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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Per Sanjay Garg, Judicial Member: The above captioned cross appeals, one by the Revenue and the other by the assessee have been preferred against the order of the learned Commissioner of Income Tax (Appeals)-41, Mumbai [hereinafter referred to as “the CIT (A)] dated 28-08-2014 for assessment year 2009-10. The same have been heard together and are being disposed of by this common order for the sake of convenience.
First, we take up the appeal of the Revenue being ITA No.7101/Mum/2014. The Revenue in this appeal has raised five effective grounds of appeal.
Grounds No. 1 to 3:
Grounds No.1, 2 and 3 of the Revenue’s appeal are regarding Annual Letting Value [hereinafter referred to as “ALV”] of the property and grounds No.4 and 5 are relating to the disallowance of expenditure u/s 14A of the Income Tax Act, 1961 [hereinafter referred to as “the Act”] read with Rule 8D of the Income Tax Rules, 1962 [hereinafter referred to as “Rule 8D”].
With regard to Grounds No.1, 2 and 3 of the appeal relating to the issue of determination of ALV, the brief facts are that during the assessment proceedings the AO noted that the assessee had shown rental income from its properties located at Corporate Park and Kamala Mills Compound. The assessee was asked to explain the ALV along with rent and deposits taken. The assessee in this respect filed the following chart:-
Particulars of Property Name of Tenant Annual rent Deposit (Rs.) taken(Rs.) Unit 6, Corporate Park, Sion Axis Bank Ltd. 1,89,80,500 1,82,70,000 Trombay Road, Chembur, Mumbai (10150 sq. ft.) Unit 14, Corporate Park, Sion -do- 43,64,400 4,76,10,000 Trombay Road, Chembur, Mumbai (10150 sq. ft.) Unit 15, Corporate Park, Sion -do- 43,64,400 4,62,87,500 Trombay Road, Chembur, Mumbai (10150 sq. ft.) Unit 1 to 13, 2nd floor, Kamala ICICI Bank Ltd. 1,81,85,807 2,62,76,412 Mill Compound, Trade World, (Refunded B Wing, Senapati Bapat Marg, on Lower authorities Parel, 04.08.2008) Mumbai Unit 2, 3rd Floor, Baxter India Pvt. 9,46,871 14,20,500 Address –do- Ltd. Unit 7 & 8, Basement, Address -do- 12,37,210 17,88,000 –do- (Refunded on 01.11.2008)
The assessee submitted that the actual rent received in respect of the above stated properties had been offered for taxation. The assessee also submitted with regard to the three properties located at Corporate Park that the rent of Unit -6 was more than the rent of Unit Nos. 14 and 15 because of location advantage viz. main road facing etc. and that the agreements in respect of Unit Nos. 14 and 15 were quite old, executed in the year 2001 and 2000 respectively, whereas, the agreement in respect of Unit No.6 was executed in the year 2008. The AO however, was not satisfied with the above explanations given by the assessee. He observed that the assessee had received interest-free deposits in relation to the above properties and that the said deposits might have affected the rental value of the properties. He, thereafter, deputed an Inspector to conduct the enquiry regarding the fair rental value of the properties in question. The AO thereafter, considered the notional/estimated fair market rates given by the Inspector in relation to the financial year 2011-12. Based on the said market rates he calculated the fair rent for the assessment year under consideration by considering ad- hoc average annual increase @10% and thereby doing the backward calculation from the financial year 2011-12 and arrived at a fair market value for the year under consideration in respect of the properties at Corporate Park at Rs.4,44,27,866/- and in respect of the properties at Kamala Mill Compound at Rs.1,44,92,240/-.
The AO further noted that even if, notional interest @16% of the deposits is taken and added to the rental value declared by the assessee, then the annual rental value, so arrived would be almost the same as arrived at by him on the basis of the report of the Inspector. He accordingly made addition of Rs.1,97,72,400/- in respect of Unit Nos. 14 and 15 of Corporate Park and Rs.32,07,862/- in respect of Kamala Mill Compound.
