Case Law Details

Case Name : Dy. CIT Vs Gentex Merchants (P) Ltd. (ITAT Kolkata)
Appeal Number : ITA No. 1161 (Kol.) of 2014
Date of Judgement/Order : 30/08/2017
Related Assessment Year :
Courts : All ITAT (7627) ITAT Kolkata (607)

DCIT Vs Gentex Merchants (P) Ltd. (ITAT Kolkata)

The loan which the assessee received had no connection with the tenancy of Shri L.N. Mittal. The amount in question was received by the assessee from the holding company and not from the tenant. Interest free loan was received during the period when construction of the property was in progress. The loans were received from the holding company in order to meet the cost of construction and cost of acquisition of the property. Therefore the receipt of interest free loan from the holding company was an event which had occurred prior to grant of tenancy and as such these two events apparently did not have any connection. The CIT(A) therefore was right in holding that the very basis on which the AO concluded that the interest free loan was in the nature of interest free deposit from the tenant was factually unfounded. The arrangement between the parties was therefore real and not sham. In such circumstances it is not possible to ignore the agreements and conclude that the agreements have to be disregarded as it results in lesser tax burden on an Assessee. If one were to proceed on the assumption that L.N.Mittal was the person in control of the affairs of the holding and subsidiary company and the corporate personality of the holding and subsidiary company has to be ignored, then, as rightly submitted by the learned counsel for the Assessee, L.N.Mittal would have to be construed as owner of the property and was entitled to a nil annual value, as the property would have to be regarded as self occupied. We need not go that far. It would be sufficient to hold that the claim of the revenue for ignoring the agreements between the parties is not sustainable.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This is an appeal by the Revenue against the order dated 04.03.2014 of CIT(A)-VIII, Kolkata relating to AY 2010-11.

2. Grounds of appeal raised by the Revenue reads as follows :-

“1. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition made by the Aa in treating the income of Rs. 12,00,000/- received towards service charges under the head ‘income from house property’.

2. That on the facts and circumstances of the case and in law the Ld.CIT(A) erred in deleting the disallowance made by the Aa on account of various administrative expenses incurred for earning the income from rendition of service.

3. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the action of AO in determining the annual value of the property let out at Rs. 13,06,61,131/-.

4. That the appellant craves leave to add, modify and/or rescind any of the ground(s) of appeal at the time of hearing of the case.”

3. The Assessee is a Company. Its main source of income is income from house property and income from business. For A.Y.2010-11, the assessee filed return of income declaring a loss of Rs.8,34,181/-. The assessee was the owner of a palatial bungalow in New Delhi namely Premises No.22 Aurangzab Road, New Delhi. The property was let out to Shri L.N. Mittal on a monthly rent of Rs.5 lakhs under an agreement dated 08.09.2006. As per the terms of the agreement, the Assesse was also required to provide the tenant various amenities in the premises given on lease like telephone, electricity, swimming pool, car, furniture and fittings, gym etc. For providing various services Shri L.N.Mittal, the tenant has to pay Rs.1 lakh to the assessee. The rental income received by the assessee from letting out the premises namely Rs.60 lakhs (Rs.5 lakhs x 12) was declared under the head “Income from house property”. The income of Rs.1 lakh per month received from Shri L.N.Mittal for providing various services was declared under the head “ income from business”. In providing various amenities to Shri L.N.Mittal the assessee incurred the total expenses of Rs.57,24,318/- after setting off the income of Rs.12 lakhs which is consideration payable by Shri.L.N.Mittal for providing various services against the expenses of Rs.57,27,318/-, the assessee declared a loss of Rs.45,24,318/- under the head “income from business” and this loss was set off against the sum of Rs.60 lakhs received as income from house property.

4. M/S.Maurrindo Investments Ltd., is the holding company of the Assessee. The holding company had taken a long term foreign currency loan of Rs.90,28,00,000/-and the holding company had also invested in 0% optionally convertible debenture of Rs.39,18,11,312/-. The total interest free loan/funds received by the Assessee from the holding company was a sum of Rs.129,46,312 (Rs.90,28,00,000 + Rs.39,18,11,312). Shri.L.N.Mittal is the principal shareholder of the holding company (lender) Maurrindo Investment Ltd.

