Income Tax Appellate Tribunal - Mumbai
Encee Dyeing And Printing Works Ltd, ... vs Department Of Income Tax on 10 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "E",
MUMBAI
BEFORE SHRI P.M.JAGTAP (A.M) & SHRI N.V.VASUDEVAN(J.M)
ITA NO. 6563/M/10(A.Y. 2006-07)
The ITO, Ward 9(1)(3), Encee Dyeing and Printing
224, Aaykar Bhavan, Works Pvt. Ltd.,
MK Road, Mumbai - 20 Vs. Plot No.25, Cama Indl. Estate,
(Appellant) Walbhat Road, Goregaon(E),
Mumbai 400 063.
PAN:AAACE 6108Q
(Respondent)
Appellant by : Shri Manoj Kanojia
Respondent by : Shri Sandeep Shridhar
Date of hearing : 10/04/2012
Date of pronouncement :
ORDER
PER N.V.VASUDEVAN, J.M
This is an appeal by the revenue against the order dated 9/6/2010 of CIT(A) 19, Mumbai relating to the assessment year 2006-07. The ground of appeal raised by the revenue reads as follows:
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that notional interest on interest free deposit received by the assessee in relation to properties let out by it should not be reckoned as part of the annual value of the property computed u/s. 23(1)(b) by the Assessing Officer."
2. The assessee is a company engaged in the business of doing embroidery job work and management consultancy. The assessee had given premises measuring 9400 sq.ft. and 10000 sq. ft. respectively on lease to M/s. Overnite Express Ltd. and M/s. Standard Contract Management 2 ITA NO. 6563/M/10(A.Y. 2006-07) Solutions Ltd. The income from such letting was claimed by the assessee to be business income but the AO treated the same as income from other sources. The issue with regard to the head of income is not in dispute before us. The dispute is with regard to determination of the ALV for the purpose of determining the income chargeable to tax under the head income from house property chargeable to tax under section 22 of the Act. The AO noticed that the assessee had received Rs. 20,01,000/- from M/s. Overnite Express and M/s. Standard Contract Management Solutions Ltd. as advance. The AO added notional interest at 18% on such advance and made an addition of Rs. 4,51,800/- to the income determined under the head income from house property. While doing so the AO followed his own order in assessment year 2005-06 in assessee's own case.
3. On appeal by the assessee the CIT(A) deleted the addition made by the AO for the following reasons.
"3.4. I find that identical issues had arisen for consideration in A.Yrs. 2003-04, 2004-05 and 2005-06. In Appeal No. CIT(A)IX/9(1)(3)/IT 427/2005-06 dated 5.10. 2006, my predecessor has held as under in respect of A.Y. 2003-04, which was the first year in which the said issues were considered; as under:
"I have carefully gone through the above facts of the case and 1 am inclined to agree with the findings of the AO. It may be seen that there is no dispute over this fact that the assessee's business of dyeing and processing of textiles has been discontinued and after the suspension of the business activity, the said premises were given to these parties for their business activities. It is found that the assessee has no intention of reviving its business activity and the said premises were given to these two parties with the intention to earn rental income only for which it had entered into Agreements with these two parties and fixed amount were received as compensation from M/s. Overnite Epress Ltd and M/s. Standard Contract Management P Ltd. Besides the fixed amount of receipt, the appellant has also received interest free advance from these parties. From the above facts, it is clear that both the above parties are carrying out their own business activities in the business premises and the appellant is only getting a fixed amount of compensation for allowing them to use the premise. Hence, I hold that the receipt 3 ITA NO. 6563/M/10(A.Y. 2006-07) has rightly been taxed as 'Income from House Property' in the hands of the assessee company. However, I don't agree with the AO's view that notional interest on interest free advance should also be included in the rental income actually received by the appellant. The Hon'ble Jurisdictional High court in the case of CIT Vs. J.K. Investors Bombay Ltd reported in 248 ITR 723 and the Hon. Mumbai ITAT in the case of Marwaha Steel P. Ltd. Mumbai Vs. DCIT, ITA No. 8098/Mum/2001 (A. Y. 2001 -02) wherein the Hon. ITAT following the decision of the Hon. Jurisdictional High court in the case of CTT Vs. J.K. Investors Mumbai has held that notional interest on interest free deposits received from the lessee would not form part of the actual rent under s. 23(1)b) of the I.T Act. The AO is directed to recompute the rental income as per my above direction. This ground of appeal is partly allowed".