Being aggrieved by the order of the AO, the assessee preferred appeal before the learned CIT (A). The learned CIT (A) after considering the submissions of the assessee observed that the AO had mainly relied upon the Inspector’s report for financial year 2011-12 for determining the ALV of the properties in question for the year under consideration. He also noted that the assessee had taken a plea that the said Inspector’s report was not confronted to him. He, however, observed that even otherwise the report of the Inspector was more or less general report and not specific in nature. The said report did not contain the names and addresses of the property agents/dealers contacted by the Inspector for the purpose of ascertaining the prevailing market rate. Even, it did not mention any comparable instance of commercial properties in Corporate Park and Kamala Mill Compound which were let out.
The Inspector had simply reported that he had contacted certain agents who were said to have been providing let out charges to various parties. The said report was vague and even no names of such agents were mentioned. No specific details were given, only the rates per sq. ft. were mentioned. However, no details of the specification or infrastructures etc. were mentioned to which those rates were applicable. He, therefore, held that no details of comparable instances were obtained by the Inspector. He, therefore, held that in the absence of any specific details, the so- called prevailing market rates obtained by the Inspector could not be considered to be reliable and credible evidences. He thereafter observed that, as per the settled law as laid down by various High Courts, the ALV is the sum at which the property may reasonably let out from year to year uninfluenced by any extraneous circumstances and that actual rent received is a reliable yardstick in normal circumstances. That however, the ALV determined cannot exceed the standard rent as per the Rent Control Legislation applicable to the properties. He however, observed that the provisions of Maharashtra Rent Control Act, 1999 were not applicable in the case in hand, as the tenants were Public Limited Companies having paid up capital of more than Rs.1 Crore each.
He however, observed that the municipal valuation relating to the properties in question was available. He observed that the actual rent received by the assessee in respect of the properties was far higher than the municipal rateable value fixed by MCGM. He further observed that the provisions of Section 154 (1) of the Bombay Municipal Corporation Act, 1888 deal with determination of rateable value of the land or building also uses the words “annual rent … for which such land or building might reasonably be expected to let from year to year”. He observed that the said wordings are similar to the wordings of Section 23 of the Income Tax Act. He, therefore, held that the provisions of Section 23(1) (a) of the Income Tax Act were in para-materia with that of the provisions of BMC. Thus, the annual value fixed by the municipal authorities can be safely treated as rational and reasonable yardstick for determination of ALV u/s 23 (1) (a) of the Income Tax Act. He, in this respect also referred to the following decisions: 1. Mrs. Sheila Kaushish Vs. CIT 131 ITR 435 (SC) 2. Diwan Daulat Kapoor Vs. New Delhi Municipal Committee 122 ITR 700 (SC) 3. CIT Vs. Moni Kumar Subba 240 CTR 97 (Del) (FB) and 4. Smitaben N. Ambani Vs CWT 323 ITR 104 (Bom) He further observed that whatever benefits were derived by the assessee form the interest free deposits that were duly reflected and offered for taxation in the return of income as per the provisions of the Income Tax Act. He further relying upon the decision of the Hon’ble Bombay High Court in the case of Tip Top Typography & Ors. passed in Income Tax Appeal No. 1213/2011 vide Order dated 08-08-2014 observed that the Hon’ble High Court in the said case laid down certain principles regarding determination of ALV of properties and it was held that the actual rent received in normal circumstances would be a reliable evidence unless the rent is inflated or deflated by reasons of extraneous consideration and that the AO is not prevented from carrying out any independent investigation or enquiry regarding determination of fair market value where he has derived a positive material to indicate that the parties have suppressed the prevailing rate of the locality. The AO must not make a guess work or act on conjecture or surmises. He can make a comparative study and make analysis. In this regard, transactions of identical and similar nature can be ascertained by obtaining the requisite details. The AO must safeguard against adopting the rate stating therein straightway, rather, he should take into account all relevant factors. That the AO must comply with the principles of fairness and justice and should disclose the material in his possession to the assessee so as to obtain his view.
That if the letting out of the properties does not reflect any extraneous circumstances, then merely because an interest-free security deposit has been obtained, the AO should not presume that this sum or the interest derived there from is the rental income of the assessee. After considering the above principles, the learned CIT (A) observed that in the case in hand, the AO did not have any definite and positive material to show that the assessee has suppressed the prevailing market rate of the properties in question.