5. The AO was of the view that the monthly rent of Rs.5 lacs received by the Assessee for letting out such a palatial property owned by it in a very posh locality of New Delhi was very low. He was of the view that the very reason for charging such a small amount of rent in such a posh area of New Delhi, was the interest free loan which has been received from Maurrindo Investment Ltd., by the Assessee. He was of the view that the interest chargeable on the loan by the holding company has been compensated by subsidised rent. He was of the view that the whole purpose was to avoid payment of legitimate tax payable had the transaction been done in the normal course. The holding as well as the Assessee company were controlled by Shri L. N. Mittal and hence the affairs have been arranged in such a manner to derive benefit of payment of lesser tax.

6. The AO in the above circumstances was of the view that on a conservative estimate interest @10% on the interest free loan by the holding company to the Assessee has to be construed as income which the Assessee ought to have charged as rent from Mr.L.N.Mittal. The AO held that the notional interest on the above loan @ 10% P.A. being Rs.12,94,61,131/- was the expected rent for the property owned by the Assessee and let out to Mr.L.N.Mittal. The Assessee declared a sum of Rs.60 lacs as rent from the property. The AO brought to tax the difference between the sum of Rs.12,94,61,131 and Rs.60 lacs as Annual Value of the property chargeable to tax under the head “Income from House property” and allowed statutory deduction of 30% on the sum so arrived at and added the same to the “Income from House Property” declared by the Assessee.

7. The AO has also referred to the fact that Municipal Valuation (New Delhi Municipal Council) had on 27.03.2012 valued the property in question w.e.f 26.04.2006 at Rs.1,80,15,700/- P.A. This was much higher than the actual value taken by assesee which was Rs.60,00,000/- P.A. According to the AO his claim that the income from house property declared by the Assessee was low, stood corroborated by the fact that even the Municipal Valuation of the property was much higher at Rs.1,80,15,700/-. For the above reasons, the AO added a sum of Rs. 12,34,61,131/-to the income from house property declared by the Assessee.

8. The AO was also of the view that the income in the form of service fee declared by the Assessee was in fact part of the rent and the Assessee’s claim that provision of services was a separate transaction was again a devise to avoid payment of tax. He was of the view that the service fee was integral part of the rent and the agreement for providing services was nothing but a sham transaction to take the benefit of claiming expenses which would not be allowable as deduction had the service fee been declared as part of the rental income. The AO therefore held that the service fee received also needs to be treated as part of the income from house property. He therefore disallowed the loss claimed by the Assessee for providing services to the tenant of the property.

9. The AO ultimately computed the total income of the Assessee as follows:

Income House Property as per computation

10. Before CIT(A) the Assessee submitted that agreement between the Assessee and Shri.L.N.Mittal specifically provided for bifurcation between the rent for property and service charges for provision of car, furniture & fixtures, telephone, electricity, gym, swimming pool, etc. Since inception of the lease, assessee was separately charging rent & service charges. In the assessment order U/S 143(3) for AY 2006-07, being the first year of lease, the AO had accepted the contractual bifurcation of the monthly sum payable between the rent & service charges. In this order AO however held that the service charges received were’ assessable under the head ‘Other Sources’ and not under the head ‘Profits & Gains of Business’. The AO did not allow deduction for any of the expenses claimed nor allowed depreciation on the actual cost of the plant & equipments provided to the tenant. The CIT(A)- VIII, Kolkata in his appellate order dated 28.09.2012 considered the issue of assessability of service charges. For the reasons set out in Para 5.3 of the said order he held that the amount received by the appellant for providing services to the tenant was assessable as business income. For the relevant findings of my predecessor was as follows:

“After careful consideration of the submission put forward by the appellant along with the case laws relied upon, perusing the facts of the case including the observation of the AO in the assessment order and. other materials on record, this ground of the appeal is decided in favour of the appellant for the following reasons:-

i) The appellant apart from providing the property on rent is also providing services like- car, furniture and fixture, telephone, electricity, gymnasium, swimming pool etc., and is charging tenant separately for these services.

