Krishna N Bhojwani, Vs. ACIT (ITAT Mumbai)
While calculating annual value of the let out property, maintenance charges paid to the society by the assessee is admissible deduction from the annual let out value under section 23(1)(b). Hence, disallowance made by AO was not justified.
FULL TEXT OF ITAT ORDER IS AS FOLLOWS:
The captioned are cross-appeals by the assessee and Revenue pertaining to assessment year 2007-08. The appeals are directed against the order of the CIT(A)-30, Mumbai, dated 5.12.2011 which in turn has arisen from an order passed by the Assessing Officer dated 27.10.2009 under section 143(3) of the Income Tax Act, 1961(in short ’the Act).
2. The issue raised by the assessee in grounds of appeal no.1 is against the order of ld.CIT(A) in not allowing the maintenance charges paid in respect of let out properties bearing flat at 15thfloor in Steesha Apartment amounting to Rs.85,726/- and in respect of flat at Bhojwani Enclave 1,42,144/- while computing the income from house property.
3. Facts of the case in brief are that the assessee during the course of assessment proceedings made a claim before the AO to allow maintenance charges of two flats as deduction while computing the Annual Letting Value of the property (ALV). As per the lease and license agreement of the assessee with the licensees, the assessee was to meet the maintenance charges and only lease was to be received from the tenants. However, the AO did not accept the contention of the assessee by observing that the said claim was not made at the time if filing of original return of income and therefore, the claim made during the course of assessment proceedings cannot be accepted and hence did not allow the same while computing the ALV of the property.
4. During the appellate proceedings, the First Appellate Authority upheld the action of the AO by observing and holding as under (para 6.11):
“7.11 I have considered the facts of the case and the submissions made on behalf of the appellant. The AO. has taxed the amount by considering it as rent. The AO. has held that any amount received on leave and licence is rent. On the other hand the Ld. AR has contended that the same is not right as the parties have clearly agreed to pay the damages in the event of default on the part of the licensee to vacate the premises on expiry of the license period. The parties have honoured their commitments under the agreement entered into by them. The amount of Rs. 10,40,000 received by the appellant has been claimed to be in the nature of mesne profits. The Ld. AR of the appellant has relied upon the case of Narang Overseas (supra) in his favour. However, a close look at this decision reveals that in thiscase the question of law was based in the light of the case of P. Mariappa Gounder vis CIT(1998) 232 ITR 2(SC)/ 149 CTR 322 (SC). I have also gone through the case of P.Mariappa Gounder 01 Hon’ble Supreme Court. The brief facts of this case are as under :-
“The assessee had agreed to purchase a tile factory, vide written agreement dated 22-5-1950, When the vendor did not convey the property, as promised, the appellant filed a suit for specific performance. This suit was ultimately decreed in appeal by the Supreme Court vide judgment dated 22-4-1958. The Supreme Court also passed decree declaring that the appellant was entitled to mesne profits against the vendor. The Trial Court determined the quantum of mesne profits by its order dated 22- 12-1962 relevant to the assessment year 1963-64. The amount of mesne profits determined was received by the assessee the following accounting year relevant to the assessment year 1964- 65. The ITO assessed the sum of the mesne profits in the assessment year 1963-64. On appeal, the AAC deleted that amount on ground that the same could taxed only in the year 1964-65. On further appeal, the Tribunal came to the conclusion that the said sum was taxable only in the assessment year 1963-64. On reference, the High Court held that the mesne profits were rightly taxed in the assessment year 1963-64 and the same could not be taxed in the assessment year 1964-65.