The AO had made no attempt to ascertain transactions of identical or similar nature or comparable instances showing actual letting out of commercial properties in the same premises at higher rates than that have been disclosed by the assessee. Considering the above factual position and in the light of the decision of the Hon’ble Bombay High Court in the case of Tip Top Typography & Ors. (supra), the learned CIT (A) deleted the addition made by the AO to the ALV of the properties.
We have heard the rival contentions and have also gone through the records. As discussed above, the learned CIT (A) has thoroughly discussed the factual aspects and has found that the AO has determined the fair market value on the basis of a vague and general report of the Inspector. There was no credible and reliable evidence before the AO for arriving at the fair market value of the properties. Even, the municipal valuation of the properties was much lower than the actual rent received by the assessee. There was no evidence on record that similarly placed properties like that of the assessee were having higher rental value than that was offered by the assessee. The impugned order of the learned CIT (A) is quite elaborative and is based on a very well reasoning. We do not find any infirmity in his order while deleting the addition made by the AO in respect to the ALV of the properties question.
Accordingly, we uphold the same and dismiss these grounds of appeal of the Revenue.
Grounds No.4 & 5: 7. The issue involved in Ground Nos. 4 and 5 of the Revenue’s appeal is regarding disallowance of expenditure u/s 14A of the Act read with Rule 8 of the Rules. The assessee had claimed the netting of the interest income & expenditure and then to consider the net interest expenditure for disallowance u/s 14A of the Act. The proportionate allocation of expenditure in respect of Head Office and Manufacturing Unit has also been claimed. The learned AR of the assessee has invited our attention to Para 7.2.3 of the impugned Order, wherein the fact has been mentioned that that the identical issue has been decided by the learned CIT (A) in the assessee’s own case for assessment year 2008-09 which has been further decided by the Tribunal in favour of the assessee. The learned AR of the assessee further invited our attention to the order of the Tribunal dated 12th March, passed in for assessment year 2008-09 wherein the Tribunal, on identical facts and circumstances, as are in the year under consideration, has allowed the netting of interest and has held that the disallowance of interest should be made with reference to the net interest only. The Tribunal upheld the findings of the learned CIT (A) directing the AO to verify the figures given by the assessee and to take into consideration only net interest if any, for computation of disallowance of expenditure under Rule 8D of the Rules. The Tribunal has further upheld the findings of the learned CIT (A) allowing bifurcation of the expenses between the Head Office and Regional Offices and to re-compute the disallowance on proportionate basis relatable to the Head Office only. It has been further noted by the CIT (A) in the impugned order that the AO has followed the aforesaid decision of the Tribunal while completing the re-opened assessment for assessment year 2007-08 and regular assessment for assessment year 2010-11. The learned CIT (A) accordingly has directed the AO to verify the allocation of the expenses as well as calculation of disallowance u/s 14A of the Act read with Rule 8D of the Rules with the same methodology which has been directed to be adopted in the assessment year 2008-09.Even, similar method has been adopted by the AO for earlier assessment year 2007-08 and subsequent assessment year 2010-11. In view of the above, we do not find any infirmity in the order of the learned CIT (A) in this issue also and the same is accordingly upheld. There is no merit in the appeal of the Revenue on this issue. Resultantly, Ground Nos. 4 and 5 of the Revenue’s appeal also stand dismissed.
So far as the assessee’s appeal in is concerned, though the assessee has raised five grounds, however, only Ground No.2 of the appeal relating to confirmation of disallowance of lease rent paid to Bombay Port Trust while computing income under the head “income from house property” is found to be effective. The other grounds of the assessee’s appeal are general in nature and hence require no adjudication.
At the time of hearing before us, the learned AR of the assessee stated that because of the smallness of the amount involved, he does not wish to press this ground of appeal. In view of this, Ground No.2 of the assessee’s appeal is dismissed being not pressed.
In the result, appeal of the assessee and the appeal of the Revenue, both are dismissed.
Order pronounced in the open court on 20 July, 2016