Case Law Details

Case Name : Oberoi Hotels Pvt. Ltd. Vs DCIT (ITAT Kolkata)
Appeal Number : Income tax (Appeal) nos. 230 & 233 of 2012 and 1030 & 1041 of 2012
Date of Judgement/Order : 15/10/2015
Related Assessment Year :
Courts : All ITAT (4430) ITAT Kolkata (283)

Brief of the Case

ITAT Kolkata held In the case of Oberoi Hotels Pvt. Ltd. vs. DCIT that the AO while applying clause (a) of Section 1 to Section 23, failed to appreciate that in the present case actually let out the property being a farm house is on rent to EIH Limited and if a property is actually let out, then the expectation of its letting out becomes an actual reality and such property cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the property. Hence, even as per the deeming provision of Section 23(l) (a), in the case of let out property, only the actual rent received was required to be considered as annual value of property.

Ration decidendi – Deeming provision of Section 23(1) (a) applicable only in case of vacant property and not where the property was actually let out.

Facts of the Case

Disallowance u/s 14A for AY 2007-08

The assessee earned dividend income of Rs.6,26,69,394/- and long term capital gains of Rs.17,49,975/- aggregating to Rs.6,44,19,369/-.The assessee claimed both the incomes as exempt. The AO during the course of assessment proceedings required the assessee to explain as to why the expenditure relatable to the exempted income should not be disallowed by invoking the provisions of section 14A read with Rule 8D.The assessee explained that it had already offered a sum of Rs.12,73,10,367/- and Rs.7,51,731/- being interest on loan and demat charges respectively incurred in connection with earning of dividend income and long term capital gains. Hence, no other expenditure was incurred by it for earning exempted income. He also stated that the assessee has made disallowance of expenses on a reasonable basis and this practice is being consistently followed. The AO was not satisfied by the explanation of the assessee and he made further disallowance of Rs. 83,93,827/- by invoking the provisions of section 14A on account of proportionate management expenses.

Disallowance u/s 14A for AY 2008-09

The assessee company during the assessment year 2008-09 earned dividend income of Rs.13,44,01,081/- and long term capital gains of Rs.1,52,47,379/- and claimed the same as exempted from tax. The assessee also claimed to have added back interest on loan of Rs.14,21,34,269/- and de mat charges of Rs.6,85,115/- relatable to exempted income and added to total income as expenditure disallowable u/s. 14A. The AO during the course of assessment proceedings considered the explanation of the assessee and noted that, “it is not possible that the investment activity would not have required any time and energy of any employee, resources etc. of the company. Somebody has to take the effort to decide the investment pattern and the nature of shares, securities units etc. where investment has to be made.” Accordingly, he invoked the provisions of section 14A read with Rule 8D made further disallowance of 0.5% of average investment being value of expenditure incurred for exempted income and made disallowance of expenditure to the extent of Rs.83,25,042/-.

Addition on account of deemed dividend u/s section 2(22) (e)

The assessee company during FY 2006-07, received advances from its associate concerns. The AO during the course of assessment proceedings required the assessee to file details in respect of such advances from the aforesaid companies. The assessee before AO stated that these advances were accepted from various group companies only on pure commercial exigency and such advances were also repaid according to availability of funds. But the AO treated the above advances as deemed dividend in the hands of the assessee by invoking the provisions of section 2(22) (e). The main contention of the AO was that perusal of audited accounts of Oberoi Private Limited, Oberoi Buildings & Investments Private Limited and Oberoi Investments Private Limited shows that the concerns are not in the business of lending of the money. The said companies do not have certificates of NBFC & the said companies do not have any certificate from any Government Authority showing that they are engaged in money lending business.

Disallowance of depreciation for assets part of block of assets

 The AO during the course of assessment proceedings disallowed depreciation on building house as guest house at Naila Fort and other fixed assets used therein at Rs.10,76,681/-. Before AO, assessee claimed that depreciation is otherwise allowable u/s. 32(1). For this, he explained that the mode of computation of depreciation is allowable under the Act has been shifted to the concept of ‘block of assets’ whereby the identity of an individual asset is completely lost. According to assessee, this building used as guest house at Naila Fort is part of block of assets and accordingly, depreciation is allowable. But the AO disallowed the depreciation being depreciation claimed on guest house.