Aggrieved by the order of the CIT(A) the revenue has preferred the present appeal before the Tribunal.
4. At the time of hearing the parties agreed that the order of the CIT(A) for A.Y 2003-04 which was followed by the CIT(A) in the impugned order was subject matter of appeal before the Tribunal in ITA No.7076/M/06 and this Tribunal on the above issue has held as follows:
"8. Ground No. 3 is with reference to the issue of addition of 15% of the notional interest on interest free deposit received. This rent was received from a closely associated group concern of the assessee- company. By virtue of provisions of section 22 of the I.T. Act, 1961 this income is also liable to be charged under the head 'income from house property'. Accordingly, this amount was charged to tax under the head from house property. Assessee has also received interest free deposit of Rs.25,00,000/- against the rented premises from this party. Following the provisions of section 23(1)(a) and the reasons discussed, interest on such deposit @ 18% was added and deemed to be a notional rent in determining the fair market rent of the property for working out the income from house property. The notional rent on this account worked out to Rs.4,50,000/- (being 18% 25,00,000/-. On an appeal, the learned CIT(A) confirmed the same by observing as under :
"The appellant has not furnished any details of rental income received from its sister concern except the interest 4 ITA NO. 6563/M/10(A.Y. 2006-07) free deposit taken from them. In view of the decision of Hon'ble ITAT in the case of Tivoli Invest & Trading Co. Pvt. Ltd. vs. ACIT Mumbai ITA. No. 3269/M/93 and 3009/M/94 dated 30-6-2003, wherein it was held that if there is no rent paid and in lieu of rent excess deposit is being made, the said deposit may be considered as rent. This ground of appeal is therefore dismissed."
9. Contesting the same, it was the submission of the learned Counsel for the assessee before us that the notional interest cannot be added as the assessee has received the rent and referred to Assessing Officer's order. It was the submission that CIT(A) erred in giving the above finding while allowing the same in earlier ground.
10. After considering the arguments, we are of the opinion that the CIT(A) erred in confirming the addition on noticing that no rent was received, whereas the Assessing Officer considered rent offered in 'miscellaneous income' as rent received and made addition. The CIT(A) deleted such addition of notional interest on the other two properties as extracted above in para 5. Since the assessee received rent, addition of notional interest cannot be allowed, following the principles established by the Hon'ble Bombay High Court in JK Investors (Bom.) Ltd. 248 ITR 723. The AO is directed to delete the same. The ground is allowed
11. In ground No.4, the issues (a) and (b) cannot be allowed as the income was assessed under the head 'Income from House Property' on which is separate deduction upto 30% was allowed while calculating the income. So, separate allowance for repairs and management expenses does not arise. The learned Counsel also admitted that the claim is not allowable if income was assessed as 'Income from House property'. In view of this the grounds on this are rejected.
12. The issue in ground No. 4 (c) is on depreciation on plant and machinery. It was the assessee's contention that the depreciation was allowable on the machinery for passive use. It was submitted that depreciation on furniture and car were also disallowed, whereas on building it was allowed at 1/3rd.
13. After considering the rival arguments, we are of the opinion that the matter has to be examined by the Assessing Officer. The depreciation schedule was not placed on record to examine the contention that even the depreciation on furniture and car was also disallowed. In view of this, the Assessing Officer is directed to examine the claim afresh and allow the depreciation as per the facts and law.
5 ITA NO. 6563/M/10(A.Y. 2006-07)The issue in Ground No. 4 (c) is accordingly, restored to the file of Assessing Officer for fresh consideration. This ground(4) is partly allowed.
