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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: Shri G S Pannu & Shri Ravish Sood
O R D E R Per G S Pannu, Accountant Member
This appeal is directed against the order of the CIT(A)-5, Mumbai, dated 05.12.2011, which in turn has arisen out of the order passed by the AO u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) relating to A.Y. 2006-07.
In this appeal, though the assessee has raised multiple grounds of appeal, essentially the dispute is on three issues with which we shall deal in seriatim. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter alia, deriving income by way of interest, rent and dividend. For the assessment year under consideration, the assessee had originally filed return of income declaring loss of Rs. 1,42,844/-, which was subsequently revised to an M/s. Anudeep Enterprises Pvt. Ltd.
income of Rs.44,949/-. In the subsequent scrutiny assessment finalized u/s. 143(3) of the Act, the total income has been assessed at Rs.25,09,774/- after making certain additions/disallowances. The appeal preferred by the assessee before the CIT(A) was partly allowed and not being satisfied with the order of the CIT(A), the assessee is in further appeal before us.
In so far as the first issue is concerned, the same relates to determination of income under the head “income from house property”, wherein the AO has determined income at Rs.14,81,130/-. In this context, the relevant facts are that the appellant company leased out its premises at 801- Shaudeep, Altamount Road, Mumbai, to M/s. Deutsche Bank vide leave and license agreement dated 17.09.2005. For the assessment year under consideration, it had credited rental income of Rs.2,58,667/-. The AO noted that the monthly rent was to the tune of Rs.40,000/-, which was low; and, that the assessee had also taken interest free deposit from the tenant i.e. Deutsche Bank of Rs.4,28,29,693/-. In this background, the AO required the assessee to show cause as to why the notional rent on the deposit received from the tenant should not be taxed u/s. 24 of the Act.
In response, the assessee company submitted that the annual value of the property is required to be determined in accordance with the provisions of section 23 of the Act and that the annual value is to be higher of the sum for which the property is reasonably expected to be let out from year to year or the actual rent received. The assessee asserted that the actual rent received by it was more than the rent determined by the local authorities for which property was expected to be let out from year to year and, therefore, the annual value of the property would not exceed
M/s. Anudeep Enterprises Pvt. Ltd. the annual rent received. In this manner the assessee resisted the action of the AO in taking into account the notional interest on deposit for the purpose of determining the annual value of the property. Apart from the aforesaid, the assessee also brought to the notice of the AO that the deposit received from Deutsche Bank was utilized for the purpose of its business and the income received thereon was a part of the total income declared. The AO was not satisfied with the explanation furnished by the assessee and noticed that the rent of the premises in the nearby location varied from rupees four lacs to six lacs per month and that the rental value varied depending on the amount of deposit given by the tenant. The AO inferred that the assessee had charged less rent because of the interest free deposit received from the tenant. The AO concluded that interest @10% p.a. was deemed to be embedded in the rent negotiated by the assessee, and, therefore, he added notional interest to the rent declared by the assessee. As a consequence 10% of the deposit calculated for the period under consideration amounting to Rs.19,63,027/- was added to the declared rent of Rs.2,58,667/-. Accordingly, the AO adopted the gross rent of Rs.22,21,694/- and after allowing statutory allowance for repairs of Rs.7,40,564/- determined the income under the head “income from house property” at Rs. 14,81,130/-. The said action of the AO has been further affirmed by the CIT(A). As per the CIT(A), the AO was justified in invoking the provisions of section 23(1)(a) of the Act and taxing notional interest on security deposit as a part of the annual value of the property. Against the said the decision, the assessee is in further appeal before us.
M/s. Anudeep Enterprises Pvt. Ltd.
Before us, the learned representative for the assessee has vehemently argued that the action of the AO in adopting the notional interest on the deposit for the purpose of calculation of annual value of the property is quite unjustified and contrary to the provisions of the Act. It has been pointed out that the legislature has not envisaged such a situation while determining the annual value in terms of section 23 of the Act and that wherever required, such aspect has been specifically incorporated in the relevant statute. In this context, the learned representative pointed out that Schedule III to the Wealth Tax Act, 1957 specifically provides for consideration of notional rent while determining the gross maintainable rent in terms of Rule 5 in part B of Schedule III. It was pointed out that there is no such specific provision in section 23 of the Act and, therefore, the lower authorities are not justified in adding notional interest as a part of the annual value of the property.