 Enhancing the annual value of let out property

 The assessee company is owner of a property at Oberoi farm, village Kapashera, New Delhi. The assessee for this property entered into an agreement with EIH Ltd., a group company, letting out this property on rent. As per agreement, the property is to be used by EIH Ltd. as residence and office of one of its Dy. M.D for a rental of Rs.30,000/- per month. The AO during the course of assessment proceedings conducted search in certain private website and based on said search, the AO came to conclusion that the rental income of this property is about Rs. 10 lacs per month ignoring the rental value of Rs.30,000/- per month offered by the assessee. Accordingly, the AO determined the annual value of this property at Rs.1,20,00,000/- and made addition.

Non deduction of TDS u/s 195 on legal services to residence of Thailand and Australia

the assessee claimed total expenditure under the head professional and consultancy fees, during the year under consideration, at Rs.3,42,91,086/- out of which a sum of Rs.2,20,65,567/- represents expenses in foreign currencies on account of professional services rendered outside India by non-residents from their offices in foreign countries. The AO noted that this professional and consultancy fee amounting to Rs.2,20,65,567/- is subject to TDS u/s. 194J read with 195. As the assessee has not deducted the TDS, he disallowed this foreign payments claimed by the assessee under the head professional consultancy fees by invoking the provisions of section 40(a) (i).

Held by CIT (A)

Disallowance u/s 14A for AY 2007-08

The CIT (A) restricted the disallowance at 1% of the exempted income. It was held that this fact is above doubt that a part of the expenditure claimed by the appellant in its Profit and Loss Account should be relatable, to earning of the exempted income and thus should be disallowed u/s. 14A. Now comes the question of computing the quantum of disallowance. Rule 8D has been inserted in the income tax rules to compute the quantum of disallowance under section 14A.On perusal of the Judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd (2010) 328 ITR 81 (Bom), I am of the considered view that Rule 8D should not be applicable in the case of the appellant in the instant assessment year i.e. AY 200708 since Rule 8D should be applicable from the AY 2008-09.Thus, the AO was wrong in applying Rule 8D in the case of the appellant.

CIT (A) further held that AO was not reasonable in disallowing Rs. 83,93,827/- which, in my view, is very high. Based on the facts of the appellant’s case and relying on my own order in the case of EIH Limited , one of the group companies of the appellant, for the Assessment Year 2007-08, I restrict the disallowance to 1% of the exempt income of Rs.6,44,19,369/~ i.e. Rs 6,44,193/-. My order in the case of EIH Limited is based on the order of Hon’ble ITAT, Kolkata, in the case of DCIT Vs. EIH Associated Hotels Limited 126 TTJ 246, which is another group company of the appellant. Hence, I direct the AO to reduce the disallowance u/s. 14A from 83,93,827/- to 6,44,193/-.

Disallowance u/s 14A for AY 2008-09

CIT (A) directed the AO to recomputed the disallowance by ignoring the investment made in foreign companies while computing the disallowance u/s. 14A read with Rule 8D.

 Addition on account of deemed dividend u/s section 2(22) (e)

Analyzing the provision of section 2(22) (e), the CIT(A) stated that in respect to these two companies i.e. Oberoi Holding Pvt. Ltd. and Oberoi Building & Investment Pvt. Ltd. provisions of section 2(22)(e) will not be attracted. Accordingly, he deleted the addition. Hence, there is no dispute in respect to this aspect of the case. None of the parties are in appeal on this issue. In respect to advances received from Oberoi Investment Pvt. Ltd., the CIT (A) set aside the issue to the AO for examining whether the lender is in the business of money lending?

The assessee during appellate proceedings before CIT (A) filed NBFC certificate of Oberoi Investment Pvt. Ltd. and also submitted that as per Memorandum of Association of lender company, it is one of the objects to carry on money lending business and accordingly, the provisions of section 2(22)(e) will not apply but the CIT(A) set aside the issue for reexamination after considering the NBFC certificate.

Disallowance of depreciation for assets part of block of assets

CIT (A) confirmed the disallowance of depreciation. It was held that the contention of the appellant that the original assets used in Naila fort were very old and in most cases the values had been exhausted from the block is not acceptable.

Enhancing the annual value of let out property

CIT (A) deleted the addition. It was held that I have carefully considered the judgment of the Hon’ble jurisdictional High Court and found that the facts of that case are quite similar to that of the appellant’s case. Thus, in my view the said judgement should be applied in the present case. the appellant has rightly contended that if a property is actually let out the expectation of letting out becomes an actual reality. Thus, such property cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the subject property. There is no finding in record that the appellant has received an additional amount, which was not recorded in the books. Based on the above, I feel, only the actual rent received by the appellant should be considered as income in its hand. The contention of the appellant that only real income should be taxable in the hands of the appellant are also valid.

