Income Tax Appellate Tribunal - Mumbai
Income Tax Officer vs Chem Mech (P) Ltd. on 28 June, 2001
Equivalent citations: [2002]83ITD427(MUM)
ORDER
Behari Lal, AM.
1. These appeals of the Department and the cross-appeals of the assessee have been directed against the orders of the CIT(A)-XXXVI, Mumbai, dt. 22nd March, 1999, for the asst: yrs. 1989-90 and 1993-94. We are disposing of all these appeals with one consolidated order as the issues involved are identical, for the sake of convenience and brevity. The common grounds of appeal for both the assessment years taken up by the Department reads as follows :
"(i) On the facts and in the circumstances of the case and in law the learned CIT(A) erred in directing the AO for not including the sum of Rs. 3,32,500 while arriving at the ALV for the purpose of computing the income from house property.
(ii) On the facts and in the circumstances of the case and in law the learned CIT(A) failed to appreciate that ALV of the extended additional property is Rs. 27,02,458 and not Rs. 23,69,958."
The common grounds of appeal taken up by the assessee for both the assessment years are as follows :
"(i) On the facts and in the circumstances of the case, the learned CIT(A) erred in estimating annual letting value at Rs. 2,84,394 (12 per cent of Rs. 23,69,950). Such determination is not in accordance with the provisions of Section 23 of the IT Act and the Bombay Rent Control Act and is unreasonable and excessive.
(ii) In estimating the annual letting value, in relation to addition to the existing residential house owned by your appellant, the learned CIT(A) should have taken into consideration,
(a) the principles laid down in Mrs. Shiela Kaushish v. CIT (1981) 131 ITR 435 (SC), Diwan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. (1980) 122 ITR 700 (SC) and Dr. Balbir Singh and Ors. v. Municipal Corporation of Delhi (1985) 153 ITR 388 (SC), and
(b) having regard to the provisions of fixing the standard rent under the relevant provisions and decisions under the Bombay Rent Control Act, and
(c) the annual letting value revised and enhanced from Rs. 28,485 to Rs. 74,860 by the Municipal Corporation of Greater Bombay, and further held that annual letting value under Section 23 cannot exceed the standard rent under the Bombay Rent Control Act and the ALV could be the same as property taxes at Rs. 74,860."
2. The assessee derives income from business, dividend, commission, rent from bungalow at Little Gibbs Road, and interest. During the year, the company carried on the business in sale and purchase of cotton and chemicals. The assessee owns a house property situated at Little Gibbs Road, Malabar Hills, Mumbai. This property was acquired in 1972 subject to the tenancy of the ground and first floors. In January, 1987, M/s F. Padumji & Co. Ltd. (FPL) made an offer that against interest free-deposit of Rs. 20 lakhs, an area of 1,500 sq. ft. of the flat be given to its managing director. Accepting this offer, additional area was constructed. The cost of construction during 1987-88 was Rs. 22,75,449 and in the next year Rs. 74,590. The cost of the property as on 1st July, 1986, was Rs. 6,29,075. Additions were also made in 1986-87 of Rs. 3,32,500. Thus, the total cost in the books was at Rs. 33,11,544. The additionally constructed area of 1,500 sq. ft. was given on rent to the managing director of FPL at monthly rent of Rs. 1,300 and the balance was used for the purpose of business of the assessee. The managing director of M/s FPL, Mr. Shyam Jatia is also a shareholder and director of the assessee-company. From the P&L a/c of the asst. yr. 1989-90, the AO observed that the assessee had received rental income of Rs. 34,092 and Rs. 25,569 from the property of bungalow at Little Gibbs Road, Mumbai. The assessee had made extension of this bungalow and the additional cost of this extension (construction) was shown at Rs. 23,49,970, thus making the total cost of this bungalow at Rs. 33,11,545. The bungalow was rented by the assessee to the following persons for a total rent of Rs. 59,661, for the asst. yr. 1989-90 :
Rs.