Further, the learned representative for the assessee pointed out that the annual letting value fixed by the municipal authorities is a good basis to determine the annual letting value for the purpose of section 23 of the Act. In support of the said proposition, he placed reliance on the judgment of the Hon’ble Calcutta High Court in the case of CIT Vs. Prabhabati Bansali [1983] 141 ITR 419. The learned representative pointed out that the language of section 154 of the Mumbai Municipal Corporation Act, 1988 is pari materia with section 23(1)(a) of the Act. In support of his arguments, the learned representative also placed reliance on the judgment of Hon’ble Bombay High Court in the case of CIT vs. Tip Top Typography [2014] 368 ITR 330. Even otherwise, it is made out that income earned from the deposit received from Deutsche Bank has been offered for tax and in this context it
M/s. Anudeep Enterprises Pvt. Ltd. was pointed out that the assessee had earned interest income of Rs.10,28,644/-, which is duly credited in the profit & loss account. It was therefore contended that the action of the AO in adding the notional interest in the determination of annual value of the property would tantamount to double addition.
On the other hand, the learned DR appearing for the Revenue has defended the orders of the authorities below by adverting to the reasoning contained in the respective orders, which we have already noted in the earlier paragraphs and is not being repeated for the sake of brevity.
We have carefully considered the rival submissions. The controversy in the present case lies in a narrow compass in as much as the only dispute is as to whether the AO was justified in adding notional interest on the interest free deposit received from the tenant in order to determine annual value of the property for the purposes of section 23 of the Act. Section 23(1)(a) of the Act relates to the manner of determination of annual value of the property for the purpose of section 22 of the Act. Section 23(1)(a) relates to the determination of the annual letting value of such property and speaks of the sum for which the property might reasonably be expected to let out from year to year. Quite clearly what is envisaged in section 23(1)(a) of the Act is the probable rent which the property is expected to earn but certainly it does not envisage consideration of any notional interest on any security deposit that may be placed by tenant with the landlord as a part of the terms and conditions of letting out of such a property. In fact, the aforesaid proposition has been specifically approved by the Hon’ble Delhi High Court in the case of CIT Vs. Asian Hotels Ltd. [2010] 323 ITR 490 and it has also been referred with approval by M/s. Anudeep Enterprises Pvt. Ltd.
Hon’ble jurisdictional High Court in the case of Tip Top Typography (supra). The following discussion by the Hon’ble Bombay High Court is relevant in this context :
“We approve the aforesaid view of the Division Bench of this court and operative words in section 23(1)(a) of the Act are ‘the sum for which the property might reasonably be expected to let from year to year’. These words provide a specific direction to the Revenue for determining the ‘fair rent’. The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the ‘fair/market rent’ because of the reason that assessee has received abnormally high interest-free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a ‘fair rent’. The provisions of section 23(1)(a) do not mandate this. The Division Bench in Asian Hotels Ltd. [2010] 323 ITR 490 (Delhi), thus, rightly observed that in a taxing statute it would be unsafe for the court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of CIT v. J.K. Investors (Bombay) Ltd. [2001] 248 ITR 723 (Bom) categorically rejected the formula of addition of notional interest while determining the ‘fair rent’ … It is, thus, manifest that various courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view that what has been stated in Asian Hotels Ltd. [2010] 323 ITR 490 (Delhi).” [underlined for emphasis by us] 7. Applying the aforesaid parity of reasoning to the facts of the instant case, it becomes abundantly clear that the notional interest considered by the AO for the purpose of determining the annual value of the property is quite unjustified. No doubt, the AO is within his jurisdiction to formulate a belief that the actual rent received is less than the market rent of the property but he was duty bound to undertake the necessary exercise in this behalf, and not straightaway consider the notional interest on the security deposit to arrive at the annual value of the property. Notably, before the AO the assessee had asserted that the annual rent
M/s. Anudeep Enterprises Pvt. Ltd. received by the assessee was more than the rent determined by the local authorities and the entire discussion in the assessment order does not reveal any material lead by the AO, which would show as to why the municipal rateable value canvassed by the assessee was wrong or unreliable. Therefore, under these circumstances, the action of the AO in disregarding the actual rent received for the purpose of determining the annual value of the property is unjustified and deserves to be set aside.