14. Ground No. 5 is not pressed as the Assessing Officer allowed the claim under section 154 subsequently.
15. In the result, appeal of the assessee is partly allowed.
ITA. No. 4217/Mum/2008 :
16. This appeal by the assessee is against the Order of the CIT(A)-IX dated 03-03-2008 for the assessment year 2004-2005 and the assessee has raised the following grounds.
1. "The learned CIT(A) erred in holding that business income of Rs.40,20,750/- was rightly assessed as income from property u/s. 22 of I.T. Act, 1961 as against business income declared by the appellant in conformity with her decision in appeal, for assessment year 2003-2004 against which appeal has been filed and pending before the Hon'ble Tribunal.
1.1. The learned CIT(A) has consequently confirmed in holding that decision claimed in respect of repairs to building of Rs.25,75,112/- bldg. management expenses of Rs.5,35,850/- and depreciation on fixed assets of Rs.15,34,303/- was not allowable as deduction against business income.
1.2. In so doing the learned CIT(A) did not objectively consider the submissions of the appellant both oral and written and that her decision in appeal for earlier year deserved to be reconsidered.
1.3. In any event the learned CIT(A) ought to have considered the submissions of the appellant as regards admissibility of depreciation on other fixed assets based on actual and passive user thereof.
2. The learned CIT(A) erred in holding in conformity with the ITO that income from commission was rightly assessed as income from other sources.
2.1. In so doing the learned CIT(A) did not consider the submissions of the appellant objectively and did not appreciate that case law relied upon by her was distinguishable on facts.
6 ITA NO. 6563/M/10(A.Y. 2006-07)17. Ground Nos. 1, 1.1 and 1.2 raised by the assessee in the assessment year 2004-2005 are similar to that of the grounds 1 and 2 raised in the assessment year 2003-2004 in ITA. No. 7076/Mum/2006 on the issue of treating Rents received under the head House property. Since we have dealt with this issue in assessee's own case for the earlier year, by respectfully following the rule of consistency, we reject the grounds raised in this assessment year also.
18. In regard to ground No. 1.3, we restore this issue to the file of Assessing Officer for reconsideration as per facts and law as held in para 12 of this order for the earlier year.
19. With regard to ground No.2, this issue does not arise as the Assessing Officer taxed the commission income as business income only. The A.R. admitted the same. Hence, the ground is rejected.
20. In the result, appeal of the assessee is partly allowed.
ITA. No. 355/Mum/2007 - Assessment year 2003-04 :
21. The Revenue raised the grounds as under :
1. "On the facts and in circumstances of the case and in law, the learned CIT(A) erred in not confirming the rent assessed u/s. 23(1)(b) by the Assessing Officer.
2. The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the ITO be restored."
22. It was the submission of the learned DR that the ground was wrongly referred to under section 23 (1) (b) whereas it should have been under section 23 (1) (a). While admitting that addition of notional interest u/s. 23(1) (b) is not allowed as per the jurisdictional High Court Judgment in JK Investors (supra), it was his submission that the notional interest can be considered in arriving at annual letting value as held in the case of Baker Technical Services Pvt. Ltd. 125 ITD 1 (TM) (Mum.). The learned Counsel submitted that the issue was considered by the ITAT in later decision in Reclamation Realty India Pvt. Ltd. vide ITA. No. 1411, 1412 and 1413/mum/2007 order dated 26th November, 2010 and relied on the same. It was further submitted that the property was not under Rent Control Act.
