Income Tax Appellate Tribunal - Mumbai
Gagan Trading Co. Ltd. vs The Acit on 15 December, 2003
Equivalent citations: [2005]93ITD426(MUM), (2005)94TTJ(MUM)343
JUDGMENT
J.P. Bengra, Vice President
1. This is an appeal filed by the assessee against the order of the CIT(A)-V, Mumbai pertaining to assessment year 1999-2000. The grievances of the assessee in this appeal are as under:
"1. The learned Assessing Officer erred in law, while adding a notional interest, @18% on the security deposit taken, at the time of calculating "Income from House Property".
2. The addition of notional interest, Rs. 14,04,00,000/- be deleted.
3. The learned Assessing Officer erred in holding that income of the appellant chargeable under the head "Income from House Property is Rs. 11,25,23,520/-.
4. The learned AO erred in attributing proportionate interest expense to the earning of dividend income and accordingly net dividend income is allowed to be exempt Under Section 10(33).
4. Interest expenses of Rs. 92,92,510/- be allowed as legitimate business expense Under Section 36(1)(iii)."
2. Grounds 1 to 3 deal with the issue whether Rs. 14,04,00,000/- being the notional interest worked out on the interest-free deposit of Rs. 78 crores would form part of rent received by the assessee.
3. The assessee is a company engaged in the business of trading in equity shares and investment and financing. During the assessment year under consideration, the AO found that the assessee company is the owner of a commercial premises known 'Jindal Mansion' situated at Peddar Road, Mumbai. Since 1987 the assessee company had two tenants. The assessee company purchased this property when it was already under tenancy of Jindal Strips Ltd and Jindal Iron & steel Co Ltd on a monthly rent of Rs. 5,000/- and Rs. 6,500/- respectively on the basis of Rs. 1 per sq.ft. in respect of the area occupied by them. These tenants continued as tenants of the assessee on the same terms and conditions. In the financial year 1995-96 relevant to assessment year 1996-97, the assessee reconstructed the property which now consists of ground plus 5 upper floors. The assessee let out the property to Jindal Iron & Steel Co Ltd, Jindal Strips Ltd and Jindal Vijaynagar Steel Ltd under a lease agreement for three years and received security deposit totaling Rs. 58 crores. Further, during the year, the assessee had received another interest-free deposit of Rs. 10 crores from Jindal Iron & Steel Co Ltd and Jindal Vijaynagar Steel Ltd as per the renewal of the lease agreement made during this year. In this way, the assessee has received a sum of Rs. 78 crores by way of interest-free security deposit. As per the terms of the agreement, the lessees undertook the liability to pay all rates & taxes, cess, etc. of the Bombay Municipal Corporation. Therefore, the lessees were only liable to lease rent @Rs. 1/- per sq.ft. per month to the assessee company. On receipt of this interest-free deposits, the assessee has invested the money of Rs. 78 crores in purchase of equity shares of group companies, viz. Jindal Iron & Steel Co Ltd, Jindal Vijaynagar Steel Co Ltd. The assessee company was, therefore, asked to explain as to why interest on such security deposit should not be taken as indirect rent for the purposes of Income from House Property.
4. In response to the notice, the assessee has filed its explanation vide letter dated 18-01-2002 and 25-01-2002 respectively. The AO examined the claim of the assessee company and for the detailed discussion made in assessment year 1996-97 to 1998-99, he rejected the contention of the assessee and worked out notional interest of Rs. 14,04,00,000/- computed @18% p.a. on the deposits and then reworked the 'Income from House Property' at Rs. 11,25,23,520/-.
5. In the assessment year 1998-99, the AO observed that where a property is tenanted, normally a deposit is taken in terms of advance rent or simple deposit on building. The annual value is an amount, which the property may reasonably be expected to let out from year to year. It is this judicial artifact created in the provisions of the Income-tax Act which needs to be considered for determining the annual value of the property. So the owner of the property is liable to be taxed on the annual value and not the actual income arising therefrom whether it has been let out or not. In view of this, the notional interest on such deposit should be considered to determine the true and correct annual value Under Section 23(1)(a) of the Act. After analyzing the lease agreement, he was of the view that the payment of security deposit is a consideration for providing service facilities of lease property. Clause 4 of the agreement speaks that such security deposit would be refunded to the licensee after deducting therefrom such amount that may be found due and payable by licensee under this renewal agreement. Therefore, he concluded that the deposit is being utilised to recover the arrear dues, etc. if any. Thus, this interest free deposit has an essential element of annual value. Accordingly, the interest-free deposit is nothing but good basis to determine the annual letting value of the property. He further mentioned that security deposits were received from lessees, all Jindal group of companies and the said deposits were reinvested in the shares of the said companies. Therefore, it was a modus operandi to recycle the funds to the lessee companies.
