NARESH CHELLRAM GIDWANI,MUMBAI vs. ITO 19(3)(3), MUMBAI

The learned CIT(Appeal) erred in confirming the notional addition of rent income of Rs.11,00,000/-, in spite of the fact that ultimate realization of rent was Rs.1,00,000/- (of one month) only as the same property was sold in 1 month after receiving the advance rent of Rs.12,00,000/-. The remaining Rs.11,00,000/- received was adjusted against the sale proceeds of the flat.”

The assessee filed the return of income declaring total income to the tune of Rs.1,18,060/- on 30.09.2008. The case was selected for scrutiny and accordingly notice u/s.143(3) of the Income Tax Act, 1961 ( in short “the Act”) dated 05.08.2009 was issued and served upon the assessee on 24.09.2009. Thereafter, the notice u/s.142(1) dated 27.09.2010 was issued. Thereafter the Assessing Officer assessed the income of the assessee to the tune of Rs.31,47,730/- but the assessee was not satisfied, therefore filed an appeal before the learned CIT(A). The learned CIT(A) confirmed the disallowance of 2 A.Y. 2008-09 deduction claimed on account of capital gain income in respect of brokerage on sale transaction to the tune of Rs70,787/- and the learned CIT(A) also confirmed the notional addition on rent income for Rs.11,00,000/-. Whereas, the assessee only realised rent for a period of one month to the tune of Rs.1,00,000/- and remaining Rs.11,00,000/- was adjusted towards the sale proceeds of the flat. Aggrieved by this order the assessee has filed the present appeal before us.

According to issue no.1 the assessee has challenged the confirmation of disallowance of deduction claimed from capital gain income in respect of broker paid amounting to Rs.70,787/- (35% of Rs.2,02,248/-). Order of Assessing Officer dated 24.12.2010 perused. We found that this issue has not been dealt by the Assessing Officer by speaking order and the learned CIT(A) also dealt this issue by observing this fact that as per section 48 of the Act the assessee was not entitled for the deduction of brokerage. In view of the said circumstances we set aside the finding of the CIT(A) on this issue and remand this issue before the Assessing Officer to pass the order afresh after giving an opportunity of being heard to the assessee. Accordingly these issues are decided in favour of the assessee and against the revenue.

We have heard the arguments advanced by the learned representative of the parties and perused the record carefully. The assessee, Shri Naresh Gidwani was a joint owner of a flat with his brother Shri Haresh C. Gidwani. The said flat was let out as per Leave and License Agreement to M/s. Schlumberger Asia Services Limited. The Leave and License Agreement dated 26.10.2007 was for the period of 36 months commencing from 10.11.2007 to 09.11.2010. The Licensee agreed to pay advance rent to the tune of Rs.2,00,000/- per month x 12 months = Rs.24,00,000/- i.e. (Rs. 12,00,000/- to Mr. Naresh Gidwani & Rs.12,00,000/- to Mr. Haresh Gidwani) in advance for first 12 months. The licensee also agreed to pay a security deposit of Rs.4,00,000/- (Rs.2,00,000/- to Naresh Gidwani & Rs.2,00,000/- to Mr. Haresh Gidwani). The leave and license agreement have been produced by the assessee which lies at page 18 to 32 of the paper book. Subsequently, assessee along with his brother sold the said flat on 19.12.2007. In view of the agreement of sale lies in the paper book at page 33 to 44, the advance compensation to tune of Rs.22,00,000/- and security to the tune of Rs.4,00,000/- total being Rs.26,00,000/- were adjusted towards the sale amount. Infact, the assessee received the rent for the period of one month only i.e. also in proportionate as the assessee received Rs.1,00,000/-, his brother also received Rs.1,00,000/-. It can be said 4 A.Y. 2008-09 that the rental income of the assessee was to the tune of Rs.12,00,000/- vide which Rs.1,00,000/- has been received and the remaining Rs.11,00,000/- was adjusted towards the sale of the flat. In view of the said factual position, the rent to the tune of Rs.11,00,000/- which has not been received by the assessee and adjusted towards the sale amount of the flat cannot be said to the income of the assessee. In this regard the CBDT Circular No.5, dated 02.03.2001, clears the said position. No doubt in the said circumstances the learned CIT(A) has wrongly confirmed the rental income of Rs.11,00,000/- of the assessee and added to the tax. However adjustment with regard to the advance tax paid, the plea has been taken on the basis of circular no.5/2001 dated 02.03.2001. No doubt it is obvious that the instruction contained in the circular no.5/2001 dated 02.03.2001 is required to be complied with. Accordingly, this issue is decided in favour of the assessee against the revenue.

In the result, the appeal filed by the assessee is hereby allowed for statistical purpose.