23. As per the ground raised the issue is against Revenue and there is no need to differ from the order of CIT(A). However, the DR submitted that the issue is of valuation under sec. 23 (1) (a). The legal 7 ITA NO. 6563/M/10(A.Y. 2006-07) principles on the issue were considered by the Coordinate Bench in the above referred case of Reclamation Realty (supra) and decided as under :
"17. We have considered the rival submissions. Originally provisions of section 23 of the Act provided for determination of annual value of house property only on the basis of sum for which, the property might reasonably be expected to be let from year to year. The actual receipt of rent was irrelevant. By the Taxation Laws (Amendment) Act, 1975 w.e.f. 1.4.1976, Section 23(1)(b) was introduced, whereby it was provided that if the actual rent received by an assessee is in excess of the sum for which, the property might reasonably be expected to let from year to year, annual value will be the rent received. While explaining the aforesaid amendment, CBDT in Circular 204 dated 24.7.1976 in paragraph 9 has stated as follows :-
"Hitherto, the annual value of house property, chargeable to income tax under the head 'income from house property was deemed to be the sum for which the property might reasonably be expected to let from year to year. In many cases, however, the actual rent received or receivable in a year exceeds the municipal valuation of the property. Sub section (1) of section 23 has been amended to provide that the where any property is in occupation of a tenant and the annual rent received or receivable by the owner is in excess of the sum for which the property might reasonably be expected to let from year to year, the annual rent received or receivable shall be taken as the annual value of the property".
18. From the aforesaid Circular, it is clear that the law prior to introduction of section 23(1)(b) was that annual value was equal to Municipal Valuation of the property. The above circular gives an indication as to how the expression "the sum for which, the property might reasonably be expected to let from year to year" used in section 23(1)(a) hast to be interpreted.
19. In the case of Diwan Daulat Kappor Vs. New Delhi Municipal Committee, 122 ITR 700 (SC), the question before the Hon'ble Supreme Court was as to what should be the basis of determining the annual value for the purpose of levy of property tax. The expression "Annual Value" as defined in the Delhi Municipal Corporation Act, 1957 and Punjab Municipal Act, 1911 was "Gross annual rent at which such house of building may reasonably be expected to let from year to year". The Hon'ble Supreme Court held that the annual value is always rent realizable by landlord and that actual rent is only an indicator what the landlord might reasonably expect to get from a hypothetical tenant. The Honourable Court further held that where tenancy is subject to rent control legislation, Standard rent would be a proper measure and in any event, annual value cannot exceed such standard rent. In the case of Mrs. Sheila Kaushish Vs. CIT, 131 ITR 435 (Sc), the question arose in the context of provisions of section 23 of the I.T. Act. The Hon'ble Supreme Court applying the decision of Hon'ble Supreme Court in the case of Dewan Daulat Rai Kapoor (supra) observed as follows :-
"Now this was a definition given on the interpretation of the definition of "Annual value" in the Delhi Municipal Corporation Act, 1957, and the Punjab Municipal Act, 8 ITA NO. 6563/M/10(A.Y. 2006-07) 1911, for the purpose of levy of house tax, but it would be eqully applicable in interpreting the definition of 'annual value' in sub-section (1) of section 23 of the I.T. Act, 1961, because these definitions are in identical terms and it was impossible to distinguish the definition of 'annual value' in sub-section (1) of section 23 of the I.T. Act, 1961, from the definition of that term in the Delhi Municipal Corporation Act, 1957 and the Punjab Municipal Act, 1911. We must, therefore, hold on an identical line of reasoning, that even if the standard rent of a building has not been fixed by the Controller under section 9 of the Rent Act and the period of limitation prescribed by section 12 of the Rent Act for making an application for fixation of the standard rent having expired, it is no longer competent to the tenant to have the standard rent of the building fixed, the annual value of the building according to the definition given in sub-section (1) of section 23 of the I.T. Act, 1961, must be held to be the standard rent determinable under the provisions of the Rent Act and not the actual rent received by the landlord from the tenant. This interpretation which we are placing on the language of sub-section (1) of Sec.23 of the IT Act,1961, may be regarded as having received legislative approval, for, we find that Sec.6 of the Taxation Laws (Amendment) Act, 1975 sub-section (1) has been amended and it has now been made clear by the introduction of clause(b) in that sub-section that where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum for which the property might reasonably be expected to let from year to year, the amount so received or receivable shall be deemed to the annual value of the property. The newly added cl.(b) clearly postulates that the sum for which a building might reasonably be expected to let from year to year may be less than the actual amount received or receivable by the landlord from the tenant".