6. As regards the lease rent fixed @Rs. 1 per sq.ft. in a posh locality of Peddar Road, the AO was of the view that no prudent business man would ever let out such a property in a posh locality on a throw-away price. Therefore, in order to compensate the lesser rent, interest free security deposits were received. He further mentioned that perusal of the record shows hat the interest free deposit so received have been re-invested in the equity shares of the lessee-companies. Therefore, what follows is that the interest free deposits were received with the ulterior motive of purchasing the shares of their company through the conduit mechanism of leasing transaction. On the one hand, the assessee ha received a nominal rent of Re. 1/- per sq.ft. while on the other hand, the said interest free deposit has been fully utilised towards purchase of shares of such companies which have neither shown appreciation in the value of the equity shares nor resulted in dividends in the past several years. In this way, the assessee has derived no commercial benefit in resorting to such transactions. Then he concluded that it was a collusive and accommodation transaction to under state the annual value of the property with the motive of tax avoidance on such income from house property. He, further mentioned that on renewal of lease agreement, there was no revision of lease rental income after expiry of three years of earlier lease period. This shows that the annual value of the property has been substantially under valued for the purpose of Income from House Property Under Section 23 of the I.T. Act.
7. The AO further mentioned that actual rent of Rs. 2,54,400/- calculated @Re. 1 per sq.ft. and received by the assessee on the leased property was much lower than the annual value determinable Under Section 23(1)(a) of the I.T. Act. Even as per the valuation report of the assessee dated February 2, 1999, which determines the rateable value at Rs. 34.24 per sq.ft. per month. Therefore, he decided to determine the annual value of the aforesaid property Under Section 23(1)(a) of the Act and he distinguished the ratio of Bombay High Court judgment in the case of CIT v. J.K. Investors (Bombay) Ltd., 248 ITR 723 from that of the present case by mentioning that the Hon'ble Court has left the matter open in so far as it concerned the determination of annual value of property Under Section 23(1)(a) of the Act and mentioned that the case before the Hon'ble High Court was a case of Section 23(1)(b) of the Income-tax Act, 1961.
8. The AO also mentioned that the assessee has paid interest @18% on its borrowings as well as lending and therefore, it would be reasonable to adopt notional interest at the same rate on such interest free deposits so as to arrive at the annual letting value of the property Under Section 23(1)(a) of the Act. The computation of notional interest is given by him at para 2.11 and 2.12 of his order.
9. He further mentioned that the profit and loss account produced before him showed that the assessee had received dividend during the year as per details given below:
Name of the company Dividend
i. Jindal Strips (818048 shares) Rs. 24,54,144/-
ii. Jindal Iron & steel Co Ltd
(1951467 shares) Rs. 39,02,934/-
iii. Saw Pipes (62400 shares) Rs. 62,400/-
iv. Others (370) Rs. 964/-
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Total Rs. 64,20,442/-
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The above amount was claimed as exempt Under Section 10(33) of the Act. He observed that in assessment year 1998-99 the assessee claimed exemption Under Section 10(33) on gross receipt of dividend without deducting interest expenses incidental to such income. He further observed that the assessee debited interest expense of 92,92,510/- in its P & L Account which is payable to various Jindal Group of companies. The interest bearing funds so received by the assessee were utilised on purchase of shares of the Jindal Group of companies and trading in shares of Jindal Group of companies. Thus, he concluded that the interest bearing fund has been utilised by the assessee towards investment in loans and advances and work-in-capital for trading in shares. It was observed that the assessee had borrowed interest bearing funds from various Jindal Group of companies and the same is utilised working capital for purchase of shares in those very same lender companies. The details are given at paragraph 4 of his order.
10. The AO called for the explanation why interest expenses should not be disallowed on prorata basis since it is attributable to exempted dividend income. In other words, why exemption Under Section 10(33) may not be allowed on net dividend.
