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Income Tax Appellate Tribunal, “E” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
These cross appeals are directed against the order dated 3.10.2011 passed by the learned CIT(A)-16, Mumbai and they relate to A.Y. 2008-09.
The assessee is in appeal challenging the decision taken by the learned CIT(A) on following issues :-
a) Enhancement of rental income receivable from M/s. Visage Studio.
2 Empress Tin Factory Pvt. Limited b) Disallowance of expenses claimed by the assessee under head security charges, interest expenditure and depreciation.
The Revenue is challenging the decision of the learned CIT(A) in deleting the enhancement of rental income receivable from M/s. Rem Nord Research Laboratories Pvt. Ltd.
Facts relating to the case are discussed in brief. The assessee is the owner of the property situated at No. 2, Prabhat Nagar, Patel Estate Road, Jogeshwari (West), Mumbai. The assessee is engaged in the business of editing and Telecine of films and studio. It is also engaged in leasing out its properties. The assessee has given some portions of its building to two companies named M/s. Rem Nord Research Laboratories Pvt. Ltd. and M/s. Visage Studio. The assessee had given 18400 square feet to M/s. Rem Nord Research Laboratories Pvt. Ltd. at a rental rate of ` 16 per square feet. The assessee had also received interest free security deposit of ` 2.5 crores from the above said concern. M/s. Visage Studio was given 17500 square feet on the terms and condition that 50% of gross receipts earned by way of hiring of studio would be collected as rent by the assessee. The assessee declared rental income of ` 88,09,375/- from M/s. Visage Studio, being its share from hiring income. The assessing officer noticed that the above said amount of Rs.88,09,735/- was arrived at after deducting assessee’s share in Commission expenses of Rs.12,60,000/-. The AO took the view that the agreement entered between the assessee and M/s Visage Studios does not provide for deduction of Commission expenses. Accordingly he took the view that the rental income from M/s Visage Studios should be Rs.94,39,675/- (Rs.88,09,675/- plus Rs.6,30,000/-).
The Assessing Officer further noticed that M/s. Visage Studio had shown gross receipts of ` 2,22,87,861/- and hence the AO took the view that 50% thereof, which works out at ` 1,11,43,930/-, should have been received by the assessee. Since the assessee had declared its share of 3 Empress Tin Factory Pvt. Limited studio rental income only at ` 88,09,375/- only, the Assessing Officer asked the assessee to explain the difference. The assessee submitted that M/s. Visage Studio might have received other receipts also and it is entitled to get share from hiring of studio only. It also submitted that the commission expenses incurred on earning of hiring income is a direct expenses and hence the same was deducted from the hiring income treating the same as common expenditure.
The Assessing Officer also made inquiries with M/s. Visage Studio and they furnished break up details of gross receipts of ` 2,22,87,861/- and also confirmed that they have paid a sum of ` 88,09,675/- only to the assessee. The Assessing Officer was not convinced with the explanations given by the assessee as well as M/s. Visage Studio. The Assessing Officer referred to clause 1 & 4 of the agreement entered between the assessee and M/s. Visage Studio and came to the conclusion that the assessee has got right to receive ` 1,11,43,930/-, being 50% of gross receipts shown by M/s Visage Studios. Accordingly, the Assessing Officer took rental income receivable from M/s. Visage Studio at ` 1,11,43,930/- and assessed the same.
The Assessing Officer took the view that rental income received from M/s. Rem Nord Research Laboratories Pvt. Ltd. was lower than the amount received from M/s. Visage Studio. Accordingly, by taking rental income determined in the case of M/s. Visage Sutido as the basis, the Assessing Officer computed the rental income from M/s. Rem Nord Research Laboratories Pvt. Ltd. at ` 1,17,17,046/- and assessed the same.