ii) There is considerable force in, the su8bmission of the Ld. A/R that the factual position of the case of Sultan Brothers P. Lid, Chitpore Golabar Co. Ltd differs from the case of the appellant. In these cases the letting out was on inseparable. In the case of the appellant the letting out is not inseparable.

iii) The factual position of the case of the appellant is similar to the following cases relied by the Ld. A/R:-

– Karnani Properties Lld V CIT (82 ITR 547) (SC) (Page 130 to 138)

– CIT V Russell Properties P.Ltd(13l ITR 473)(Cal)(page 139 to 148)

– CIT Vs. Sarabhai P.Lld (263ITR 197)(Guj)(Page 149 to 158)

-CIT V Surat Textile Market Co-operative Shops and Warehouse Society Ltd (264 ITR 289) (Page 159 to 175)

– CIT V Associated Buildin Co. Ltd(1371TR 339)(Page 176 to 183)

– Indian Express Newspapers Ud (2010 TIOL-776 ITAT-MUM) (Page 184 to 193)

– PFH Mall & Retail Management Ltd v ITa (298 ITR (AT) 371) (Page 194 to 198)

– Universal Textile Water Proof Co. India v. ACIT (20 SOT 275) (Page 199 to 204)

– ACIT v. Vijay Mallya (52 SOT 197) (page 205 to 210)

iv) In view of the above discussed legal and factual position, I am of the considered view that the amount received by the appellant for providing services to the tenant is to be assessed as business income. “

11. The Assessee also submitted before the CIT(A) that no appeal was preferred by the Revenue against the CIT(A)’s order for AY 2006-07.

12. The CIT(A) on a consideration of the above submission of the Assessee which remained uncontroverted by the AO, was of the view that the issue as to whether income by way of service charges ‘is assessable under the head “Business” was no longer res integra. He held that in the first ‘year of the lease the AO had disputed assessee’s classification of such income under the head “Business”. On appeal however the first appellate authority held that service charges collected separately from the tenant were assessable under the head “Business” and the decision of the appellate authority was accepted by the Revenue. The CIT(A) was of the view that it was a settled proposition of law that principle of consistency has to be followed when factual matrix of the case permeating through the years remains constant. In the circumstances following the order of his predecessor for AY 2006-07, the CIT(A) held that income by way of service charges was chargeable under the’ “Profits & Gains from Business”. The AO was accordingly directed to re-compute the assessee’s total income.

13. With regard to the action of the AO in disallowing expenses incurred in providing various services to the Assessee of Rs.62,13,063/-, the Assessee submitted before the CIT(A) that the audited accounts of the Assessee would show that the actual expenditure incurred by the Assessee was much more than the sum of Rs.62,13,063 claimed as deduction in providing various services to the tenant of the property and deduction to the extent of only Rs.62,13,063/- pertaining to income by way of service charges.

14. The CIT(A) found that the expenses were disallowed by the AO for the main reason that the services charges are assessable under the head “Income from House Property” and since he has already held the services charges to be assessable under the head “Income from Business”, the disallowance of expenses in providing service charges cannot be sustained. The CIT(A) also found that on the same issue was decided by his predecessor while deciding assessee’s appeal for AY 2006-07. In the assessment order for AY 2006-07 the AO had similarly disallowed the entire expenditure claimed in relation to income by way of service charges. The CIT(Appeals) however held that the assessee was entitled for depreciation allowance under Section 32 of the Act on the actual cost of assets used for providing services. He also allowed the assessee’s claim for deduction of expenses as were claimed in the original return. The CIT(A) therefore held that the issue of allowability of expenses was also no longer res integra. The CIT(A) also found that no further appeal had been preferred by the revenue against the order of the CIT(A) for AY 2006-07. In the circumstances following the appellate order for AY 2006-07, the CIT(A) held that the deduction of Rs.62,13,063/- being expenditure incurred for earning service charges in computing income under the head “Business” has to be allowed.

