambhu Investment (P) Ltd (249 ITR 47) to support his conclusion that service charges were assessable under the head “House Property”. I however find that the facts of the said decision are distinguishable from the present case. In the case before the Calcutta High Court the landlord had charged one single composite rent from the tenant from the use of property and the furniture & fixtures in the said property. The landlord had artificially bifurcated the composite rent into rent towards property and rent towards furniture & fixtures and had accordingly offered the latter as “Business Income”. The High Court had disregarded the artificial bifurcation by the landlord and assessed it as composite rental income under the head “house property”. In the appellant’s case however separate considerations are charged for rent and service charges and it is only one single composite sum. Furthermore in the case before the High Court the issue at hand was taxability of rent charged for furniture & fixtures and not for the contractual services and amenities as involved in the appellant’s case. I therefore find that the facts of the decision of Calcutta High Court are radically different from the appellant’s case. Instead the decision of the Apex Court in the Karnani Properties Ltd. vs CIT (82 ITR 547) and Kerala High Court in Attukal Shopping Complex (P) Ltd. vs CIT (259 ITR 567) are more relevant. In both these cases the landlord had charged separate consideration for rent towards use of property and service charges for rendering services & amenities in a continuous and organized manner to the tenants. In both these decisions the service charges were held to be assessable as business income. I find that both these judgments are squarely applicable to the facts of the present case. In view of the foregoing discussions and respectfully following the decision of the Supreme Court and Kerala High Court as well as the appellate order of the Ld. IAC in appellant’s own case for AY 1978-79, I hold that the service charges received from tenants for rendering services & providing amenities is assessable under the head “Business Income” and not “House Property”. The AO is accordingly directed to assess the service charges as business income and allow the expenses as claimed by the appellant against it. Ground Nos. 1 & 2 are therefore allowed.”

5 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. 5. The learned DR strongly relied on the order of the Assessing Officer in support of the revenue’s case on this issue and submitted that the decision of Hon’ble Kolkata High Court in the case of CIT vs Shambhu Investment Pvt. Ltd. 249 ITR 47 relied upon by the A.O. is squarely in favour of the revenue. He contended that the Ld. CIT(A) however has ignored the said decision of the Hon’ble Jurisdictional High Court while giving relief to the assessee on this issue. 6. The learned counsel for the assessee, on the other hand, strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the reasons given by the Ld. CIT(A) on page 10 and 11 of his impugned order while deciding this issue in favour of the assessee may be taken into consideration. He also contended that the decision of Hon’ble Kolkata High Court in the case of Shambhu Investment Pvt. Ltd. (supra) relied upon by the revenue is not applicable to the facts of the present case as rightly held by the Ld. CIT(A) while the decision of Hon’ble Supreme Court in the case of Karnani Properties Ltd. (supra) and that of Kerala High Court in the case of Attukal Shopping Complex (P) Ltd. (supra) has direct application. 7. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the assessee company, in addition to letting out the properties owned by it, was also engaged in rendering contractual services and providing and maintaining amenities in the properties let out to the tenants. The contract for rendering such services was entered into with the tenants separately and even charges for the same were levied

6 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. separately in addition to rent. The service charges received from the tenants were not for the use / let out of the properties, but received separately in the course of rendering contractual services and providing amenities such as gas, electricity, water, lift, air conditioning, security, plumber etc. As rightly held by the Ld. CIT(A), the same not being covered under provision of section 23 of the Act could not be treated as rent chargeable to tax under the head income from house property. On the other hand, the activity of rendering services which resulted in the script of service charges was carried on by the assessee in a continuous and organized manner and the same therefore was chargeable to tax in the hands of the assessee company as business income. As regards the decision of Hon’ble Kolkata High Court in the case of Shambhu Investment Pvt. Ltd. (supra) relied upon by the learned DR, it is observed that the same is distinguishable on fact in as much as what the assessee in the said case had charged was single composite rent from the tenant for use of property as well as the furniture and fixture in the property and the composite rent so received was artificially bifurcated by the assessee into rent towards property and rent towards furniture and fixture. This artificial bifurcation made by the assessee was not accepted by the Hon’ble Kolkata High Court and the composite rental income was held to be chargeable to tax in the hands of the assessee under the head income from house property. The assessee in the present case, on the other hand, has charged rent and service charges separately and it is not a case of receipt of rent for furniture and fixture provided in the property simplicitor but the case of receipt of service charges from the activity of rendering various services that was carried on in the continuous and organized manner. As rightly held by the Ld. CIT(A),