The assessee had declared editing income of ` 703/- in its profit and loss account. The assessee had also claimed various expenses, including expenses incurred under the head “security charges” at ` 2,29,850/-, depreciation at ` 7,48,803/- and interest expenditure `13,27,304/-. The Assessing Officer did not allow the above said expenditure on the reasoning
4 Empress Tin Factory Pvt. Limited that they are not related to earning of house property income or editing income.
In the appellate proceedings, the learned CIT(A) confirmed determination of rental income from M/s. Visage Studio and also disallowance of expenses. With regard to rental income determined in the case of M/s. Rem Nord Research Laboratories Pvt. Ltd., the learned CIT(A) held that the Assessing Officer should have determined rental income as per agreement entered between the assessee and M/s Rem Nord Research and not on the basis of rental income earned from M/s Visage studios. Accordingly he deleted the addition made by the Assessing Officer. Aggrieved by the decision taken by the learned CIT(A), both the parties are in appeal before us.
We shall first take up the appeal filed by the assessee. The first issue relates to the determination of rental income receivable from M/s Visage Studios. The assessee has shown net receipt of Rs.88,09,675/- as its share of income from leasing of studios. There is no dispute with regard to the fact that the studios were rented out by M/s Visage Studios only and not by the assessee, meaning thereby the gross income from renting of studio premises was received by M/s Visage Studios only. We notice that the tax authorities have placed heavy reliance on the agreement entered between the assessee and M/s Visage studios to come to the conclusion that the assessee should have received its share of 50% on the amount of Rs.2,22,87,861/-, being the gross receipts shown by M/s Visage Studios.
However, we notice that the assessing officer has made direct enquiries with M/s Visage Studios and it has furnished the details of gross receipts. Further, it has also confirmed that it has paid a sum of Rs.88,09,675/- only to the assessee as the assessee’s share. During the course of hearing, the Ld A.R submitted that the assessee has duly shown the amount received from M/s Visage Studios and the same has also been 5 Empress Tin Factory Pvt. Limited confirmed by M/s Visage Studios. He submitted the parties to the agreement, viz., the assessee and M/s Visage studios have shared the income as per their understanding of the agreement. Accordingly he submitted that the tax authorities were not justified in giving different interpretation to the agreement and they were also not justified in enhancing the share of the assessee, when there is no dispute between the parties about the quantum of income. He also submitted that the AO has not brought any material to show that there was suppression of income, if any, made by the assessee. Accordingly he submitted that the tax authorities were not justified in determining the receipts from M/s Visage Studios at a higher figure and the same is totally against the facts available on record.
On the contrary, the Ld D.R placed heavy reliance on the order passed by Ld CIT(A) and submitted that the agreement entered between the parties have been correctly interpreted by the AO & Ld CIT(A) and accordingly the assessee’s share was determined correctly.
Having heard rival submissions, we find merit in the contentions of the assessee. We notice that the tax authorities have interpreted the agreement entered between the assessee and M/s Visage studios in their own way and accordingly came to the conclusion that the assessee was entitled to a sum of Rs.1.11 crores. However, the fact remains that the recipient of the share, being the assessee and the payer of the share, being M/s Visage Studios have understood the transactions in a particular way and accordingly shared the lease income. When there is no misunderstanding between the parties on the terms and conditions of the agreement, in our view, the tax authorities may not be justified in interpreting the agreement in a different manner. As contended by Ld A.R, the assessing officer has not brought any material on record to show that there was suppression of share of income. It is also not the case of the AO
6 Empress Tin Factory Pvt. Limited that the rent received from M/s Visage studio was less than the fair market value.
In view of the above, we are unable to agree with the view taken by Ld CIT(A) as well as the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the enhancement made by him.
The next issue contested by the assessee relates to the disallowance of expenses claimed under the head Security charges, Depreciation and Interest. The Ld A.R submitted that the assessee is a private limited company and these expenses have been incurred in the normal course of running the company. He further submitted that similar expenses claimed in the past have been allowed by the AO.
We heard the rival contentions and perused the record. There is no dispute with regard to the fact that the assessee is a private limited company and it did not discontinue the business. It is stated that similar expenses claimed in the past have been allowed. The AO has not shown that the assessee has discontinued the business activities permanently. Hence we are of the view that the expenses claimed by the assessee should be allowed fully, since they have been incurred for the purposes of business only. With regard to the depreciation, the assessee has submitted it has been claimed in respect of entire building, plant and machinery etc. With regard to the depreciation claimed on the building, we direct the AO to disallow depreciation pertaining to the let out portion on proportionate basis from the WDV of the building, since the building let out cannot be considered to be used for the purposes of business. Accordingly we modify the order passed by Ld CIT(A) on the lines discussed above.