In this case, the Hon ‘ble supreme court held as under-
Under Order XX, rule 12 or t he Code of Civil Procedure 1908, when the Court passes a decree for possession and mesne profits, by clause (ba) it may pass a decree “for mesne profits or directing an enquiry as to such mesne. profits”. In the instant case, from the relevant portion of the decree, it was clear that the Supreme Court passed passed. an order directing an enquiry as to the mesne profits which would be payable by “the judgment-debtor to the decree holder. As on the day when the Supreme Court decreed the assessee ‘s suit, there was only an inchoate right which arose in his favour. It was only when the Trial Court determined the amount of mesne profits that the right to receive the same accrued in favour of the assessee. In other words, the liability became ascertained only with the order of the Trial Court on 22-12-1962, and not earlier Following the mercantile system of accounting, the mesne profits awarded by the said order were rightly taxed in the assessment year 1963-64 and it was wholly irrelevant as to when the amount awarded was in fact realized by the assessee. The appeal was, accordingly, dismissed”
From the above it can be seen that one of the foremost conditions for mesne profits is that there should be an order by Court to the effect of mesne profit. However, in the case of the appellant there is no order or Decree by any Court of Law. Thus, in my considered opinion, the case of the appellant does not fHII within the meaning of mesne profit. Mesne profit has not been defined in the Income-tax Act but the same has been defined in section Lt 12) of the Code of Civil Procedure, 1908, which reads as under :-
“mesne profits’ of property means those profits which the person in wrongful possession of iucn property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession”
From the above definition it becomes quite clear that the case of the appellant does not fall within the ambit of mesne profit and hence the case law relied upon by the appellant are not applicable to the facts of the case of the appellant. Therefore, in my considered view the A.O. was quite justified in holding that the so called mesne profit is nothing but rental income only and therefore the addition made by the A.O. on this around is confirmed-d and this appeal is dismissed.”
5. At the time of hearing, the ld.AR submitted before us that the case of the assessee is squarely covered by the decision of Mumbai Bench of Tribunal in the case of Ms. Aloo Bejan Daver V/s ITO in ITA No.2381 and 2382/Mum/2010 (AY-2005-06 and 2006-07) dated 29.4.2011 and accordingly prayed that the same be applied to the case of the assessee and the maintenance charges which were paid by the assessee in terms of agreement between the assessee and the licensees should be allowed while working out the ALV of the property.
6. The ld. DR on the other hand, reiterated the facts of the case and relied upon the orders of authorities below.
7. We have considered the rival consideration and perused the material placed before us including the orders of authorities below and case law relied upon by the parties. We find that the issue raised in this ground is covered by the decision of the Tribunal in the case of Ms.Allo Bejan Daver (supra) wherein it has been held that the maintenance charges paid to the society are to be reduced the rent received while calculating the ALV u/s 23(1) of the Act. The relevant part of the Tribunal order is reproduced below:
“7. We have considered the submissions made by both the parties, perused the orders of the A.O. and ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The only dispute in the impugned appeal is regarding the allowability of deduction of society charges from the rental income for the purpose of calculation of annual letting value u/s 23(1)(b). We find the Mumbai Bench of the ITAT in the case of Varma Family Trust (supra) has held that section 23(1)(b) proceeds on the basis of actual rent received or receivable and therefore all the outgoings for earning the said rental income would be admissible deduction. We find the Tribunal in the case of Bombay Oil Industries (supra) has held that maintenance charges and municipal taxes paid by the assessee are to be deducted from gross rent to arrive at the annual value. We find that in the case of Sharmila Tagore (supra), the Tribunal held that maintenance charges paid to housing society have to deducted even while computing annual letting value. Similar view has been taken in various other decisions relied on by the ld. counsel for the assessee. The decisions relied on by he ld. CIT(A), in our opinion, are distinguishable and not applicable to the facts of the present case.