20. Hon'ble Calcutta High Court in the case of CIT Vs. Prabhabati Bansali, 141 ITR 419 had to deal with a case of a property in Mumbai, where the dispute was with regard to determination of its annual value u/s. 23 of the Act. Hon'ble Calcutta High Court after making reference the decision of Hon'ble Supreme Court in the case of Dewan Daulat Rai Kapoor (supra) and Mrs. Sheila Kaushish (supra) held as follows :-
"Therefore, in case where the actual rent received is higher than that for which the property might reasonably be expected to let from year to year in respect of an income accruing subsequent to the amendment different considerations might arise. But, we are not concerned with such situation in the instant case. Therefore, in view of that position and the municipal law and in view of the decision of the Supreme Court, it appears to us that the income from house property must be computed on the basis of the sum which might reasonably be expected to let from year to year and with the annual municipal value provided such a value is not above the standard rent receivable and that would be the safest guide for this purpose and the rent actually received would not be of any relevance".
21. The Court in the aforesaid decision also relied on the provisions of section 154 of the Bombay Municipal Corporation Act, wherein the manner of determination of rateable value has been laid down. The said provisions also speak of "annual rent for which, the property might reasonably be expected to let from year to year". Thus, the Court concluded that the Municipal valuation and the annual value u/s. 23(1)(a) are one of the same. The decision of Hon'ble Calcutta High Court has been followed by Hon'ble Bombay High Court in the case of M.V. Sonavala Vs. CIT, 177 ITR 246 (Bom); wherein Hon'ble Bombay High Court has observed as follows :-
9 ITA NO. 6563/M/10(A.Y. 2006-07)"However, the questions posed to us are not whether the annual value of the property for the purpose of section 23(1)(a) should be taken at the actual compensation received or on the basis of standard rent. The question is whether the annual value should be taken at the amount which is actual compensation received or at the amount fixed as municipal rateable value. Obviously, Municipal rateable value cannot be equated to standard rent.
In this context, it may be desirable to refer to the Calcutta High Court's decision in the case of CIT Vs. Prabhabati Bansali, (1983) 141 ITR 419. One of the questions involved in that case was whether the Tribunal was justified in directing the Income Tax Officer to re-determine the annual value of the property under section 23(1) afresh with reference to its rateable value as determined by the Municipal Corporation. The question was answered in the affirmative and the court held that the income from house property had to be computed on the basis of the sum for which the property might reasonably be let from year to year and the annual municipal value.
Following the Calcutta High Court decision (1983) 141 ITR 419, which we think, has taken the right view, we answer the questions in the negative and against the department with a direction that the annual value of different properties will now be determined by the Tribunal in accordance with the directions set out above. No order as to costs".
22. The Hon'ble Bombay High Court in the case of Smitaben N. Ambani Vs. CWT 323 ITR 104 (Bom) in the context of Rule 1BB to the Wealth Tax Rules, which uses the same expression "the sum for which the property might be reasonably expected to let from year to year" as is found in Sec.23(1)(a) of the Act, held that rateable value as determined by the Municipal authorities shall be the yardstick. The Learned counsel for the assessee relied on several other judicial pronouncements in support of his contention that the Municipal value should be the basis of determining the annual value. We are not making reference to those decisions, since, in our opinion the aforesaid pronouncement of Hon'ble Bombay High Court considers the decisions of Hon'ble Calcutta High Court which in turn has considered the law laid down by the Hon'ble Apex Court on the issue. It is clear from the aforesaid exposition of law that charge u/s. 22 is not on the market rent; but is on the annual value and in the case of property which is not let out, municipal value would be a proper yardstick for determining the annual value. If the property is subject to rent control laws and the fair rent determined in accordance with such law is less than the municipal valuation then only that can be substituted by the municipal value. The decision in the case of Mrs. Sheila Kaushish (supra) mentions standard rent under the Rent Control Act as one of the yardsticks. We also find from the decision of Hon'ble Calcutta High Court in the case of Smt. Prabhabati Bansali (supra) that standard rent, if it does not exceed the municipal valuation alone can be adopted in place of municipal valuation.
