Interest free loan received prior to construction of Property cannot be added to annual value

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 :-

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