(i) Mr. Mahabir Prasad Jatia 15,750
(ii) Mr. Shyam M. Jatia 27,300
(iii) Mr. M.P. Jatia, HUF 16,611 Total rent 59,661 Similarly, the bungalow was rented to the above persons for Rs. 34,092 during the asst. yr. 1993-94. The total expenses incurred by the assessee for this bungalow were Rs. 67,354 and Rs. 34,092 for the asst. yrs. 1989-90 and 1993-94 respectively. The AO thus observed that the expenses incurred by the company for the maintenance of the bungalow are much more than the actual rent received. Therefore, the AO has stated that taking into consideration the investment made by the assessee in the bungalow, the rent charged by the company from the tenants was far below the rental value. The AO also observed that the tenants of the property are related to each other and their relation is father and a son and they are both directors of the assessee-company and Mr. Mahabir Prasad Jatia is a chairman. The AO stated that during the course of assessment proceedings, the assessee has filed resolution by the assessee company and M/s FPL. As per this resolution, Mr. Chem Mech (P) Ltd., has to offer the company's property at 38, Little Gibbs Road, Mumbai to Mr. S.M. Jatia, managing director of M/s FPL at a monthly rent of Rs. 1,300 provided an interest-free deposit of Rs. 20 lakhs is paid to the assessee-company. The AO also observed that Mr. S.M. Jatia is a director in both these limited companies along with his father, Mr. Mahabir Prasad Jatia. The other director, Mr. Vijaykumar Jatia is also a brother of Mr. S.M. Jatia. Both these companies are closely connected to each other and controlled by one family. Mr. S.M. Jatia is also a coparcener of the HUF of his father. The property rented out to Shri S.M. Jatia was already in his possession even much before the extension of it. The resolution passed by both these companies for letting out the property to Mr. S.M. Jatia against interest-free deposit of Rs. 20 lakhs, according to the AO, was nothing but to accommodate each other by applying dubious method of tax planning. Thus according to him, the assessee had made tax planning applying colourful device to avoid payment of tax by dubious method. The AO thus estimated the annual letting value (ALV) of the property at Rs. 3,97,000 for the asst. yr. 1989-90 by applying the interest rate of 12 per cent on the total investment of Rs. 33 lakhs in the property. He, therefore, adopted the fair rental value for the asst. yr. 1989-90 at Rs. 6,94,750 as the previous year pertaining to the asst. yr. 1989-90 was from 1st July, 1987, to 31st March, 1989, i.e., for 21 months.
3. The learned CIT(A) observed that there are three crucial facts for ascertaining ALV within the meaning of Section 23 of the Act. i.e.
(i) Interest-free deposit which is from M/s FPL. It is admitted that in this company, the directors and the shareholders of the assessee-company are interested.
(ii) The interest-free deposit is from M/s FPL whereas the tenant is Mr. S.M. Jatia and he is paying the rent of Rs. 1,300 per month and not M/s FPL.
(iii) The so-called tenants are interested in the assessee-company either as directors or shareholders.
In view of the above observations, the learned CIT(A) has stated that the rent collected of Rs. 59,661, for the asst. yr. 1989-90 as against the actual outgoings by way of municipal tax, water tax and lease rent of Rs. 67,354 is not fair. He has made similar observation for the asst. yr. 1993-94. Thus according to him, the ALV shown by the assessee is not a fair value and the same needs to be worked out to arrive at the fair market value in terms of Section 23 of the Act. The learned CIT(A) has further pointed out that Rs. 23,69,958 was spent on the higher floors and the ground floor was purchased as constructed and in that portion at the time of purchase, a tenant was having possession. Therefore, for the ground floor being old, the learned CIT(A) has considered ALV at Rs. 9,165 as fair. However, for the remaining portion, he has confirmed the findings of the AO that 12 per cent of the investment of Rs. 23,69,958 should be the ALV. Thus according to him, the ALV should be worked out at Rs. 9,165 plus 12 per cent of Rs. 23,69,958 for the asst. yr. 1993-94 and for the asst. yr. 1989-90 being of 21 months should accordingly be calculated. Aggrieved by the order of the learned CIT(A), both the Department and the assessee filed the present appeals before the Tribunal.