11. The assesses submitted its reply vide letter dated 31-01-2001 in which he placed reliance of the Supreme Court in the case of CIT v. Indian Bank Ltd. (1995) 56 ITR 77. However, the AO did not agree with the contention of the assessee and following the decision of the Supreme Court in the case of Distributors (Baroda) Ltd. 155 ITR 120 concluded that the exemption of dividend income has to be allowed on the net dividend. Since in his opinion, the decision of Distributors (Baroda) Ltd is equally applicable to the dividend income claimed as exempt Under Section 10(33) of the Act. He further observed whether any expenditure can be claimed against any exempted income or not. In this connection he relied on the following decisions:
1. ST Conville v. CIT (1936) (4 ITR 137) (Lah)
2. MSP Raja v. CIT (1976) 105 ITR 295 (Mad)
3. Kota Co-op Marketing Soc. Ltd. (207 ITR 608)
4. Rajasthan State Warehousing Corporation Ltd (209 ITR 271)
5. Rajasthan State Warehousing Corporation Ltd (242 ITR 450) and came to the conclusion that the income which is exempt, and therefore, cannot be allowed as deduction Under Section 37 of the I.T. Act. In assessee's case, it had received dividend income of Rs. 64,20,442/- which is clearly identifiable and divisible venture. The assessee has only one business venture of trading in shares of Jindal Group of companies, which is clearly identifiable and the income is separately determinable as reflected in the P & L Account and balance-sheet. Thus, he concluded that the interest attributable to such acquisition of shares of Jindal Group of companies on which exempted dividend income has been received during the year needs to be reduced out of the gross dividend under Section 10(33) of the I.T. Act. In support of his findings he also referred to the circular No. 780 dated 04-10-1999 on Section 10(33)(i) of the I.T. Act, 1961 He further mentioned that Section 10(33) contained the words "income by way of dividend referred to in Section 115-O" for which clarification was given in the above circular. Therefore, it will follow that such exemption is available only on net dividend.
12. In view of the above he held that the interest expenses on fund utilised for investment in shares for the purposes of earning dividend income, which is exempt Under Section 10(33), the corresponding interest expenses on such borrowings cannot be allowed as business expense and have to be deducted out of the gross dividend income. Besides, he also held that the allocation of interest expenses computed on pro-rata basis by allocation of interest bearing funds on its utilization towards cost of equity shares appearing in the closing stock of the assessee and giving the details, he mentioned that such interest expenses claimed as business expenses cannot be allowed as deduction and not to be reduced out of the gross dividend declared Under Section 10(33) of the Act.
13. Aggrieved by this order of the AO, the assessee filed appeal before the first appellate authority. However, the first appellate authority concurred with the view taken by the AO basically on the same grounds and further mentioned that Section 14A of the Act has with retrospective effect made an amendment that any expense incurred to earn tax free income shall not be allowed as deduction.
14. The learned counsel for the assessee submitted that the company purchased 'Jindal Mansion' which was previously owned by Kamla Metals and the said property was under the tenancy of two companies, viz. Jindal Strips Ltd and Jindal Iron & steel Co Ltd right from 1983 onwards at the same rent of Re. 1 per sq.ft. pm. In this connection, our attention was invited to paper book page 54 which is a consent decree passed by the Hon'ble Bombay High Court in 1985. The said property was renovated during the assessment year 1996-97 and let out to the same two companies, who were already tenants in the building alongwith another company under fresh leave and licence agreement under the same terms and condition except for security deposit. So what was let out was an already tenanted property. Only fresh agreements were entered into with the lessees. It is true that Section 23(1) of the Income-tax Act deems that for the purpose of Section 22 of the Act, the annual value of any property shall be the sum for which the property might reasonably be let out or where the property or any part of the property is let and the actual rent received or receivable by the owner in respect there is in excess of the sum referred to in Section 23(1)(a), the amount so received or receivable. In other words, where the Rent Control legislation is in force, the phrase "the sum for which the property might reasonably be expected to let appearing in Section 23(1)(a) of the Act envisages a figure which cannot exceed the maximum or ceiling of rent laid down in the appropriate rent control legislation. In the present case, the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947 (hereinafter referred to as the 'BRCA') applies. Section 7(1) of the BRCA provides inter-alia that "it shall not be lawful to claim or receive on account of rent for any premises any increase above the standard rent". It is also pointed out that Section 7(2)(a) of the BRCA provides that "no person shall claim or receive on account of any licence fee or charge for any premises anything in excess of the standard rent". It is emphasised that the term "standard rent" is defined under Section 5(10) of the BRCA. Section 5(10)(b)(iii) applies in the present case and the said sub-section provides that the standard rent, in the instant case, will be the rent at which the premises were first let, where such first letting is after 1.4.1940.
15. It was submitted, therefore, that on a plain reading of Section 23(1)(a) of the Act, if the same is to be applied, the annual value is to be ascertained in accordance with the phrase "the sum for which the property might reasonably be expected to let" can never exceed Rs. 2,54,400/-. Therefore, if Section 23(1)(a) of the Act is to be applied, the annual of these rented properties can never exceed this amount.