7 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. the decision of Hon’ble Apex Court in the case of Karnani Pvt. Ltd. (supra) and Kerala High Court in the case Attukal Shopping Complex (P) Ltd. (supra) thus is clearly applicable to the facts of the present case and we find no infirmity in the impugned order of the Ld. CIT(A) holding that the service charges received by the company from the tenants is assessable under the head business income by relying on the said decision. The same is therefore upheld dismissing ground no 1 of revenue’s appeal. 8. In ground no 2, the revenue has challenged the action of the Ld. CIT(A) in holding that interest on fixed deposit is to be assessed in the hands of the assessee under the head “business income” instead of “income from other sources”. 9. During the year under consideration the assessee company had received interest income of Rs. 1,89,55,918/- on bank deposits etc. and the same was offered to tax as business income. According to the A.O., the only activity of the assessee company being letting out of property on rent, the interest received on bank deposits etc. was chargeable to tax under the head income from house property and not business income. He accordingly brought the entire interest income received by the assessee company during the year under consideration to tax in its hand under the head “income from other sources”. 10. The action of the A.O. in treating the interest income as “income from other sources” instead of business income was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after

8 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. considering the submissions made by the assessee as well as the material on record, the Ld. CIT(A) accepted the claim of the assessee on this issue and directed the A.O. to assess the interest income in the hands of the assessee company under the head business income instead of “income from other sources” for the following reasons given in his impugned order: “I have gone through the submissions of the appellant and the observations of the AO and the details placed on record. From the facts of the appellant’s case and going by findings in Ground Nos. 1 & 2; it is clearly discernible that the appellant is providing various contractual services to the tenants and amenities as well in an organized manner with a view to earn profits. I note that for rendering these services and providing the amenities, the appellant was required to make substantial capital investment in air conditional plant, generator, water pump, furniture, common lobby area, electrical fittings etc. In addition to the same the appellant was also required to maintain a permanent task force like night guards, watchmen, plumbers, liftmen, sweepers, janitors, electricians etc. at its properties. In order to meet the cost of such capital investment and common amenities the appellant had collected refundable security deposits from the tenants, which was correspondingly invested in encashable assets like fixed deposits. The interest earned from these deposits were meant to hedge the inflationary costs, increase in wages of workforce and also meet and any unexpected events or capital investment in future. I note that this was a prudent business arrangement between the appellant and the tenants so that the appellant which is the service provider is not required to make capital investment in one go and correspondingly the tenant is also not required to directly invested in such common assets. I note that this is a common business arrangement between the landlord and the tenants and prevalent practice in let-out commercial properties. I find force in the appellant’s submission that the bank interest earned on the fixed deposits which were made out of the refundable security deposits received from the tenants was inextricably linked with the business of the appellant involving rendering of services & amenities to the tenants. The interest earned by investing the interest free security deposits and the service charges received from the tenants taken together formed the revenues earned by the appellant in the business of rendering of services & providing amenities.