8. We find the Mumbai Bench of the Tribunal in the case of Gopichand P. Godhwani (supra), after considering the decision of the Hon’ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd. (2001) 168 CTR (Bom) 189 has held that for the purpose of determining annual value of the property all taxes, cesses and outgoings being liabilities of the assessee, have to be excluded from assessable income in view of s. 23(1)(b). So far as the decision of the Tribunal in the case of Barodawala Properties Ltd. (supra) is concerned, we find that the Tribunal in subsequent judgments have held that while calculating annual value of the let out property, maintenance charges paid to the society by the assessee is admissible deduction from the annual let out value u/s 23(1)(b). In view of the series of decisions relied on by the ld. counsel for the assessee supporting the deductibility of society charges from the gross rent for the purpose of determining the annual let out value u/s 23(1)(b), we hold that the assessee is entitled to deduction of society charges amounting to ` 1,26,000/- from the rent so received for the purpose of determining ALV u/s 23(1)(b) of the I.T. Act. The ground raised by the assessee is accordingly allowed.
9. Since the grounds raised by the assessee in ITA No. 2382/M/2020 are identical to the grounds raised in ITA No. 2381/M/2010 for A.Y. 2005-06, therefore, following the same ratio, we hold that the assessee is entitled to deduction of society charges of ` 1,32,300/- for A.Y. 2006-07 for the purpose of determining ALV.”
The facts of the case in hand and relied upon by the assessee are materially same, therefore, we respectfully following the decision of the co-ordinate Bench of the Tribunal (supra), set aside the order of the ld.CIT(A) and direct the AO to allow the maintenance charges by computing the ALV. Resultantly, grounds of appeal no.1 is allowed.
8. The issue raised in the grounds of appeal no.2 by the assessee is regarding damages received by the assessee from the licensee for the period falling beyond the period of the leave and license agreement and the licensee was not vacating the flats which as per the assessee was a capital receipt which was not taxable not rental income whereas the authorities below holding the same to be chargeable tax under the head “income from house property” as ALV of such property.
9. The facts of the case are that the during the year the assessee received an amount of Rs.17,60,000/- fro M/s Nortel Networks (India) Pvt Ltd as per clause 17 of the leave and license agreement entered into by the assessee with the licensee and the said amount was credited in the profit and loss account and offered for taxation under the head “income from business”. The assessee claimed before the AO that the said amount comprised of Rs.7,20,000/- being license fee for the period from 1.4.2006 to 31.5.2006 and balance amount of Rs.10,40,000/- being damages for delay in handing over the possession by the licensee and accordingly submitted that Rs.7,20,000/- could be assessed under the head income from house property whereas the amount of Rs.10,40,000/- was capital receipt and not taxable. However, the AO rejected the contention of the assessed and added the same to the total income of the assessee while determining the ALV in respect of the flat in Steesha Apartment, Mount Mary road, Bandra (W), Mumbai-400050. In the appellate proceedings, the ld.CIT(A) dismissed the appeal of the assessee vide para 7.11 to 7.9 of the appellate order which is already reproduced above.
10. The ld. AR submitted before us that the issue raised in this ground also covered by the following decisions:
i) CIT V/s Goodwill Theatres (P.) Ltd.
 72 taxmann.com 190 (Bombay);
ii) Narang Overseas (P) Ltd V/s ACIT (2008) 111 ITD 1(Mum) (SB).
The ld.AR therefore prayed that in view of the aforesaid decisions the orders of the authorities below should be set aside and direct the AO be directed to exclude the amount of Rs.10,40,000/- while calculating the ALV for the purpose of determining income under the head income from house property as was not taxable being capital receipt.