16. The learned counsel for the assessee then submitted that the proposition that the said phrase "the sum for which the property might reasonably be expected to let" cannot exceed the standard rent in areas where rent control legislation is in force applies in a case where the standard rent in respect of the premises has actually been fixed. It is established law that where for any reason the standard rent has not been fixed and / or cannot be fixed, whether by virtue of limitation having expired to apply for fixation of standard rent or for any other reason. In this connection reliance was placed on the decisions of the Hon'ble Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. (122 ITR 700 at 715 - 716); Mrs Sheila Kaushik v. CIT (131 ITR 435) and in Amolak Ram v. CIT (131 ITR 589). Reliance was also placed on another decision of the Hon'ble Supreme Court in Dr. Balbir Singh and Ors. v. M.C.D. and Ors. (152 ITR 388). It was further submitted that in a case, where the standard rent is not fixed and / or where the rent control legislation does not set out any formula for the computation of standard rent, the municipal rateable value of the property may be taken as a good guide to the same. It is established law that the phrase "annual rent.....receivable..." must be interpreted as meaning, the rent contracted for, or the rent to be paid in accordance with an agreement or the rent required to be paid under the law and not the rent which one hypothetically may obtain by a hypothetical letting of the property. This is obvious because if the phrase "rent receivable" is interpreted as meaning, the rent one hypothetically may obtain, there will be no difference between the provisions of Section 23(1)(a) and 23(1)(b) of the Act. It was, therefore, submitted that the words "annual rent receivable" must be the rent receivable under the agreement. In this connection reliance was placed on the Calcutta High Court decision in CIT v. Satya Co. Ltd. (75 Taxman 193), wherein in para 13, Their Lordships have specifically mentioned that under Sub-clause (b) of Section 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The actual rent is the actual sum of money which is payable by the tenant for the use of the premises to the landlord. It was then pointed out that the municipal rateable value for the entire 'Jindal Mansion' amounted to Rs. 10,61,190/- for 01-10-1998 to 31-03-1999 and, therefore, if this value was to be accepted as a guide to standard rent, then an appropriate proportion of this amount would have to be taken for computing the standard rent in respect of these three tenanted premises. It was submitted that this is not necessary in the present case, since the standard rent is actually fixed in terms of Section 5(10(b)(iii) of the BRCA.
17. The learned counsel for the assessee further submitted that Section 23(1)(b) of the Act provides that annual value of any property computed under this sub clause shall be annual rent received or receivable in respect of the property where the sum exceeds the sum computed Under Section 23(1)(a) of the Act. It was pointed out that in the present case, the amount of annual rent received or receivable is Rs. 2,54,400/- being @ Re 1 per sq.ft. pm and the assessment order of the property tax for a period of 6 months wef 01-10-1998 to 31-03-1999 show a reateable value of Rs. 10,61,190/- (please refer page 166 of the paper book). It was submitted that though the case of assessee falls Under Section 23(1)(b), however, even if the department applies provisions of Section 23(1)(a), it cannot determine the annual letting value beyond the standard rent fixed by the BRCA. It was further submitted that the case of the assessee falls Under Section 23(1)(b) which is directly covered by the decision of the jurisdictional High Court in the case of CIT v. JK Investors (Bombay) Ltd. reported in 248 ITR 723. It is pointed out that while deciding this case, the AO had relied on the decision of the Tribunal in the case of Cygnus Negri Investment Pvt. Ltd. ITA No. 3830 (Bom) of 1991 for assessment year 1987-88. It is pointed out that the Tribunal held that annual letting value of the property governed by BRCA could not be more than the municipal valuation or rent received whichever is higher and in the present case, admittedly, being higher than the municipal value, there was no justification for making addition while computing the annual letting value in respect of notional rent on account of interest free deposit. The appeal of the revenue was dismissed by the Hon'ble Bombay High Court which is clear from the paper book page 64. It was further pointed out that the SLP against that order was also rejected which is reported at 253 ITR (St) 78. Thus, the reference to this decision does not help the department.
18. It is further pointed out that appeals against the orders for assessment years 1996-97, 1997-98 and 1998-99 was allowed by the first appellate authority. So far as the reliance of the department on the decision of the Tribunal in Tivoli Investment & Trading Co. Pvt. Ltd., Mumbai v. ACIT ITA 3269/Bom/1993 is concerned, it is pointed out from paragraph 22 that it was a case where no separate amount of licence fee or rent was stipulated in the agreement. Only deposit was received towards the payment of taxes and outgoings. So it is pointed out that the Tribunal has observed that no cogent material was placed before them to indicate that what is the rateable value of the property. The piece of evidence which was placed before the revenue authority was only certificate from Builders Pvt Ltd, who said that the rateable value of the property was Rs. 10,2000/-. Thus, in the circumstances, the Tribunal held that the amount received by way of deposit shall be taken into consideration for computing annual letting value Under Section 23(1)(a) of the Act.