9 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. According to AO the appellant had claimed expenses were 178% of the service charges received from the tenants. I however note that the finding of the AO was misplaced. As stated in the above paragraph, the service charges were not the only income earned by the appellant in the business of rendering of services & providing amenities. Instead the bank interest which was earned on fixed deposits made out of refundable security deposits obtained from the appellant also formed an integral receipt of the said business. Both taken together were sufficiently more than the expenses claimed by the appellant. I therefore note that the allegation of the AO that the appellant had claimed higher expenses so as to avoid taxes was incorrect and contrary to the facts of the appellant’s case. The AO had further observed that the appellant had claimed a fictitious loss of Rs. 72,66,056/-. I however find that even this observation is incorrect and is not borne out from the facts of the case. The appellant had offered business income of Rs. 72,66,056/- and not a loss. The AO’s allegation is in this regard was therefore wrong as well. In view of the above discussions and findings and in totality of the facts & circumstances of the case, I hold that the AO had erred in assessing the bank interest under the head “other sources” instead of “Business Income”. In my considered view, the bank interest of Rs. 1,89,55,918/- is assessable as “Business Income” and also expenses as claimed by the appellant. The AO is directed accordingly. Ground Nos. 3 & 4 are therefore allowed. 11. The learned DR relied on the order of the Assessing Officer in support of the revenue’s case on this issue while the learned counsel for the assessee strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the observations recorded by the Ld. CIT(A) in this context on page no 14 & 15 of his impugned order may be taken into consideration. 12. We have considered the rival submissions and also perused the relevant material available on record. As already noted by us, the activity of providing various services to the tenants was carried on by the assessee company in continuous and organised manner and the

10 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. charges received for rendering the said services constituted business income of the assessee company. For this purpose, substantial capital investment was required to be made by the assessee company in air conditional plant, generator, water pump, furniture, common lobby, electric fittings etc. and even the required manpower was also to be maintained. The assessee company had collected the refundable security deposit from the tenants in order to cater to this requirement and the amount of such deposits partly was deposited in bank to earn interest. Such interest earned by the assessee company was a source, in addition to the service charges levied, to meet the expenses involved in rendering of services and amenities to tenants. The interest income earned by the assessee company thus was inextricably linked with the business of the assessee company of providing services and amenities to the tenants and as rightly noted by the Ld. CIT(A) in his impugned order, the activity of rendering services had resulted into profit only because of interest income earned by the assessee company. Having regard to all these facts of the case, we are of the view that the interest income earned by the assessee company is chargeable to tax as business income as rightly held by the Ld. CIT(A). and not as “income from other sources”. In that view of the matter, we uphold the impugned order of the Ld. CIT(A) and dismiss ground no 2 of the revenue’s appeal. 13. In ground no 3, the revenue has challenged the action of the Ld. CIT(A) in holding that rental income received by the assessee company from its subsidiary company be assessed on actual basis instead of considering the fair rent as provided under section 23 of the Income Tax Act, 1961.

11 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. 14. The assessee company had given a number of properties on rent in Kolkata, Mumbai and other places to M/s. KCT & Bros. Ltd., its sister concern. As noted by the A.O. during the course of assessment proceedings, the rent charged by the assessee company to KCT for all the properties was abysmally low. He also noted that the rent so charged was very low in comparison to the rent charged by the assessee company to other licensees of the same building. Applying the rate of rent charged by the assessee company to other licensees the deemed rent receivable by the assessee company from KCT was worked out by the A.O. at Rs. 2,30,75,539/- and after allowing deduction of 30%, the net income of Rs. 1,61,52,877/- on account of deemed rent receivable by the assessee from KCT was brought to tax by the A.O. in the hands of the assessee company under the head income from house property. 15. The addition made by the A.O. on the basis of deemed rent receivable from KCT was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the said addition for the following reasons given in his impugned order: “I have gone through the submissions of the appellant and the observations of the AO and the details placed on record. I have also considered the decisions referred to by the appellant on this issue. The appellant had let out premises at various properties across India to M/s. KCT & Bros (Coal Sales) Limited more than 4 to 5 decades ago. According to AO the rent charged by the appellant from M/s. KCT & Bros (Coal Sales) Limited which is its sister concern was comparatively low than the rent charged from other parties. The AO therefore made best estimate of the rental rates referring to internet websites and ascertained a sum of