15. As far as the issue with regard to determination of annual value of the leased property at 22, Aurangzeb Road, New Delhi at Rs. 13,06,61,131/- as against Rs.60 lacs disclosed by the assessee in the return filed, is concerned, the Assessee submitted before the CIT(A) that the residential property at 22, Aurangzeb Road, New Delhi, was purchased and thereafter construction of a residential building at a substantial cost was done. The construction of the building was completed in FY 2005-06. After the completion of the building the same was let out on monthly rent of Rs.5 lacs to Shri Laxmi Niwas Mittal. It was submitted that the property in question was at New Delhi and subjected to levy of municipal taxes levied by New Delhi Municipal Corporation (‘NDMC’). The annual value of the property was earlier assessed by NDMC at Rs.69,500/- and by an order dated 27.03.2012, NDMC revised the assessable value of the property at 22, Aurangzeb Road, New Delhi to Rs. 1,80,15,700/-. By subsequent rectification order dated 27.09.2012 the annual value of the said property was however revised by NDMC to Rs.l,16,83,790/- with effect from FY 2009-10. It was submitted that at the material time when the assessee entered into lease agreement contemporaneous assessment of the annual value of the property was not made by the local authority. In absence of the assessment of the annual value by the municipal authorities the parties had negotiated and agreed on the annual rent of Rs.60 lacs which was substantially higher than Rs.69,500/- which was the annual value assessed by NDMC in relation to the said property at the relevant time. Therefore the adoption of annual value on the basis of actual rent received was justified. It was contended that the AO in arriving at the true & fair annual value of the property assessable, under Section 23 of the Act, adopted a fair return at the rate of 10% of the interest free loan received by the Assessee from the holding company. It was contended that giving of loan by the holding company and the transaction of lease between the Assessee and Shri L.N.Mittal were two independent transactions and the AO was not justified in concluding that the motive of giving interest free loan by the holding company to the Assessee was to compensate the low rent charged by the Assessee from Shri.L.N.Mittal. It was also highlighted that the interest free loan was given prior to the tenancy between the Assessee and L.N.Mittal.

16. The CIT(A) agreed with the submission of the Assessee that the loan which the assessee received had no connection with the tenancy of Shri L.N. Mittal. He held that the amount in question was received by the assessee from the holding company and not from the tenant. Interest free loan was received during the period when construction of the property was in progress. The loans were received from the holding company in order to meet the cost of construction and cost of acquisition of the property. Therefore the receipt of interest free loan from the holding company was an event which had occurred prior to grant of tenancy and as such these two events apparently did not have any connection. The CIT(A) therefore held that the very basis on which the AO concluded that the interest free loan was in the nature of interest free deposit from the tenant was factually unfounded.

17. The CIT(A) thereafter went into the question as to whether even in a case where interest free advance was given by the tenant could notional interest on such advance be taken for the purpose of arriving at the Annual Value of the property. The CIT(A) relied on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs Hemraj Mahavir Prasad 279 ITR 522(Cal) wherein it was held that notional interest on interest free loan given by the tenant would neither be a determining factor nor a component to be considered in assessing the true & fair annual value of house property in terms of Section 23 of the Income-tax Act, 1961. Similar view was also expressed by the Bombay High Court in the case of CIT Vs J.K. Investors (Born.) Ltd 248 ITR 723 and by the Delhi High Court in the case of CIT Vs Asian HotelsLimited 168 Taxman 59. The CIT(A) found that the Full Bench of the Delhi High Court in its decision in the case of CIT Vs M.K. Subba 333 ITR 38(del) held that in arriving at the fair rent there is no provision in law for inclusion of any notional interest on interest free deposit received from tenant. The Full Bench of the High Court specifically rejected the Revenue’s contention that a reasonable interest can be included in arriving at the true & correct annual value of a house property. The Full Bench of the Delhi High Court thereafter made the following observation:

“Since the provisions of fixation-of annual rent under Delhi Municipal Corporation Act are pari materia of Section 23, the view of the Calcutta High Court in Satya & Co Ltd (supra) was to be accepted thatin sucn circumstances, the annual value fixed by the municipal authorities can be retionei yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the Income-tax laws, “

18. The CIT(A) was of the view that the judgments of the Calcutta, Bombay & Delhi High Court therefore supports the submission of the Assessee that in arriving at the annual value of a house property for the purposes of Section 23 of the Income-tax Act, 1961, notional interest on the interest free loan or deposit cannot be considered to be a relevant factor. Such notional interest cannot be included in the fair rent of the property. In the circumstances, the CIT(A) held, that the AO not justified in enhancing the annual value of the property by making addition to the actual rent received equivalent to 10% of the interest free loan received by the assessee from its holding company. The addition made by the AO was therefore held by the CIT(A) to be unsustainable in view of the decision of the Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra.)