19. As regards the case of Dy. CIT v. Apar Ltd it is submitted that from the paragraph 17 of the order it is clear that in that case also no actual rent was received by the assessee. Therefore, provisions of Section 23(1)(a) was considered by the Tribunal. Under these circumstances, the learned counsel submitted that firstly, this case is directly covered by the decision of the Bombay High Court and even if the department considers it that the case is covered Under Section 23(1)(a), even then, the standard rent already fixed prior to 1940 cannot be altered by taking notional interest on security deposit.
20. It is submitted that the assessee company is an investment company. Its business is of trading in equity shares and investment & financing. Accordingly some of the shares are held as stock in trade for buying and selling securities. From the financial statement it can be observed that the assessee had earned dividend income from scrips held as stock in trade and from investments. The amount borrowed is a legitimate business necessity and the interest payable on it is allowable Under Section 36(1)(iii) of the Income tax Act, 1961. Even though dividend income is exempt under the Income-tax Act, the assessee held substantial amount of shares as stock-in-trade and thus, interest paid is not only to earn dividend but also to hold the stock which will earn income for the assessee on the future date. Referring to Sub-section 2(24)(ii) of the Act it is submitted that income includes dividend whereas Section 10(33)(i) of the Act exempts from tax any such income earned by way of dividend referred to in Section 115-O. As per Section 115-O of the Act, additional tax is leviable on dividend declared out of the current or accumulated profits. Thus, as per Section 10(33) of the Act, gross dividend received is exempt and not the net dividend, i.e. net of expenses. Therefore, the AO erred in allocating proportionate interest expenses against dividend and allowing net dividend exempt Under Section 10(33) of the Act. Therefore, disallowing a proportionate interest expenditure is unjustified and it should be allowed Under Section 36(1)(iii) of the Act. Section 14A does not apply in the present case. In this connection our attention was invited to the order of the Tribunal in which one of us was a party to the order, viz. Mafatlal Holdings Ltd. v. ACIT specifically paras 13 to 18 of the order, ITA No 2935/M/02. It is pointed out that the department could not establish any nexus between borrowing and purchase of the share, therefore, action of the department is erroneous.
21. As against this, the learned departmental representative heavily relied on the order of the revenue authorities and pointed out that the actual rent received was Rs. 2,54,400/- i.e. @Re.1/- per sq.ft.pm whereas as per the assessee's valuation report dated February 2, 1999, the annual rateable value comes to Rs. 34.24 per sq.ft pm. Once it is proved that the annual value declared by the assessee on the basis of fair rent is lower, the standard rent determinable Under Section 23(1) (a) should be adopted and provisions of Section 23(1)(b) cannot be invoked. Therefore, the decision of the Bombay High Court in the case of JK Investors (Bombay) Pvt Ltd is not applicable in the present case. In this connection, our attention was invited to the following discussion of the Bombay High Court:
"We once again repeat that whether such notional interest could form part of the fair rent Under Section 23(1)(a) is expressly left open".
Our attention was also invited that this is a transaction between the family concerns in which both the lessees are of some group of companies. As per the observations of the Hon'ble Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. 122 ITR 700 annual value cannot exceed measure of standard rent. It is pointed out that the CIT(A) has adopted a rateable value at 8.5% of the cost of construction for rateable value and it will reach Rs. 18 to Rs. 20 lakhs which should be taken as ALV Under Section 23(1)(a). In this connection our attention was drawn to the decision reported in 163 ITR 525 (Del) CIT v. R. Dalmia (Deed) wherein it has been mentioned that if the assessee has understated the value, the AO could fix the value. It is reiterated that as per the assessee's own valuation report, rateable value comes to Rs. 34.54 per sq.ft.
22. With regard to grounds 4 & 5, the learned departmental representative submitted that the same arguments as has been mentioned in the assessment order.
23. In reply, the learned counsel for the assessee invited our attention to the fact that in the present case, the tenants are paying all sorts of Municipal taxes, cess, etc. and the rent is over and above the taxes paid by them which is clear from pages 23 to 25 of the paper book and Clause 6(d) of the agreement. It is submitted that a per the decision of the Hon'ble Supreme Court in the case of Daulat Rai Kapoor (supra) value of the property cannot exceed standard rent since Bombay Rent Control Act is applicable to the building. Therefore, the value ha to be determined as per the standard rent fixed.