Another aspect which also renders the action of the AO as untenable is as follows. The Hon’ble Calcutta High Court in the case of CIT v. Satya Co. Ltd. [1997] 40 CTR 569 was considering an identical situation as to whether the annual value of the property could be determined by, inter alia, considering the notional interest on the deposit made by the tenant. While holding that there was no scope or justification for making addition based on the notional interest for determining the annual value, the Hon’ble High Court noted that whatever benefit or advantage which is derived from the deposit in the shape of saving of interest or earning of interest or making profits would be reflected in computing the income of the assessee under other heads; and, thus negated the action of the Revenue. In the facts of the present case before us, it is clear that the deposit received from the tenant has been kept in fixed deposit by the assessee which has yielded interest income of Rs.10,28,644/- and such sum is lying credited to the Profit and loss account of the assessee, therefore, the benefit derived from the deposit received from the tenant is very much part of the total income declared by the assessee.
Hence, there is no scope for making any addition on account of so called notional
M/s. Anudeep Enterprises Pvt. Ltd. interest on the deposit while determining the annual value of the property for the purpose of section 23 of the Act.
Thus, in conclusion we set aside the order of the CIT(A) and direct the AO to delete the impugned addition and accept the income as declared by the assessee under the head “income from house property” on account of rent earned on the property leased to Deutsche Bank. The assessee succeeds on this aspect.
The second issue in this appeal is with regard to the nature of interest income earned by the assessee. The AO noted that interest income was offered for taxation by the assessee as “business income”. The assessee was show caused as to why the interest income should not be taxed as “income from other sources” since no business activity was carried out by the assessee. Before the AO, the assessee contended that its main business was to give loans and advances and therefore interest income is to be seen as part and parcel of its business activities and, therefore, such income be taxed as “business income”. The AO did not find any merit in the explanation rendered by the assessee as no activity of advancing loan was carried out and the only income was by way of interest earned on bank deposit besides dividend income and rent. The AO therefore assessed the interest income as “income from other sources”. The CIT(A) has also upheld the stand of the AO.
Before us, apart from contending that the main business of the assessee company was to give loans and advances no other arguments have been raised in support of taxing the interest income as business income.
M/s. Anudeep Enterprises Pvt. Ltd.
In our considered opinion, the orders of the authorities below do not require any interference in as much as factually it has been made out by the AO that no activity of giving loans and advances has indeed been carried out and, therefore, the impugned interest income has been correctly taxed as “income from other sources”. Notably interest has been earned on the fixed deposit kept with the bank and the source of such deposit is the security deposit received from the tenant.
Under these circumstances, we confirm the stand of the AO that interest income is liable to be taxed as “income from other sources”. Thus, on this aspect the assessee fails.
The last issue in this appeal is with respect to expenses of Rs.2,95,174/- representing local travel and conveyance and commission expenses. The AO denied deduction for the aforesaid expenses on the ground that the same have no direct nexus with the earning of interest income. The CIT(A) has also confirmed the stand of the AO that the aforesaid expenses should not be allowed u/s. 57 of the Act while assessing the income from other sources.
Before us the learned representative for the assessee pointed out that the aforesaid expenses are routine small expenses which are incurred for sustaining the corporate entity and, therefore, the same deserve to be allowed while computing the total income.
On the other hand, the learned DR has reiterated the stand of the lower authorities.
M/s. Anudeep Enterprises Pvt. Ltd.
In our considered opinion, the expenses in question are necessary to sustain the corporate entity and, therefore, the same deserve to be allowed while computing the total income. Accordingly, we direct the AO to allow the aforesaid expenses while computing the total income. Thus, on this aspect the assessee succeeds.
In the result, the appeal is partly allowed.
Order pronounced in the open court on this day of 3rd March, 2017.