4. At the time of hearing, the learned counsel for the assessee contended that the property is subject to the provisions of the Bombay Rent Control Act and the ALV in terms of Section 23 cannot exceed the standard rent. He further argued that having regard to the provisions of the Bombay Rent Control Act, the return on investment pegged between 8.5 per cent to 10 per cent for fixation of the standard rent and the interest-free deposit of Rs. 20 lakhs, the actual rent charged at Rs. 15,600 represents fair ALV within the meaning of Section 23 of the Act. The learned counsel referred to the following Court cases :
(i) Mrs. Shiela Kaushish v. CIT (1981) 131 ITR 435 (SC);
(ii) Diwan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. (1980) 122 ITR 700 (SC); and
(iii) Dr. Balbir Singh and Ors. v. Municipal Corporation of Delhi (1985) 153 ITR 388 (SC).
The learned counsel invited our attention to pp. 34 to 38 of the paper book and contended that the rateable value of the property was fixed by the Municipal Corporation of Greater Bombay at Rs. 74,860 after making the necessary investigation. He contended that the ALV may have to be estimated on cost of construction of Rs. 22,75,499. He referred to the decision of the Supreme Court in the case of dr. Balbir Singh (supra) and contended that in estimating ALV, return on investment is to be taken on the basis of 7-1/2 per cent to 8-1/4 per cent of cost. He further referred to the following Court cases to support his contention that annual rateable value fixed by the Municipal Corporation Act should be adopted for the determination of annual value of the fair rental value of the accommodation and should be determined with reference to standard rent payable under the Rent Control Act.
(i) CIT v. Poddar Bros. (P) Ltd. (1999) 240 ITR 925 (Cal);
(ii) ITO v. S. Trilochan Singh Sahney (1985) 11 ITD 472 (Bom);
(iii) CIT v. Shri Ashraf-Ur-Rehman Azimullah (1994) 209 ITR 341 (Bom); and
(iv) M.A.E. Paes v. CIT (1998) 230 ITR 60 (Bom).
The learned Departmental Representative relied on the findings of the AO and placed his reliance on the decision of the Allahabad High Court in the case of Smt. Radha Devi Dalmiya v. CIT (1980) 125 ITR 134 (All) wherein the Hon'ble High Court has held that the ALV is based on the cost of construction of the building and other relevant costs including interest on amount borrowed for the construction of the property.
5. We have carefully considered the submissions made by the rival parties. Income from house property is based on the "Annual Value" of the house property which is the notional figure and is different from actual receipt. It is the deemed amount for which the property might reasonably be expected to let from year to year. It is this artificial or statutory income which is the annual value of the property and is different from the mandatory benefits derived from the property or the profit arising to the owner of the house property therefrom. The owner of the property is liable to tax on the "annual value" and not on the actual income arising therefrom whether it has been let out or not. As per the provisions of Section 23 of the Act, the annual value is the reasonable amount which is expected when let out from year to year irrespective of the method of accounting followed by the owner. It has been held by the Supreme Court in the case of Amolak Ram Khosla v. CIT (1981) 131 ITR 589 (SC) and Mrs. Shiela Kaushish (supra) that "When the building is covered under the Rent Control Act and the standard rent is fixed, the assessing authority can fix up the annual value based on standard rent." Generally, the annual value cannot exceed standard rent which is based on the cost of the property from time to time. In Bombay, it is the "Annual rateable value" as fixed by the Municipal Corporation Act which is taken as annual value as the same is based on the cost of construction of the building and other relevant cost including interest on amount borrowed for the construction of the property. From the asst. yr. 1976-77, as per Clause (b) of Section 23(1), it was laid down that when the actual rent received or receivable is more than the reasonable expected rent from the property let out from year to year, the actual rent is to be taken as annual value of the property let out. In view of the aforesaid discussion, where the property is under the rent control legislation and the rent receivable by the owner is the standard rent, the notional value in that case would be standard rent. If the actual rent received or receivable is more than the standard rent, then the actual rent is to be taken as notional rent. When the property is not