We shall now take up the appeal filed by the revenue. The AO determined the Annual letting value of property let out to M/s Rem Nord Research Laboratories Ltd, by taking the assessee’s share in Studio lease
7 Empress Tin Factory Pvt. Limited income earned by M/s Visage Studios as the basis. The Ld CIT(A) deleted the enhancement so made by the AO and hence the revenue has filed this appeal before us.
We heard the parties and perused the record. We notice that the Ld CIT(A) has decided the issue by making following observations:- 3.3.1 I have carefully considered the contention of the appellant and also carefully gone through the documents as are available on record. I find that the appellant had given the property on the leave and license to M/s. Ram Nord Lab Pvt. Ltd in 1995. The agreement clearly indicates that the appellant had given property admeasuring approximately 17600 sq. ft. of built up area, and 9300 sq. ft. of open space in the factory premises for a period of 3 years commencing on 29th March 1995. The licensee gave a deposit of 2 crores interest free security and a further amount of ` 50 lakh as interest free security for the due performance and observance of all the terms and conditions of leave and license agreement by the licensee. The rate at which the property was let out was fixed at the rate of ` 5 per sq.ft. for built up area and ` 2 per square ft. of the open space area. The said rent was subsequently revised in the further agreements which have been renewed from time to time. The last one was entered on 2/12/2006 upto 31/3/2010. The Ld. AO during the course of the assessment proceedings find that the property which was given on leave and license agreement to M/s. Visage Studioz in the year 2005 carries a very high rental value as compared to one that has been given to Ram Nord Research Laboratories P. Ltd. Accordingly, the Ld. AO determined the rental value of the property at the rate of Z.18400 per square and calculated the rent receivable on the basis of such computation and made the addition accordingly.
3.3.2 The finding of the Ld. AO that rear part of the property carries a high rental value in the year 2005 and the rate received by the assessee should be applied ipso facto to the property given on leave and license basis in the year 1995 cannot be held as logical. Firstly, the property that was given on leave and license in the year 1995 was on the basis of prevailing rent at that point of time and the department had accepted that valuation. Secondly, the licensee in the first case is using the property for its own business while the Visage Studioz is giving the property on further hire basis to other parties for a short duration by providing sets and other facilities for the person to whom the property was given on hire for the purposes of making documentary/advertising films etc. The appellant's arrangement with M/s. Visage Studioz is entire on a different footing i.e. to receive 50% of the gross receipts as compared to the agreement with M/s. Ram Nord
8 Empress Tin Factory Pvt. Limited
Research Laboratories P. Ltd. In the case of Ram Nord Research Laboratories P. Ltd, the appellant had to receive the rental as decided by it in its agreement. Without prejudice to the foregoing, the income from house property is to be determined on a notional value i.e. the annual letting value of the property. This is to be determined with reference to the provisions contained in section 23(1)(a) or (b). In the clause (b), the actual rent receipt by the appellant has to be taken as annual letting value of the property and in the second case, if the property is not actually let out; the annual value is to be determined by the Ld. AO. The Ld. AO can also determine the annual value of property which is actually let out, if in his opinion the rent received is less than the annual letting value of the property. As indicated by the Ld. AR of the appellant that the various Courts by and large have agreed in principle that the annual letting value of the property should be determined on the basis of standard rent or municipal rateable value or the fair market rent. However, the annual letting value of the property cannot exceed the standard rent as determined by the Rent Control Authorities. In the appellant's case, the property is actually let out and in the opinion of the Ld. AO all of the property is not correct, therefore, the annual value of the property should be based on either the municipal valuation or standard rent or the actual rent whichever is more. The municipal rateable value of the entire property to which a part is let out to Ram Nord Research Laboratories P. Ltd is only ` 76,790. The appellant is actually receiving a higher sum of ` 35,32,800 than the municipal valuation, therefore, the actual rent is to be taken as annual letting value of the property. The market rent as taken by the Ld. AO cannot be taken firstly it is not the market rent but the business income received by Visage Studioz from several persons.