9. In respect of interest free loans, he has mentioned that the loans and advances shown by the assessee were from the following parties:
Ms Tanvi Jindal Rs. 2,33,414/-
Ms Tarini Jindal Rs. 1,94,869/-
S.K. Jindal, HUF Rs. 4,84,388/-
Smt. Sangeeta Jindal Rs. 14,76,299/-
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Total Rs. 23,88,970/-
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The case of the assessee was that these loans were given for a short period of three months. Therefore, no interest were charged. However, the AO was not convinced with this argument, because the loans were given to family members out of interest bearing funds for non-business purposes. He mentioned the availability of funds and its utilization at paragraph 3.4 of his order and worked out the total interest free funds to the tune of Rs. 115,27,78,110/- whereas the utilization of funds was to the tune of Rs. 149,37,75,692/-. Thus, he concluded that the assessee did not have any surplus interest-free funds which was utilised towards such interest-free loans and investments. Therefore, he held that if the assessee had not advanced such interest-free loans to the family members there was no need to obtain unsecured loans to the extent of utilization of interest-free loan. Thus interest payable to such creditor could have been avoided. Since the interest on borrowed funds utilised towards interest free loan to the family members cannot said to be incidental to the business purposes, he disallowed the interest attributable to the amount of interest free advances from that of the interest paid by the assessee, by Rs. 4,30,015/-. For this he relied on the decision in the case of Phalton Sugar Works Ltd 208 ITR 989 (Bom), Saraya Sugar Mills P Ltd 201 ITR 711 (All), Sujani Textiles Pvt Ltd 151 ITR 653 (Mad), Doctor & Co 180 ITR 627 (Bom) and K Somasundaram & Bros 238 ITR 939.
10. We have considered the rival submissions and gone through the material available on record. It is an admitted position that the company purchased 'Jindal Mansion' which was previously owned by Kamla Metals and the said property was under the tenancy of two companies, viz. Jindal Strips Ltd and Jindal Iron & Steel Co Ltd right from 1983 onwards at the same rent of Rs. 1/- per sq.f.t., at the time when the assessee has purchased this property. Now, the question arise, whether notional interest on the interest-free deposit can be considered while determining the annual letting value of the building Under Section 23 of the I.T. Act.
11. Section 22 of the Income-tax Act, 1961 reads as under :-
"22. the annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
The method of computation of annual letting value is provided in Section 23 of the Income-tax Act, 1961. According to this section, the sum for which the property might reasonably be expected to let from year to year and where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in Clause (a) of Sub-section (1) of Section 23, the amount so received or receivable would be the annual letting value of the property. The phrase "the sum for which the property might reasonably be expected to let" appearing in Section 23(1)(a) of the Act, envisages a figure which cannot exceed the maximum or ceiling of rent stipulated in the appropriate Rent Control Legislation and in the present case, the Bombay Rent Control Act. Section 7(1) of BRCA provides inter-alia that "it shall not be lawful to claim or receive on account of rent for any premises any increase above the standard rent". Clause (a) of Sub-section (2) of Section 7 of the said Act further provides that no person shall claim or receive on account of any licence fee or charge for any premises anything in excess of the standard rent. Sub-clause (iii) of Clause (b) of Sub-section 10 of Section 5 of BRCA applies in the present case, according to which the standard rent in the instant case will be the rent at which the premises were first let, where such first letting is after 1.4.1940. So, naturally the standard rent in the case of the assessee would be the rent which was fixed at the time when the building was first let to M/s Jindal Strips Ltd and M/s Jindal Iron & Steel Co Ltd. It follows that if Section 23(1)(a) of the Income-tax Act, 1961, is to be applied, the annual letting value of the let out portion of the property cannot exceed the standard rent. Therefore, the proposition mentioned in Clause (a) of Sub-section (1) of Section 23 of the Income-tax Act, 1961 implies that the sum for which the property might reasonably be expected to let cannot exceed, in any case, the standard rent in respect of areas where the Rent Control Legislation is applicable.
12. In the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Another (supra), the Hon'ble Supreme Court has observed as under:
"When the rent control legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the legislature as unreasonable or excessive. The legislature obviously regards recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant."
In the case of Sheila Kaushik v. CIT (supra), the same principle was followed wherein it was observed that after the rent control legislation came into force the standard rent would be the rent which will be determinative of the factor of annual letting value of the building and not the actual rent received by the landlord from the tenants. This principle was further followed in Amolok Ram v. IT (supra). In Dr. Balbir Singh and Ors. v. M.C.D. and Ors. (supra), the Hon'ble Supreme Court considered its earlier decision in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee and Anr. (supra); Mrs. Sheila Kaushik v. CIT (supra) and Amolok Ram v. CIT (supra) and it was held that the rent control does not enjoy unfettered discretion to do what he likes and he is bound to take into account the standard rent payable in respect of similar or nearly similar premises in the locality. The standard rent determinable on the principles is the guiding principle for fixation of annual letting value. The Supreme Court has gone to the extent that where for any reason that standard rent has not been fixed and / or cannot be fixed whether by virtue of limitation having expired to apply for fixation of standard rent or for any other reason, the rent control authority has to fix the annual letting value of the premises as enjoined in the Rent Control Act which shall necessarily be limited to standard rent of such premises or the premises in the vicinity.