Non deduction of TDS u/s 195 on legal services to residence of Thailand and Australia

CIT (A) allowed the appeal of the assessee. It was held that the remittances made abroad can be taxed in India only under the ‘Residency rule’ and not under the ‘Source rule’ principle. Since the services were rendered from outside India and in the absence of any evidence that the payees have any P.E. in India, in my view, the remittances should not be subject to tax in India. Therefore, the appellant had no obligation to withhold tax while making the remittances outside India and the A.O. was not correct in applying the provisions of section 40(a) (i).

Held by ITAT

Disallowance u/s 14A for AY 2007-08

We find that for the relevant AY 2007-08 Rule 8D is not applicable because the same was introduced by the I. T. (5th amendment) Rules 2008 w.e.f. 24.03.2008. Hon’ble Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom) has held that applicability of Rule 8D as prospective for and from AY 2008-09 and not retrospective.

We further find that the assessee had already offered and identified an amount of Rs.12,73,10,367/- and Rs.7,51,731/- being interest on loan and demat charges respectively for disallowance being related to exempted income. According to us, in view of the above facts and circumstances, no further disallowance can be called for in respect of exempted income. Even otherwise, the assessee company has received the dividend income from one of its group company i.e. EIH Ltd., which has the same registered office as that of the assessee and there is no specific management cost incurred for earning this dividend income. Further, the AO failed to appreciate the facts of the case that there is no satisfaction recorded by the AO with regard to correctness or otherwise of the claim of the assessee made in return having regard to the accounts of the assessee. According to us, assessee’s claim is reasonable and is to be accepted. There is no scope for further disallowance of 1% of the exempted income in view of the above reasons and facts of the case. Accordingly, this issue of revenue’s appeal is dismissed and that of the assessee is allowed.

Disallowance u/s 14A for AY 2008-09

We find that the assessee company has already identified and disallowed interest on loan amounting to Rs.14,21,35,269/- and de mat charges at Rs.6,85,115/- under the provisions of section 14A read with Rule 8D of the Rules being expenses relatable to earning of exempted income. The assessee has earned total exempt income at Rs.14,96,64,407/- and disallowance was made by invoking the provisions of section 14A read with Rule 8D of the Rules at Rs.14,28,20,364/-. We further find that the assessee has already identified the expenditure relatable to earning of exempted income but could not find any other expenditure debited in the P&L Account which had nexus with earning of exempted income. Even from the order of AO or that of the CIT (A), we could not find that there is any specific item of expenditure is related to earning of exempt income. Unless there is a direct or proximate connection between the exempt income and that of the expenditure incurred, the provisions of section 14A read with Rule 8D of the Rules cannot be attracted or invoked.

It is also a fact that there is no fresh investment made by the assessee during the year and these investments are primarily made in group companies with the intention to acquire and retain controlling stakes and even dividend is received through ECS. This practice assessee is following consistently and the same has not been disputed in the past assessments. Now it is well settled that even after insertion of rule 8D of the Rules, the AO must satisfy himself that the claim of expenditure made by assessee is incurred before invoking this provision. The AO has simply given a finding that some expenditure might have been incurred for earning this exempted income thereby Rule 8D of the Rules was invoked. There is no satisfaction recorded by the AO for invoking Rule 8D of the Rules despite the fact that the assessee has disclosed huge expenditure for earning of exempted income and the same was disallowed himself, the correctness of which is not in doubt. The assessee has enclosed details of investment made in group concerns and subsidiary companies.

In view of the above facts and circumstances, we are of the view that the AO has not recorded any satisfaction about the correctness or otherwise of the accounts of the assessee wherein the assessee himself has made disallowance of expenses relatable to earning of exempted income and secondly, we are also of the view that the primary object of investment of assessee is for holding controlling stake in group concerns and not for earning of income out of that investment. In both the eventualities, no disallowance can made u/s. 14A read with Rule 8D. Accordingly, this issue of assessee’s appeal is allowed.