12 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. Rs. 1,61,52,877/- as the rent which was under charged by the appellant and accordingly assessed the same as deemed rent under the head “House Property”. I find that the fact that the appellant had let out the properties to M/s. KCT & Bros (Coal Sales) Limited more than 3 to 4 decades ago is not in dispute. This fact has been admitted by the AO in his remand report as well. I therefore find that the bonafide of the tenancies of M/s. KCT & Bros (Coal Sales) Limited is undoubtedly genuine. It is the appellant’s plea that the properties which were let out to M/s. KCT & Bros (Coal Sales) Limited were on monthly tenancy and was protected under the respective State Tenancy Acts as well as under the Rent Control laws. The appellant explained that under the laws of the respective States Rent Control Act, it could not have unilaterally increased the rent charged from M/s. KCT & Bros (Coal Sales) Limited. The appellant thus contended that when the bonafide of the tenancies were not in dispute, the rent charged from KCT & Bros (Coal Sales) Limited which was protected under the Rent Control Laws was justified and could not be tinkered with. After going through the facts of the case and the submissions, I find merit in the submissions of the appellant. Undeniably the properties were let out to KCT & Bros (Coal Sales) Limited more than 3 to 4 decade ago and the tenancies have been held to be genuine by the Department. I am in agreement with the appellant that these properties were subject to tenancy laws and rent control laws and therefore the rent charged from KCT & Bros (Coal Sales) Limited could not have been increased by it unilaterally by it. I find that this particular issue had been dealt with by the Calcutta High Court in the case of CIT vs Bhaskar Mitter (73 Taxman 437) wherein it was held as follows: “The ratio of the several decisions of the Supreme Court as well as this Court is that there is unity of the Municipal Act and the Income tax Act on the question of annual value and that such annual value cannot exceed the standard or fair rent under the Rent Control Act and may in a given case even be lower than the standard or fair rent. The principles for determining the annual municipal value and the annual letting value under the two Acts being common, in a case where the annual municipal value is available, that itself would be the annual letting value under the Act. In fact, this principle has now been statutorily recognized in Schedule III of the Wealth-tax Act, 1957, Rule 5 of Part B of Schedule III to the Wealth-tax Act lays down the procedure for determining the gross maintainable rent”

13 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. In view of the above judgment, I find force in the appellant’s submissions that for the purposes of Section 23, the annual value of the property let out to KCT & Bros (Coal Sales) Limited could not be higher than the standard rent determined under the Rent Control Act. From the details placed on record including the municipal tax receipts, it is noted that the rent charged from KCT & Bros (Coal Sales) Limited was sufficiently higher than the annual determined by the Municipal Corporation with reference to rent control laws. As regard property at Carmicheal Road, I find that the appellant had produced sufficient evidences which established that the property was unhabitable and hence the annual value was taken at NIL. I therefore hold that the rent charged from KCT & Bros (Coal Sales) Limited and considered for the purposes of Section 23 could not be said to be depressed or low. I further note that the jurisdictional Calcutta High Court in following cases held that for determining the annual letting value of the property under section 23(1) of the Income-tax Act, 1961 the annual letting value taken by the Calcutta Municipal Corporation had to be adopted. - CIT vs Poddar Bros (P) Limited (240 ITR 925) -` CIT vs Prabhabati Bhansali (141 ITR 419) - CIT vs Satya Co. Ltd. (173 Taxman 193) Applying the principle laid down in the above judgments of jurisdictional Calcutta High Court which I am bound to follow and taking into account the facts of the present case, I am in agreement with the appellant that the annual letting value of the property let out KCT & Bros (Coal Sales) Limited should be determined with reference to annual value determined by the Municipal Corporation. According to AO, the tenancies were with sister concern, KCT & Bros (Coal Sales) Limited and therefore the appellant could have disregarded the tenancies and the rental rates should have been as per prevailing market rates. I find that this proposition of the AO is untenable. As stated above, when the bonafide of the tenancies had been accepted and found to be genuine then merely because the tenancies which are otherwise protected under the Rent Control Acts are with sister concern, it could not be disregarded or treated as null or void. In fact the Income-tax Act endorses the proposition that transactions inter se amongst related concerns should be on arm’s length basis. The appellant and KCT & Bros (Coal Sales) Limited are separate persons and therefore the tenancy could not be disregarded. I find that exactly same issue was considered by ITAT,