13. In the present case, the municipal rateable value of the building as per the copy of receipt place on paper book page 166 for a period of 6 months from 01-10-1998 to 31-03-1999 is Rs. 10,61,190/-. Thus the yearly municipal rateable value of the entire property 'Jindal Mansion' can only be Rs. 21,22,380/-. Therefore, if this value was to be adopted as a guide for the determination of the standard rent, then appropriate proportion of this amount shall have to be taken for computing the standard rent of the portion let out by the assessee. Therefore, even if we apply provisions of Section 23(1)(a) of the Act, the annual letting value of the entire property cannot be more than Rs. 21,22,380/-.
14. However, the issue relating to the determination of the annual letting value of the let out portion of the building does not fall under provisions of Section 23(1)(a), because the building was already tenanted right from 1983 and when the assessee purchased this building in 1987 it was in the tenancy of these two companies, viz. M/s Jindal Strips Ltd and M/s Jindal Iron & Steel Co Ltd. Therefore, the provisions of Section 23(1)(b) of the I.T. Act would be applicable to the case before us.
15. Provisions of Section 23(1)(b) of the Act provides that "where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred in Clause (a), the amount so received or receivable. In the instant case, the amount of annual rent received or receivable being less than that of that computed Under Section 23(1)(a) of the Act, it cannot exceed the municipal rateable value already fixed by BRCA.
16. Now the question arises, whether the revenue authorities can take into consideration the notional interest on the interest-free deposits received by the assessee from its tenants while determining the annual letting value of the building under Section 23 of the I.T. Act. Since we are of the opinion that the provisions of Sub-clause (b) to Sub-section (1) of Section 23 is applicable to the present case, this issue stands directly covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. J.K. Investors (Bombay) Ltd reported at 248 ITR 723 and Calcutta High Court in the case of CIT v. Satya Co. Ltd. reported at 73 Taxman - Tax Reports 193. We find that this issue was also considered at length by the Tribunal, in favour of the assessee, in which one of us was a party to the order, in the case of Ruchi Properties Ltd v. Jt CIT ITA No. 3407/MUM/99 for assessment year 1994-95 to which our attention was invited by the learned counsel at the time of argument. Therefore, we are of the opinion that notional interest on the interest-free deposit cannot be taken into consideration while determining the annual letting value of the building under Section 23 of the I.T. Act, 1961. Therefore, we adopt the same reasoning as has been in the order of the ITAT in Ruchi Properties Ltd (supra) for arriving at the above conclusion.
17. The learned departmental representative invited our attention to the decisions of the Tribunal in the case of Tivoli Investment & Trading Co. Pvt. Ltd. passed by D-Bench of the Tribunal in ITA No. 3269/Bom/1994 and another decision of A-Bench of the Mumbai Tribunal in DC(IT) v. Apar Ltd in ITA No. 9326/Bom/95 and submitted that in these cases, the Hon'ble Benches have laid down that notional interest can be considered for determining the value of the annual letting value of the property. However, we find that the facts of the above cases are totally distinguishable from that of the present case. In the case of Tivoli Investment & Trading Co Pvt Ltd, the Bench itself has observed that the assessee received only deposit and no rent was stipulated. Similarly, the case of Apart Ltd was also a case where no actual rent was received by the assessee and the Bench was concerned with the application of Sub-clause (a) of sub section of Section 23 of the Act. Therefore, both these cases are distinguishable. In the case of cit VS r Dalmia (Deed) (supra), the question was whether municipal valuation can be considered as annual letting value of the property, which is not the case in the instant case.
18. Therefore, taking into consideration the entire facts and circumstances and the material available on record, we are of the opinion that the revenue authorities cannot take into consideration the notional interest on the interest-free advances received by the assessee while determining the annual letting value of the rented property. We accordingly set aside the orders of the authorities below on this issue. Grounds 1 to 3 of the assessee are allowed.