23. As far as decisions relied upon by the learned D.R. in the case of Baker Technical Services (P) Ltd. (supra), we find that the same is based on the decision of the ITAT Mumbai bench in the case of ITO Vs. Makrupa Chemicals (P) Ltd. 108 ITD 95 (Mumbai). In the case of Makrupa Chemicals, in para-14 of the decision it has been clearly held that rateable value, if correctly determined under the municipal laws can 10 ITA NO. 6563/M/10(A.Y. 2006-07) be taken as ALV u/s.23(1)(a) of the Act and in this regard the decision of the Hon'ble Supreme Court in the case of Sheila Kaushish(supra) has been followed. It has further been observed that the rateable value is not binding on the AO, if the AO can show that rateable value under the municipal law does not represent the correct fair rent. In coming to the above conclusion, the Bench has followed the decision of the Patna High Court in the case of Kashi Prasad Katarvka Vs. CIT 101 ITR 810 (Patna). We find that the Bombay High Court which is the jurisdictional High Court has held that the rateable value under the municipal law has to be adopted as annual value u/s.23(1)(a) of the Act and therefore the decision in the case f Makrupa Chemicals (supra) to the contrary cannot be followed. Further In para-13 of its decision in the case of Makrupa Chemicals, the Tribunal has very categorically held that if ratable value is less than the standard rent (where the property is subject to rent control laws) then only standard rent has to be taken. In coming to the above conclusion the Tribunal has followed the decision of the Hon'ble Supreme Court in the case of Dewan Daulat Rai kapoor (supra). Thus the decision in the case of Baker Technical Services (P) Ltd. (supra) being contrary to the decision of the Hon'ble Bombay High court in our view cannot be followed.
24. The decision relied upon by the learned D.R. in the case of Fizz Drinks Ltd.(supra), are distinguishable on facts. The facts in that case were that the agreed rent was Re.1/- per month and interest free security deposit of Rs.1,62,36,000/- was taken by the owner. It was this factor which weighed in the mind of the Tribunal as is evident from the observations in para-8 of its order where they have held that any fair judicial administration would not allow such things to happen. The decision in the case of Tivoli Investment & Trading Co. (P) Ltd. (supra) is again distinguishable because it was a case where there was no rent and only a huge interest free security deposit was taken by the owner.
25. For the reasons given above, we hold that the annual value (also referred to as municipal valuation/ rateable value) adopted by the municipal authorities in respect of the property at Rs.27,50,835 should be the determining factor for applying the provisions of Sec.23(1)(a) of the Act. Since the rent received by the Assessee was more than the sum for which the property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property u/s.23(1)(b) of the Act. Notional interest on interest free security deposit/rent received in advance should not be added to the same in view of the decision of the Hon'ble Bombay High Court in the case of J.K.Investors (Bombay) Ltd. (supra). We hold accordingly. The appeal of the revenue is dismissed."
5. The facts and circumstances under which the addition was made in AY 03-04 and the present Assessment Year are identical. The decision rendered by the Tribunal in AY 03-04 would therefore apply to the present 11 ITA NO. 6563/M/10(A.Y. 2006-07) Assessment year also. Respectfully following the above decision of the Tribunal, we confirm the order of the CIT(A). Consequently the appeal by the revenue is dismissed.
6. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on the 13th day of April 2012 Sd/- Sd/-
(P.M.JAGTAP ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 13th April 2012
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"C" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
12 ITA NO. 6563/M/10(A.Y. 2006-07)
Details Date Initials Designation
1 Draft dictated on 09/04/2012 Sr.PS/PS
2 Draft Placed before author 10/04/2012 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order