19. The CIT(A) thereafter went into the question as to what should be the correct annual value of the property for the purpose of determination of income under the head “Income from House Property. The CIT(A) found that the Hon’ble Calcutta High Court in the case of Satya & Co. Ltd 146 CTR 569, CIT Vs Bhaskar Mitter 73 Taxman 437, CIT Vs Poddar Bros. Pvt Ltd 240 ITR 925, CIT Vs Prabhavati Bhansali 141 ITR 419 has consistently held that the annual value of a House Property under Section 23 is to be assessed at higher of the actual rent or the annual value determined by the municipal/local authority. The Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra) in principle accepted the ratio laid down by the Calcutta High Court and held that in arriving at the annual value of the property the annual value determined by the municipal authorities is the relevant factor provided however assessment by the local authority was contemporaneous and reflected true annual value.

20. The CIT(A) found that the annual value of the property assessed by NDMC at the relevant time was only Rs.69,5001-. He found that the said Annual Value did not reflect the true annual value of the property. He found that the Assessee’s action in adopting Rs.60 lacs as annual value on the basis of higher of actual rent received or annual value assessed by municipal authorities was proper. He however found that by an order dated 27.09.2012 NDMC assessed the annual value of the said property for FY 2009-10 and onwards at Rs.l,16,83,790/-. The AO in his remand report had also admitted that subsequent to completion of assessments by NDMC in 2012 the assessee entered into an agreement with the lessee for revision of rent with retrospective effect from 2006. Copy of the revised rent agreement was also filed before the AO as well as before CIT(A). It appeared from the documents on record that the annual rent for the year under consideration was revised upwards to Rs.1,17,00,000/-. The revision in the annual rent was made effective retrospectively from AY 2006-07. The arrears of rent amounting to Rs.3,54,31,400/- was offered as income of the assessee in AY 2013-14 in conformity with Section 25B of the Income-tax Act, 1961. In the remand report the AO admitted these facts.

21. Based on the above facts, the CIT(A) was of the view that after the revision of the annual value was carried out by NDMC, the assessee also correspondingly revised the annual rent payable by the tenant. For the relevant. year the assessee ultimately received annual rent of Rs.1,17,00,000/- in respect of its property at 22, Aurangzeb Road, New Delhi. The CIT(A) therefore held that annual value of the property has to be assessed at Rs.1,17,00,000 which is the actual rent received which was much higher than the Municipal Valuation. The CIT(A) found that the Assessee received the arrears of rent consequent to revised agreement between the Assessee and Mr.L.N.Mittal which was due to revision annual value by NDMC, in the FY 2012-13 and offered the same to tax as arrears of rent u/s.25B of the Act in AY 2013-14 and was taxed on the said income by the revenue. The CIT(A) ultimately found that the entire annual value as determined by NDMC amounting to Rs.1,17,00,0001- has suffered tax in AYs 2010-11 & 2013-14. He therefore held that no further adjustment to the. disclosed annual value was necessary in the assessment for AY 2010-11. The CIT(A) therefore directed the AO to assess the income from house property at 22, Aurangzeb Road, New Delhi taking its annual value at Rs.60 lacs and recompute the assessee’s income under the head “House Property” accordingly.

22. Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal.

23. The learned DR reiterated the case of the AO that the entire arrangement of giving interest free loans by the holding company to the subsidiary(Assessee) and the use of those funds for construction of the property by the Assessee and the ultimate letting out of the property on rent to Mr.Mittal at a low rent clearly showed that there was a motive to evade tax and the Tribunal should look through the transaction and take note of the real intent behind the web of transactions and uphold the stand taken by the AO in the order of Assessment. The learned counsel for the Assessee reiterated contentions put forth by the Assessee before CIT(A) and relied on the order of the CIT(A).