14 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. Kolkata in ITO vs Wellworth Suppliers Pvt. Ltd. (ITA No. 1754 of 2005) relied upon by the appellant. In the case before the Tribunal, in 1967, the assessee had let out its flat to a partnership concern in which one of the directors of the appellant was a partner. In turn the partnership firm had sub-let the premises to a Trust. The AO in his order observed that although the rent charged was protected under the Rent Control Laws but since all the three persons were related the prevailing market value should be considered for the purposes of Section 23 of the Act. On appeal the Tribunal found that the tenant was in the occupation of the said flat since 1967 and was therefore protected under the West Bengal Premises Act, 1956. The bonafide of the tenancy was not in doubt and therefore the tenancy could not be disregarded or held to be sham. The Tribunal thus held that for determining the annual value u/s 23 of the AO was bound to accept the tenancy of the partnership concern and therefore the annual value should be standard rent under the rent control laws and not the fair market value of the said property. I find that the ratio laid down in this decision is square applicable to the appellant’s case and supports its claim. I further note that the AO’s finding is based on his understanding that lower rent was being charged in order to avoid tax. The appellant has however placed on record the copies of IT acknowledgements of KCT & Bros (Coal Sales) Limited which shows that it has returned income running into crores and is assessed at maximum marginal rates. I therefore agree with the appellant that whatever the rent may be, since both the appellant and KCT & Bros (Coal Sales) Limited assessed at same rate, the overall tax is same and the net effect is revenue neutral. In the circumstances the AO’s allegation that the tenancies were to avoid taxes is misplaced and incorrect. In view of the above discussions and findings, and respectfully following the decisions of the jurisdictional Calcutta High Court and ITAT, Kolkata, I hold that the tenancies of KCT & Bros (Coal Sales) Limited are bonafide and genuine and the actual rent so realized, was bonafide annual value of the property u/s 23 of the Act. I therefore hold that the addition of Rs. 1,61,52,877/- as deemed rent was completely unjustified and the AO is directed to delete the same in full. Ground Nos. 5 to 7 are therefore allowed. 16. The learned DR relied on the order of the Assessing Officer in support of the revenue’s case on this issue.

15 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. 17. The learned counsel for the assessee, on the other hand, strongly supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. He submitted that the rent charged by the assessee company during the year under consideration for the relevant properties was more than municipal valuation and even the A.O. himself had accepted income declared by the assessee under the head income from house property on the basis of actual rent received in A.Y. 2008-09. He also contended that the tenancy was found to be bonafide and there was no case of tax evasion by the assessee company as found by the Ld. CIT(A). Relying on the decision of Hon’ble Kolkata High Court in the case of CIT vs Bhaskar Mitter 73 Taxman 437 and that of Coordinate Bench of this Tribunal in the case of ITO vs Wellworth Suppliers Pvt. Ltd. (ITA No. 1754/K/2005 dated 25.12.2005), he contended that the addition made by the A.O. to the total income of the assessee under the head income from house property merely on the basis of market rate of rent is not sustainable. 18. We have considered the rival submissions and also perused the relevant material available on record. It is observed that M/s. KCT & Bros. Ltd. had occupied the properties of the assessee company as tenants for more than 3 to 4 decades and thus being protected under the respective State Tenancy Act as well as under the rent control laws, the assessee company was not in a position to unilaterally increase the rent charged from the said tenant. As contended on behalf of the assessee before the Ld. CIT(A) as well as before us, the bonafide of the said tenancy was never disputed or doubted by the A.O. As found by the Ld. CIT(A) from the relevant material placed on record before him including municipal tax record, the rent charged by