Addition on account of deemed dividend u/s section 2(22) (e)

We find from the findings of CIT (A) that he has admitted the additional evidence submitted before him in the shape of NBFC certificate of Oberoi Investment Pvt. Ltd. and remanded the matter back to the file of the AO. Once there is money lending business, according to ld. Counsel, the assessee is out of the mischief of the provisions of section 2(22) (e) i.e. the deemed dividend. In terms of the above, we remit the issue to the file of AO to re-decide after considering the clauses of Memorandum of Association of the lender company and also NBFC certificate of Oberoi Investment Pvt. Ltd. Accordingly, this issue of both the appeals assessee is set aside and allowed for statistical purposes

Disallowance of depreciation for assets part of block of assets

There is no provision in the Act which discriminates the allowability of depreciation on fixed assets on the basis of its use or any restriction had been provided in the statute as in the case of section 37(4); which has been deleted. The original assets used in Naila Fort are very old and in most cases the values have been exhausted from the block. The disallowance made by the AO is ad hoc, not based on any logic. Accordingly, we are of the view that the depreciation cannot be disallowed. For this proposition we are relying on the judgment of Hon’ble Delhi High court in the case of CIT Vs. 1. Oswal Agro Mills Ltd. 2. Oswal Chemicals & Fertilizers Ltd. (2012) 341 ITR 467 (Del.). Accordingly, we allow the claim of assessee and reverse the orders of lower authorities. This common issue of assessee’s appeals is allowed.

Enhancing the annual value of let out property

We find that the AO erred in determining an arbitrary annual value of property by holding that Section 23 is a deeming provision and determination of annual value does not depend on actual realization of rent. The AO while applying clause (a) of Section 1 to Section 23 in the assessee case failed to appreciate that in the present case actually let out the property being a farm house is on rent to EIH Limited and if a property is actually let out, then the expectation of its letting out becomes an actual reality and such property cannot be expected to let from year to year at any figure higher than the rent which is being produced actually by the property in question. Hence, even as per the deeming provision of Section 23(l)(a), in the case of let out property, only the actual rent received was required to be considered as annual value of property.

The AO failed to appreciate such estimation of annual letable value as per provision of Section 23(1)(a) was called for only in case of vacant property and not where the property was actually let out since in the case of let out property, the assessee was not entitled to anything over and above the agreed rent. The said action of the AO has resulted in taxing notional income in the hands of the assessee, which never accrued and hence cannot be brought to tax.

Non deduction of TDS u/s 195 on legal services to residence of Thailand and Australia

We find that the assessee has filed complete address of each party including the country of residence had been clearly specified. The specimen copies of the bills raised by the foreign parties were filed as well. So countries of residence of the parties were established.

Before CIT (A) also it was clarified that when services rendered are in the nature of professional services, then those provisions of DTAA are to be applied which specifically deal with ‘professional services’. Under the tax treaties “professional services” include legal services and the same could only be taxed in the countries of residence of the nonresidents unless the services are rendered from a fixed base in India. Since the bills of the parties were also filed the nature of services were easily verifiable. Besides this, it was pointed out that if any sum is not taxable under DTAA, the same cannot be taxed even if it is taxable under domestic law.

We find that admittedly, these expenses in foreign currency represent on account of professional services rendered by non-residents from their offices in foreign countries. The parties reside in foreign countries namely, Thailand and Australia. Admitted position is that to these payments the provisions of DTAA will apply because with both the countries India have DTAAs. Under the tax treaties ‘professional services’ includes legal services and the same could only be taxed in the countries of residence of the non-residents unless the services are rendered from a fixed base in India. In these facts, the assessee relied on the decision of Coordinate bench of this Tribunal of Delhi bench in the case of Right Tunnelling Co. Ltd. Vs. ADIT (2014) 45 Taxman.com 196 (Del. Trib.) wherein the similar issue was adjudicated.

Similarly, Hon’ble Madras High Court in the case of Bangkok Glass Industry Co. Ltd. Vs. ACIT (2013) 34 Taxman.com 77 (Mad), wherein it has been held that the assessee, a non-resident company of Thailand, entered into technical assistance know-how agreement with MBDL, in India for transfer of glass technology know-how. The assessee received technical know-how fees for five years, which was treated as not taxable as per article 12 of DTAA between India and Thailand. In view of the above facts and circumstances of the case and following the decisions cited above, we confirm the order of CIT (A) deleting the disallowance. This issue of revenue’s appeal is dismissed.

Accordingly all appeal disposed of.

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Category : Income Tax (25504)
Type : Judiciary (10254)
Tags : CA Deepak Aggarwal (390) ITAT Judgments (4610)

0 responses to “Addition on account of expected rent higher than actual rent received is not sustainable”

  1. Manish says:

    Very appreciated that you put the “ratio decidendi” title. Thank you

    • CA Sandeep Kanoi says:

      Dear Manish,

      Acting on your comment we have requested to our team to take care and make sure that they have Rational for judgment in their analysis but it is not necessary to show it seprately.

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