24. We have given a very careful consideration to the rival submissions. Under Sec.22 of the Income Tax Act, 1961 (‘Act’), the charge to tax under the head ‘income from house property’ is on the annual value of the property. Sec.22 reads as follows:

“Income from house property.

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”.”

25. Section 23of the Act lays down as to how the annual value has to be determined. The relevant portion of section 23 is as follows :-

“23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be–

(a) the sum for which the property might reasonably be expected to let from year to year; or

(b) 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 to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable :

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation.–For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realise.”

26. For the present appeal, what is relevant are the provisions of Sec.23(1)(a) and 23(1)(b) of the Act. The greater of the sums referred to Sec.23(1)(a) and 23(1)(b) has to be adopted as the annual value. Originally provisions ofsection 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”.

27. From the aforesaid Circular, it is clear that the law prior to introduction ofsection 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.

28. The Hon’ble Calcutta High Court in the case of Satya & Co. Ltd 146 CTR 569, CIT Vs Bhaskar Mitter 73 Taxman 437, CIT Vs Poddar Bros. Pvt Ltd 240 ITR 925, CIT Vs Prabhavati Bhansali 141 ITR 419 has consistently held that the annual value of a House Property under Section 23 is to be assessed at higher of the actual rent or the annual value determined by the municipal/local authority. The Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra) in principle accepted the ratio laid down by the Calcutta High Court and held that in arriving at the annual value of the property the annual value determined by the municipal authorities is the relevant factor provided however assessment by the local authority was contemporaneous and reflected true annual value.

29. In the present case the facts as it transpired before CIT(A) shows that the Municipal Valuation determined by the NDMC for the relevant previous year was a sum of Rs.1,16,83,790. The determination of annual valuation by NDMC happened by an order dated 27.9.2012 much after the AY 2010-11. Based on the revision in the Municipal Valuation, the Assessee and Mr.L.N.Mittal revised the terms of the lease and the tenant revised annual rent to Rs.1,17,00,000/-. The higher of the municipal valuation or the actual rent received has to be adopted as the annual value for the purpose of Sec.23(1)(b) of the Act. Therefore the annual value of the property in question has to be adopted at Rs.1,17,00,000/-. The conclusions of the CIT(A) in this regard are correct and does not call for any interference.

30. The facts as it transpired further show that the revision in the annual rent by agreement between the parties was made after the end of the relevant previous year relevant to AY 2010-11 and was applicable retrospectively from AY 2006-07. The arrears of rent consequent to revision in the annual rent between the parties amounting to Rs.3,54,31,400/- was offered as income of the assessee in AY 2013-14 in conformity. Sec.25B of the Act, provides as follows:

“Special provision for arrears of rent received.

25B. Where the assessee—

( a) is the owner of any property consisting of any buildings or lands appurtenant thereto which has been let to a tenant; and

(b ) has received any amount, by way of arrears of rent from such property, not charged to income-tax for any previous year,  the amount so received, after deducting a sum equal to thirty per cent of such amount], shall be deemed to be the income chargeable under the head “Income  from house property” and accordingly charged to income-tax as the income of that previous year in which such rent is received, whether the assessee is the owner of that property in that year or not.”

Thus ultimately the entire annual value as determined by NDMC amounting to Rs.1,17,00,000/- has suffered tax in AYs 2010-11 & 2013-14. The conclusion of the CIT(A) that no further adjustment to the disclosed annual value was necessary in the assessment for AY 2010-11, in our view is fully justified and calls for no interference. The CIT(A)’s conclusion directing the AO to assess the income from house property at 22, Aurangzeb Road, New Delhi taking its annual value at Rs.60 lacs and re-compute the assessee’s income under the head “House Property” is therefore upheld.