19. With regard to the issue relating to attribution of proportionate interest expense to the earning of dividend income resulting into allowance of only net dividend income as exempt Under Section 10(33) and not treating the entire interest expenses of Rs. 92,92,516/- as legitimate business expense Under Section 36(1)(iii), on perusal of the P & L Account, it is found that the assessee has received dividend of Rs. 64,20,442/-. The dividend income has been claimed as exempt Under Section 10(33) of the Act on gross receipt without deducting expenses incidental to the said income. It is not disputed that the interest bearing funds received by the assessee company were utilised for the purchase of shares of Jindal group of companies and trading in shares. The AO has analysed the availability of funds and its utilization. As on 31-03-1999, the interest bearing funds available with the assessee was Rs. 149,37,73,692/- and the closing stock of equity shares on which dividend declared was Rs. 26,95,59,759/-. Thus, it is clear that the interest bearing funds have been utilised by the assessee towards investments, loans and advances, work-in-capital for trading in shares of Jindal Group of companies and the details of the borrowing and corresponding investment and dividend received thereon is as under:
__________________________________________________________________ S. No. Name of the Amount of Interest Qty on Amount company loan paid which of dividend dividend received ___________________________________________________________________
1. Jindal Iron & 351381164 9292164 1951467 3902934 Steel Co Ltd
2. Jindal Strips Ltd 57113709 - 818043 2454144
3. Jindal Vijay- 4283218 - - -
nagar Steel Ltd
4. Saw Pipes Ltd - - 62400 62400
5. Others - - 370 964 ____________________________________________________________________
20. Now the question arises as to whether, in such circumstances, the interest expenses should be allowed on pro-rata basis or not. The learned assessing officer has mentioned that exemption Under Section 10(33) may be allowed on net dividend after setting off interest expenses against it. Section 10(33) introduced with effect from 01-04-1998 prescribes that any income by way of dividends referred to in Section 115-O is exempt. The word "income" essentially qualifies that the expenses incidental to such income have to be deducted from the gross dividend receipt. If we go through the intent of the section introduced with effect from 01-04-1998, the legislative intention was not to exempt gross dividend income, but the net dividend income after deducting the incidental expenses attributable to such income, otherwise the words "receipt of gross dividend income" would have been found in the said section. In the case of distributors (Baroda) Ltd reported in 150 ITR 120, the Hon'ble Supreme Court has held that the amount of dividend income need to be computed in accordance with the provisions of the Act after deducting the interest paid on monies borrowed for earning such income and not with reference to the gross amount of dividend received by the assessee. Therefore, the legislative intention in introducing Section 10(33) was not to exempt the gross dividend income but the net dividend income after deducting the expenses attributable to such income. Since the word "income" is used, the income means receipt minus expenditure, which will be the income of the assessee. Therefore, the ratio of Hon'ble Supreme Court in the case of Distributor (Baroda) Ltd applies to the dividend income which is claimed exempt Under Section 10(33) of the Act. The total interest attributable to the funds invested in shares on which dividend income has been earned need to be deducted from the gross dividend receipt which has rightly been arrived at by the AO. Therefore, the interest expenses of Rs. 16,76,883/- which is attributable to earning of dividend income is to be reduced from the gross dividend of Rs. 64,20,442/-. Accordingly, the net dividend income of Rs. 47,43,559/- was rightly allowed by the AO, which finds support from the above Supreme Court decision.
21. In the present case, the interest bearing funds having been utilised for the work in capital for the investment for trading in shares is identifiable that interest bearing funds were utilised for purchase of shares which shows the direct nexus of such interest expenditure with the exempted dividend income received. Therefore, the AO was justified in computing the interest expenses on pro-rata basis and allocating it towards the interest bearing equity shares appearing in the closing stock of the assessee. Thus, the AO has rightly allowed net dividend income as exempt Under Section 10(33) of the Act. As regards, whether the interest expense is allowable as business expenditure or not, we hold that the interest expenses on funds utilised for investment in shares for the purpose of earning dividend income, which is exempt Under Section 10(33), the corresponding expense on such borrowings cannot be allowed as business expenditure.
22. The learned counsel for the assessee relied on the decision in the case of Mafatlal Holdings Ltd v. Addl CIT ITA No. 2935/M/02 in which one of us was a party to the order. We are of the opinion that the decision does not come in our way for arriving at the above conclusion because the facts in in that are distinguishable, in that case the controversy was that the assessee company borrowed money and paid interest on such borrowings and claimed it eligible for deduction Under Section 36(1)(iii) of the Act. The AO had found that during the assessment year under consideration there was no business activity of the assessee. Under these circumstances, the issue before the Bench was whether any business activities were carried out or not and whether interest income can be allowed Under Section 36(1)(iii) or under Section 37(1) of the Act. The Tribunal while dealing with provisions of Sections 115-O and 10(33) came to the conclusion that since there was business activity of the company, the dividend income earned during the assessment year was the income of the assessee under the head 'Income from Business', therefore, deduction of interest has to be allowed Under Section 36(1)(iii) of the Income-tax Act.
23. Therefore, in our view, the assessing officer has rightly allowed the net dividend income as exempt Under Section 10(33) of the I.T. Act. We, therefore, do not find any justification to interfere with the order of the CIT(A) on this issue. We uphold the same.
24. In the result, appeal filed by the assessee is partly allowed.