11. On the other hand, the ld.DR relied on the orders of authorities below.
12. We have heard both the parties on the issue and carefully perused the material placed before us including the orders relied upon by the assessee. The undisputed facts of the case that the licensee did not vacate the flats as per the terms of leave and license agreement and as a result the assessee received Rs.10,40,000/- as damages pertaining to that period when the licensee occupied the premises without any valid authority as per the licensee deed dated 31.5.2006 and the said damages related to the period after 31.5.2006. We find merit in the argument of AR that the said receipt is a capital receipt and not liable to tax as the issue is directly covered in favour of the assessee by the following decisions of the jurisdictional high court and coordinate benches as relied and referred to by the ld AR. The relevant portion of the judgement t is reproduced below :
> In the case of Narang Overseas (P) Ltd, the Mumbai Special Bench of the Tribunal has held :
“48. The above analysis clearly reveals that there is cleavage of opinion between High Courts. The Hon ’ble Madras High Court has held that mesne profits is recompense for deprivation of income which the owner would have enjoyed but for the interference of the persons in wrongful possession of the property. Consequently, the same is revenue receipt chargeable to tax. On the other hand the Hon’ble High Courts of Andhra Pradesh, Calcutta, Kerala and Patna have held that mesne profit is in the nature of damages for deprivation for use and occupation of the property and therefore capital receipt not chargeable to tax. There is no judgment of the jurisdictional High Court on this issue. In our view, such conflict can be resolved only by the Hon’ble Supreme Court in some appropriate case. In the absence of the judgment of the highest court of land or of the jurisdictional High Court, the legal position is that where there are two views then the view favourable to the subject should be preferred. Reference can be made to various judgments of the Apex Court : CIT v. Vegetable Product Ltd.  88 ITR 192, CIT v. Naga Hills Tea Co. Ltd.  89 ITR 236, CIT v. Madho Prasad Jatia  105 ITR 179, CIT v. J. K. Hosiery Factory  159 ITR 85 1, Smt. Shashi Gupta v. LIC of India  84 Comp. Cas. 436, therefore, following the same, it has to be held that mesne profit received for deprivation of use and occupation of property would be capital receipt not chargeable to tax. We hold accordingly. Consequently, the decision of the Special Bench of the Tribunal in the case of Sushil Kumar & Co. (supra), holding to the extent that mesne profit is taxable as revenue receipt is overruled”
> In the case of Goodwill Theatres (P.) Ltd, the Hon’ble Bombay High Court has held as under:
“11. We make it clear that we have not examined the merits of the question raised for our consideration. We are not entertaining the present appeal on the limited ground that the Revenue must adopt an uniform stand in respect of all assessees. This is more so as the issue of law is settled by the decision of the Special Bench of the Tribunal in Narang Overseas (P.) Ltd. (supra). The fact that even after the dismissal of its Appeal (L) No. 1791 of 2008 for non-removal of office objections on 25th June, 2009, no steps have been taken by the Revenue to have the appeal restored, is evidence enough of the Revenue having accepted the decision of the Special Bench of the Tribunal in Narang Overseas (P.) Ltd. (supra). Thus, the question as framed in the present facts does not give rise to any substantial question of law.
12. Accordingly, Appeal is dismissed. No order as to costs”.
13. The facts of the case in hand are materially same to the facts of the cases discussed as above. We, therefore, respectfully following the ratio laid down in the aforesaid cases set aside the order of the ld. CIT(A) and direct the AO to exclude the amount of Rs.10,40,000/- from the ALV. Accordingly, the appeal of the assessee sands allowed on this ground.
14. Resultantly, the appeal of the assessee is allowed.
15. The grounds of appeal raised by the revenue are as under :
(i) “On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition made on account of notional interest @ 10% on interest free security deposits received by the assessee while computing the annual value of the residential properties u/s 23 of the I.T.Act ignoring the fact that the decision in the case of J.K. Investors is not applicable in the instant case as there is no finding by the Hon ‘ble ITAT in the appellant’s case that the actual rent received, even without notional income is more .than the annual value determinable u/s 23(1 )(a) of the Income Tax Act.
(ii) The appellant prays that the order of the CIT(A) on the above ground be set side and that of the AO be restored.”
15. The issue raised by the revenue is against the deletion of notional interest on security deposits in respect of both the flats which was stated as part of the ALV by computing the income from house property.
16. The facts of the case are that the AO added notional interest at the rate of 10% of the security deposits received by the assessee from the licensee while calculating the ALV in respect of both the flats and added the same to the rent received.