16 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. the assessee company from KCT & Bros. Ltd. was higher than the annual value of the properties determined by the Municipal Corporation with reference to rent control laws. At the time of hearing before us, nothing has been brought on record by the learned DR to rebut or controvert this finding recorded by the Ld. CIT(A). The rent charged by the assessee company from KCT & Bros. Ltd. thus was higher than the annual letting value of the properties determined by the Municipal Authorities and as rightly held by the Ld. CIT(A) by relying on the decision of the Hon’ble Kolkata High Court in the case of Bhaskar Mitter (supra), the income under the head income from the house property was rightly declared by the assessee company on the basis of rent charged from KCT & Bros. Ltd. The Ld. CIT(A) has also relied on the decision of Co-ordinate Bench of this Tribunal in the case of Wellworth Suppliers Pvt. Ltd. (supra) wherein it was held in the identical facts and circumstances of the case that the annual value should be standard rent under the Rent Control Act and not the fair market value of the property. As regards the allegation made by the A.O. that no rent was being charged by the assessee company to its sister concern M/s. KCT to avoid tax, the Ld. CIT(A) has found the same to be baseless and incorrect after having noted that the said sister concern had declared income running into crores and was assessed to tax at maximum marginal rate. Keeping in view all these observations and findings recorded by the Ld. CIT(A), which have remained uncontroverted by the learned DR, we find no infirmity in the impugned order of the Ld. CIT(A) deleting the addition of Rs. 1,61,52,877/- made by the A.O. on account of the deemed rent allegedly receivable by the assessee company from its tenant namely

17 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. KCT and upholding the same, we dismiss ground no 3 of the revenue’s appeal. 19. In ground no 4, the revenue has challenged the action of the Ld. CIT(A) in deleting the addition made by the A.O. on account of notional interest earned by the assessee on refundable security deposit taken from the tenants. 20. The assessee company had taken security deposit of Rs. 16.27 crores from the tenants / licensees. According to the A.O., the said security deposit was taken by the assessee company interest free to avoid showing rental income and paying tax thereon. He, therefore, treated the notional interest on such deposits calculated @ 10% p.a. as the rental income of the assessee and after allowing deduction of 30%, an addition of Rs. 1,13,93,565/- was made by the A.O. to the total income of the assessee under the head income from house property. 21. The addition made by the A.O. on account of notional interest on security deposits by treating the same as rental income was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as material available on record, the Ld. CIT(A) deleted the said addition for the following reasons given in his impugned order: “I have gone through the submissions of the appellant and the observations of the AO and the details placed on record. I have also considered the decisions referred to by the appellant on this issue. According to AO the appellant has obtained security deposits from tenants to avoid showing rental income and has therefore assessed

18 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. notional interest computed @ 10% of the security deposits. I note that no evidence has been brought on record by the AO to corroborate his allegation. I further note that the AO had accepted the annual value of the properties let out to various tenants and has assessed it under the head “house property”. I also find that the security deposits received from tenants has been invested by the appellant in fixed deposits which is yielding interest @ 9% to 10% which has been offered to tax. I therefore find that the AO’s observation that the appellant has avoided showing rental income is contradictory to his own conduct. Instead the AO has already offered the interest earned from investing the security deposits and therefore the AO’s action of assessing notional interest again tantamount to double addition. Furthermore it is by now well settled in law that what is taxable under the Act is real income and not notional or hypothetical income. The following decisions of the Supreme Court relied upon by the appellant is applicable to its case: 1. UCO Bank vs CIT (237 ITR 889) 2. CIT vs Shoorji Vallabhdas (46 ITR 144) 3. Godra Electricity Co. Ltd. vs CIT (225 ITR 746) I further find that this particular issue has been adjudicated upon by various Courts including the jurisdictional Calcutta High Court in the case of CIT vs Satya Co. Ltd. (75 Taxman 193) and Full Bench of Delhi High Court in the case of CIT vs Moni Kumar Subba (333 ITR 38) wherein the notional interest assessed by the AO on security deposits received from tenants was held to be unjustified and deleted. Respectfully following the binding decision of the Calcutta High Court as well as the Delhi High Court, I direct the AO to delete the addition of Rs. 1,62,76,521/- on account of notional interest on security deposits. Ground Nos. 8 & 9 are therefore allowed”. 22. The learned DR relied on the order of the Assessing Officer in support of the revenue’s case on this issue and also relied on the decision of Hon’ble Kolkata High Court in the case of CIT vs Satya Co. Ltd.