covered by the Rent Control Act, the annual value can be determined by comparison of annual value fixed of the adjacent properties let out. But in the case of CIT v. Bhaskar Mittal (1994) 73 Taxman 437 (Cal), the High Court has laid down that "There is unity of the Municipal Act and the IT Act on the question of annual value and annual value cannot exceed the standard rent or fair rent under the Rent Control Act and may in given case be even lower than the standard or fair rent. In a case where the annual municipal value is available, that itself would be the annual letting value under the Act." After going through the various Court cases, we find that the ALV has to be determined on the basis (i) standard rent determined in accordance with Rent Control Act, (ii) annual municipal value if available that itself would be the annual letting value under the Act, and (iii) if the actual rent received or receivable is more than the standard rent or annual municipal value, then the actual rent is to be taken as annual value of the property. In the present case, the standard rent in Bombay is to be fixed at 8.5 per cent on the total investment as per the Bombay Rent Control Act as contended by the learned counsel. The total investment made in the property is Rs. 33 lakhs as has been mentioned by the AO in his order. Therefore, the standard rent would be Rs. 33,00,000 x 17/200 = Rs. 2,80,500 for 12 months. The Municipal Corporation of Greater Bombay has revised the ALV from Rs. 28,485 to Rs. 74,860. Now the only point remains for consideration is the actual rent received by the assessee as per the provisions of Section 23(1)(b) of the Act. For the asst. yr. 1989-90, the assessee received the rent of Rs. 59,661 along with that the assessee has also received Rs. 20 lakhs interest-free from M/s FPL, in which Shri S.M. Jatia one of the tenants is a director. Shri S.M. Jatia is also a director in the assessee-company. Shri Mahabir Prasad Jatia, father of Shri S.M. Jatia, another tenant is also a director in both the companies. Another director, Mr. Vijaykumar Jatia is also a brother of Shri S.M. Jatia, and also a director in the above company. The third tenant is HUF of Shri M.P. Jatia. Shri S.M. Jatia is also a coparcener of the HUF. Thus, both the companies are closely related. Therefore, interest-free deposit of Rs. 20 lakhs with the assessee-company has definitely contributed to bring down the rental value to a nominal amount. We fully agree with the AO that the resolution passed by both the companies for letting out the property to Shri S.M. Jatia against interest-free deposit of Rs. 20 lakhs was in fact to accommodate each other by applying dubious method of tax planning. Therefore, to determine the annual value of the property, the interest @ 12 per cent which was prevailing bank rate at the relevant time on the advance of Rs. 20 lakhs has to be taken into account for determining the annual rent receivable by the assessee. For the asst. yr. 1989-90, the notional benefit received by the assessee on interest-free advance of Rs. 20 lakhs would amount to Rs. 4,20,000 (Rs. 20,00,000 x 21/12 x 12/100 = Rs. 4,20,000). The actual rent received during this year is Rs. 59,661. Therefore, the notional rent receivable by the assessee during the assessment year would amount to Rs. 4,79,661 (Rs. 4,20,000 + Rs. 59,661). Now the standard rent under the Bombay Rent Control Act for 21 months would come to Rs. 4,90,875 (This has been calculated by taking interest rate at 8.5 per cent on the total investment in the property of Rs. 33 lakhs for 21 months). The municipal valuation for 21 months would come to Rs. 1,31,005 (Rs. 74,860 + Rs. 56,145 i.e., the valuation for 9 months). The actual rent receivable as determined would come to Rs. 4,79,661. The highest of these three figures is the standard rent as per the Bombay Rent Control Act. Therefore, we direct the AO to adopt the fair rental value of this property for the asst. yr. 1989-90 at Rs. 4,90,875. Similarly, for the asst. yr. 1993-94, the standard rent under the Bombay Rent Control Act would come to Rs. 2,80,500, the municipal valuation as per Bombay Municipal Corporation would come to Rs. 74,860 whereas the rent receivable during the year would come to Rs. 2,74,092 (Rs. 2,40,000 + Rs. 34,092 = Rs. 2,74,092). The figure of Rs. 2,80,500 is the highest, therefore, the same has to be adopted as the annual value of the property. The AO is, therefore, directed to adopt the fair rental value of the property for the asst. yr. 1993-94 at Rs. 2,80,500.
6. In the result, the appeals of the Department are dismissed whereas the appeals of the assesses are partly allowed.