17. The ld. AR submitted that the issue raised by the revenue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case in ITA No.5819/Mum/2008 (AY-2004-05) dated 21.11.2011 vide para 8 of the order and thereafter the same has been confirmed by the Hon’ble jurisdictional High Court in Income Tax Appeal (L) No.1245 of 2011 dated 11.2011.
18. The ld.DR could not bring any material contrary to this submissions of the ld.AR.
19. We have heard both the parties on this issue. We find that the issue raised by the revenue is covered against the revenue by the decision of the Tribunal in assessee’s own case as well as the finding of the Tribunal confirmed by the Hon’ble jurisdictional High Court. For the sake of ready reference, we reproduce the finding of the Tribunal order and judgment of Hon’ble Bombay High Court as under :
> The operative part of the decision of the Co-ordinae Bench of the Tribunal in ITA No.5819/Mum/2008 (para 8,9 and 10) are as under:
“8. We have heard the parties. We find that the identical issue has been considered by the Tribunal in the assessee’s own case for A.Ys. 2003-04, 2005-06 & 2006-07 being ITA Nos.109-110/M/2010 & 1072/M/2007 order dated 30th March, 2011, dismissing the ground taken by the revenue in those years the Tribunal has held as under:-
“10. Learned CIT (A) has followed the judgment of Hon ‘ble Jurisdictional High Court in the case of J.K. Investors (Bombay) Ltd.., 112 Taxman 107 and held that notional interest cannot be added to annual rent receipt.
11. Learned DR relied on the decision of the Third Member in the case of ITO vs. Baker Technical Services (P) Ltd., 125 ITD 1 (TM). “D” Bench of the Tribunal in ITA No.1411/Mum/2007 in the case of DCIT 10(1) vs. Reclamation Realty India Pvt. Ltd., after considering the Third Member decision relied upon by learned DR held as follows:-
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 of 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 e 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.V. Investors (Bombay) Ltd. (supra). We hold accordingly. The appeal of the revenue is dismissed.”
12. Respectfully following the same, we uphold the order of the First Appellate Authority and dismiss ground No. 1&2 of the “
9. Now, this issue also stands covered in favour of the assessee by the decision of the Hon’ble High Court of Delhi (Full Bench) in the case of CIT vs. Monikumar Subba 333 ITR 38 (Del) (FB). We find no reason to interfere with the order of the Ld. CIT (A).
10. In the result, both the appeals, assessee ‘s as well as revenue’s are dismissed.”
> The decision of the jurisdictional High Court in Income Tax Appeal (L) No.1245 of 2011 are as under :
“1. Whether the notional interest income on the security deposit/advance rent is liable to be included in the income from house property for the purpose of Section 23(l)(a) of the Income Tax Act, 1961, is the question raised in these Appeals.
2. The finding of fact recorded by the CIT(A) and upheld by the ITAT in the e Appeal i that the actual rent received by the assessee far exceed the Municipal ratable value and, therefore, the annual value of the property need to be computed under section 23(1)(b) of the Income Tax Act, 1961. This Court in the ea e of Commissioner of Income Tax Vs. J.K. Investors (Bombay) Ltd., reported in 248 ITR 723 has held that while computing the annual value under Section 23(1)(b) of the Income Tax Act, 1961 the notional interest on the security deposit / advance rent cannot be included in the income from house property under section 23( 1 )(b) of the Income Tax Act.
3. The SLP filed by the Revenue being S.L. P. (Civil) 0.5480 of 2001 again t the decision of this Court in the case of J.K. Investors (supra) has been dismissed by the Apex Court on 1st November, 2002.
4. In these circumstances , we see no reason to entertain these Appeals.
Accordingly, all the three Appeals are dismissed. “
20. After hearing of both the parties and on perusal of the above said decisions, we find that the issue raised by the revenue stands covered in favour of the assessee. Therefore, we have no other option but to dismiss the appeal of the revenue. Accordingly, we dismiss the same.
21. In the result, the appeal filed by the assessee is allowed and that of revenue is dismissed.
Order pronounced in the open court on 3rd July, 2017