19 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. 23. The learned counsel for the assessee, on the other hand supported the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and submitted that the decision of Hon’ble Kolkata High Court in the case of Satya Co. Ltd. (supra) relied upon by the learned DR actually supports the case of the assessee on this issue. 24. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the revenue in the ground raised in its appeal on this issue as well as at the time of hearing before us has relied on the decision of Hon’ble Kolkata High Court in the case of CIT vs Satya & Co. 75 taxman 193 in support of its case. It is however observed that Hon’ble Jurisdictional High Court in the said case has held that notional interest on interest free security deposit cannot be added to arrive at the annual value of the property while determining the income under the head income from house property. As rightly contended by the learned counsel for the assessee, the said decision thus supports the case of the assessee on the issue under consideration and not that of the revenue. It is also observed that a similar issue had come up for consideration before the full bench of Hon’ble Delhi High Court in the case of CIT vs Moni Kumar Subba 333 ITR 38 and while rejecting revenue’s contention on this issue, Hon’ble Delhi High Court held that in arriving at the fair rent, there is no provision in law for inclusion of any notional interest on interest free deposit received from tenant. Moreover, as noted by the Ld. CIT(A) in his impugned order, the amount of security deposit received by the assessee company from tenants was invested in fixed deposit and the interest earned thereon at the rate of 9% to 10%

20 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. having been offered to tax, the action of the Assessing Officer in assessing notional interest on security deposit again clearly resulted in double addition. Keeping in view all these facts of the case as well as the decision of Hon’ble Kolkata High Court in the case of Satya Co. Ltd. (supra) as well as Hon’ble Delhi High court in the case CIT vs Moni Kumar Subba (supra), we hold that the addition made by the A.O. to the total income of the assessee under the head income from house property on account of notional interest on security deposits received from tenants was not sustainable and the Ld. CIT(A) is fully justified in deleting the same. We accordingly uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 4 of the revenues appeal. 25. As regards the issue involved in ground no 5 of revenue’s appeal for A.Y. 2009-10 relating to the computation of disallowance under section 14A of the Act r.w.r. 8D by taking into consideration only the dividend yielding investment, the learned representatives of both the sides have agreed that the same is squarely covered in favour of the assessee by the decision of Hon’ble Kolkata High Court in the case of REI Agro Ltd. (G.A. No. 3581 of 2013) wherein it was held that only the investment which yield dividend during the relevant previous year that has to be considered while adopting the average value of investment for the purpose of computing disallowance to be made under section 14A as per the Rule 8D(2)(ii) & (iii) of the rules. Respectfully following the said decision of the Hon’ble Jurisdictional High Court, we uphold the impugned order of the Ld. CIT(A) on this issue and dismiss ground no 5 of the revenue’s appeal.

21 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. 26. Now we take up the appeal of the revenue for A.Y. 2010-11 being ITA No. 1184/Kol/2015. Grounds raised by the revenue in this appeal read as under: “1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) erred in law in holding that the service charges received from tenants are as integral part of the rental income assessed under the head “Business Income” instead of “Income from Houses Property” ignoring the decision of the Jurisdictional High Court in CIT vs Shambhu Investment in 249 ITR 47, Kol. 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law holding that rental income received from its subsidiary company be assessed on actual basis instead of considering the “fair rent” as expressly provided u/s 23 of the IT Act, 1961? 3 Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in deleting the protective assessment of Rs. 1.33 crores as deemed dividend on the hands of the assessee? 4. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in deleting the notional interest earned on refundable security deposits ignoring decision of the Jurisdictional High Court in CIT vs Satya & Co. wherein the benefit and advantage derived out of the deposits have been held to be computed as income.” 27. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As regards the issue involved in ground no 1 of the revenue’s appeal for A.Y. 2010-11, it is observed that the same is similar to the one involved in ground no 1 of the revenue’s appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion of this order. Since all the material facts relevant to this issue as involved in the year under consideration as well as the arguments raised by both the sides are similar to that of A.Y. 2009-10, we follow our conclusion