31. On the question whether in a case where interest free advance are given by the tenant could notional interest on such advance be taken for the purpose of arriving at the Annual Value of the property, the CIT(A) held that notional interest cannot be taken into account for the purpose of determining annual value of property. The CIT(A) relied on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs Hemraj Mahavir Prasad 279 ITR 522(Cal) wherein it was held that notional interest on interest free loan given by the tenant would neither be a determining factor nor a component to be considered in assessing the true & fair annual value of house property in terms of Section 23 of the Income-tax Act, 1961. The Hon’ble Calcutta High Court in the case of CIT Vs. Satya & Co. Ltd. 75 Taxman 193(Cal) has held that notional interest cannot be added to the interest free security deposit to arrive at the annual value of the property while determining income under the head “income from House Property”. Similar view was also expressed by the Bombay High Court in the case of CIT Vs J.K. Investors (Born.) Ltd 248 ITR 723 and by the Delhi High Court in the case of CIT Vs Asian Hotels Limited 168 Taxman 59. The CIT(A) found that the Full Bench of the Delhi High Court in its decision in the case of CIT Vs M.K. Subba 333 ITR 38(del) held that in arriving at the fair rent there is no provision in law for inclusion of any notional interest on interest free deposit received from tenant. The Full Bench of the High Court specifically rejected the Revenue’s contention that a reasonable interest can be included in arriving at the true & correct annual value of a house property. The Full Bench of the Delhi High Court thereafter made the following observation:

“Since the provisions of fixation-of annual rent under Delhi Municipal Corporation Act are pari materia of Section 23, the view of the Calcutta High Court in Satya & Co Ltd (supra) was to be accepted that in such circumstances, the annual value fixed by the municipal authorities can be rational yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the Income-tax laws, “

32. We are of the view that the in the light of the judgments of the Calcutta, Bombay & Delhi High Court, in arriving at the annual value of a house property for the purposes of Section 23 of the Income-tax Act, 1961, notional interest on the interest free loan or deposit cannot be considered to be a relevant factor. Such notional interest cannot be included in the fair rent of the property. In the circumstances, the CIT(A) was fully justified in holding that AO was not justified in enhancing the annual value of the property by making addition to the actual rent received equivalent to 10% of the interest free loan received by the assessee from its holding company. The addition made by the AO was therefore rightly held by the CIT(A) to be unsustainable in view of the decision of the Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra.). We hold accordingly.

33. On the question whether the parties have arranged their affairs in such a manner that the taxes payable are avoided and therefore all arrangements have to be ignored and on the question whether income from providing services charges have to be assessed under the head “Income from Business” or should form part of the “income from house property”, we are of the view that the issue as to whether income by way of service charges ‘is assessable under the head “Business” was no longer res integra. It is not in dispute that in the first year of the lease the AO had disputed assessee’s classification of such income under the head “Business”. On appeal however the first appellate authority held that service charges collected separately from the tenant were assessable under the head “Business” and the decision of the appellate authority was accepted by the Revenue. In the circumstances, the issue was rightly held by the CIT(A) to have attained finality in the case of the Assessee. The CIT(A) was therefore right in concluding that income by way of service charges was chargeable under the’ “Profits & Gains from Business”.

34. The loan which the assessee received had no connection with the tenancy of Shri L.N. Mittal. The amount in question was received by the assessee from the holding company and not from the tenant. Interest free loan was received during the period when construction of the property was in progress. The loans were received from the holding company in order to meet the cost of construction and cost of acquisition of the property. Therefore the receipt of interest free loan from the holding company was an event which had occurred prior to grant of tenancy and as such these two events apparently did not have any connection. The CIT(A) therefore was right in holding that the very basis on which the AO concluded that the interest free loan was in the nature of interest free deposit from the tenant was factually unfounded. The arrangement between the parties was therefore real and not sham. In such circumstances it is not possible to ignore the agreements and conclude that the agreements have to be disregarded as it results in lesser tax burden on an Assessee. If one were to proceed on the assumption that L.N.Mittal was the person in control of the affairs of the holding and subsidiary company and the corporate personality of the holding and subsidiary company has to be ignored, then, as rightly submitted by the learned counsel for the Assessee, L.N.Mittal would have to be construed as owner of the property and was entitled to a nil annual value, as the property would have to be regarded as self occupied. We need not go that far. It would be sufficient to hold that the claim of the revenue for ignoring the agreements between the parties is not sustainable.

35. For the reasons given above, we uphold the order of the CIT(A) and dismiss the appeal of the revenue as one without merit.

36. In the result, the appeal of the revenue is dismissed.

Order pronounced in the Court on 30.08.2017.

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