3.3.3 Further, in a recently pronounced decision in the case of Moni Kumar Subba., (2011) 240 UR (Del)(FB) 97 the Hon'ble full bench of Delhi, while relying on the decisions of CIT vs. Asian Hotels Ltd. (2008) 215 CTR (Del) 84, CIT vs. J.K. Investors (Bombay) Ltd. (2001) 168 CTR (Born) 189, IT vs. Satya Co., Ltd. (1997) 140 CTR (Cal) 569 and Kashi Prasad Kataruka vs. CIT 1976 CTR (Pat) 95 has held as under :-
"Operative words in s. 23(1)(a) 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 AO, 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 the 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 9 Empress Tin Factory Pvt. Limited stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a 'fair rent'. Provisions of s. 23(1)(a) do not mandate this (Para 13)
Since the provisions of fixation of annual rent under the Delhi Municipal Corporation Act are pan imateria with s. 23 of the IT Act, the annual value fixed by the municipal authorities can be a rational yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the IT laws. If there is a change in circumstances because of passage of time, viz., the annual value was fixed by the municipal authorities much earlier in point of time on the basis of rent then received, this may not provide a safe yardstick if in the assessment year in question when assessment is to be made under IT Act the property is let out at a much higher rent. Thus, the AO in a given case can ignore the municipal valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the 'fair rent' in the market and there is sufficient material on record for taking a different valuation. If the AO can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material /evidence evidence placed on record. — (Paras 18 & 19)
The discussion leads to the following conclusions : (i) annual letting value would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances, (ii) an inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness, (iii) actual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration, (iv) such ALV, however, cannot exceed the standard rent as per the rent control legislation applicable to the property, (v) if standard rent has not been fixed by the rent controller, then it is the duty of the AO to determine the standard rent as per the provisions of rent control enactment, (vi) the standard rent is the upper limit, if the fair rent is less than the standard rent, then it is the fair rent which shall be taken as ALV and not the standard rent. (Para 20)
In the present case, the AO added notional interest on the interest-free security for arriving at ALV. Since that was not permissible, the effect would be that such assessment was rightly set aside by the CIT(A) and the Tribunal. Therefore, the orders
10 Empress Tin Factory Pvt. Limited would not call for any interference. (Para 22)”
3.3.4 Therefore it is a settled proposition that if the AO finds that the actual rent received is less than the fair rent for the reason that the assessee has received abnormally high interest-free security deposit, he can undertake necessary exercise in that behalf for determination of fair rent under s. 23(1)(a); however, notional interest on interest-free security deposit cannot be taken as a determinative factor to arrive at the 'fair rent'; rateable value, if correctly determined under the municipal laws, can be taken as ALV under s. 23(1)(a). In view of that, the addition of ` 81,84,246 made by the Ld. AO on account of the annual rental value of the property is accordingly, deleted and the learned Assessing Officer is directed to accept the annual letting value as shown by the appellant at ` 35,32,800/-
It can be noticed that M/s Rem Nord Lab P Ltd have been occupying the premises of the assessee since 1995 and the agreement is being renewed periodically. The AO has not shown that the fair rental value of the property was more than the rent received by the assessee. The agreement with M/s Visage studios was entered only in the preceding year and the assessee could fix the rental value on some other methodology depending upon market conditions. The same, in our view, would not render the agreements entered by the assessee with M/s Rem Nord Lab P Ltd since 1995 void. Hence we are of the view that the AO was not justified in determining the Annual Letting value of the property let out to M/s Rem Nord Lab P Ltd by taking the share of income of the assessee in lease rent as the basis. We notice that the Ld CIT(A) has analysed the facts in a proper perspective in accordance with the law and hence we do not find any reason to interfere with his decision rendered on this issue.
In the result, the appeal filed by the assessee is partly allowed and the appeal of the revenue is dismissed. Order has been pronounced in the Court on 15.2.2017.