22 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. drawn on this issue in A.Y. 2009-10 and uphold the impugned order of the Ld. CIT(A) giving relief to the assessee. Ground no 1 is accordingly dismissed. 28. As regards ground no 2 of the revenue’s appeal for A.Y. 2010- 11, it is observed that the issue involved therein is similar to the one involved in ground no 3 of the revenues appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2009-10 on the similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 2 of the revenue’s appeal for A.Y. 2010-11. 29. As regards the issue involved in ground no 3 relating to the deletion by the Ld. CIT(A) of the addition of Rs. 1.33 crores made by the A.O. on protective basis in the hands of the assessee company on account of deemed dividend, it is observed that this addition on protective basis was sought to be made by the A.O. in the hands of the KCT & Bros. and not in the hands of the assessee. This issue thus was not involved in the case of the assessee and the Ld. CIT(A), in our opinion, was not justified in entertaining the same and giving decision thereon. We, therefore, set aside the impugned order of the Ld. CIT(A) on this issue and allow ground no 3 of revenue’s appeal for A.Y. 2010- 11. 30. As regards the issue raised in ground no 4 of the revenue’s appeal for A.Y. 2010-11, it is observed that the same is similar to the one involved in ground no 4 of revenue’s appeal for A.Y. 2009-10

23 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. which has already been decided by us in the foregoing portion by us. Following our conclusion drawn in A.Y. 2009-10 on a similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 4 of revenue’s appeal for A.Y. 2010-11. 31. Now we take up the appeal of the revenue for A.Y. 2011-12 being ITA No. 1185/K/2015. Grounds raised by the revenue in this appeal read as under: “1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) erred in law in holding that the service charges received from tenants are as integral part of the rental income assessed under the head “Business Income” instead of “Income from Houses Property” ignoring the decision of the Jurisdictional High Court in CIT vs Shambhu Investment in 249 ITR 47, Kol. 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law holding that interest on Fixed Deposits are to be assessed under the head “business income” instead of “income from other sources”? 3 Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding that rental income received from its subsidiary company be assessed on actual basis instead of considering the “fair rent” as expressly provided u/s 23 of the IT Act, 1961? 4. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in deleting the notional interest earned on refundable security deposits ignoring decision of the Jurisdictional High Court in CIT vs Satya & Co. wherein the benefit and advantage derived out of the deposits have been held to be computed as income.” 32. As regards the issue involved in ground No. 1 for A.Y. 2011-12, it is observed that the same is similar to the one involved in ground no 1 of the revenue’s appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion of this order. Since all the

24 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. material facts relevant to this issue as involved in the year under consideration as well as the arguments raised by both the sides are similar to that of A.Y. 2009-10, we follow our conclusion drawn on this issue in A.Y. 2009-10 and uphold the impugned order of the Ld. CIT(A) giving relief to the assessee. Ground no 1 is accordingly dismissed. 33. As regards ground no 2 of the revenue’s appeal for A.Y. 2011- 12, it is observed that the issue involved therein is similar to the one involved in ground no 2 of the revenues appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2009-10 on the similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 2 of the revenue’s appeal for A.Y. 2011-12. 34. As regards ground no 3 of the revenue’s appeal for A.Y. 2011- 12, it is observed that the issue involved therein is similar to the one involved in ground no 3 of the revenues appeal for A.Y. 2009-10 which has already been decided by us in the foregoing portion of this order. Following our conclusion drawn in A.Y. 2009-10 on the similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 3 of the revenue’s appeal for A.Y. 2011-12. 35. As regards the issue raised in ground no 4 of the revenue’s appeal for A.Y. 2011-12, it is observed that the same is similar to the one involved in ground no 4 of revenue’s appeal for A.Y. 2009-10

25 I.T.A. No. 1183 to 1185/Kol/2015 Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Indian City Properties Ltd.. which has already been decided by us in the foregoing portion by us. Following our conclusion drawn in A.Y. 2009-10 on a similar issue, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 4 of revenue’s appeal for A.Y. 2011-12. 36. In the result, the revenue’s appeal for A.Y. 2009-10, 2011- 12 are dismissed while the revenues appeal for A.Y. 2010-11 is partly allowed. Order Pronounced in the Open Court on 29th November, 2017. Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 29/11/2017 Biswajit, Sr. PS Copy of order forwarded to: 1. M/s. Indian City Properties Ltd., 25, Brabourne Road, Kol-01. 2. DCIT, Cir 6(1), Aayakar Bhawan, 6th Floor, Room No. 6/17, P-7, Chowringhee Square, Kol-69. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata