Case Law Details
Brief Facts of the Case:
There are various Grounds in this case on which ITAT has discussed in detail. The two important Grounds of Appeals discussed are as follows:
1st Matter – Addition of Rs. 53,48,000/- (after 30% standard deduction on 76,40,000) on account of estimation of annual letting value (herewith “ALV”) while computing the income from house property:
The assessee owned two buildings; the flats in the said buildings were rented out. The Assessing Officer (herewith “AO”) accepted the ALV of all the flats except the two mentioned below:
| Particulars | Deposit recd | Name of the Tenant | Monthly rent recd | Date from which property is rented |
| Flat no. 4 | 3.5 Crores | Johnson & Johnson (1st Tenant) | 20,000/- | 01.01.02 to Nov 2006 |
| Flat no. 4 | 15 Lakhs | Futura Polyester (2nd Tenant) | 5,00,000/- | 16.01.2007 |
| Flat no. 5 | 2 Crores | Centurion Bank (3rd Tenant) | 1,00,000/- | 01.07.2004 |
The AO noted that Flat no. 4 and 5 were similar in nature but were rented out to 1st and 3rdtenants at much lesser rent than the 2nd tenant which showed that the market rate of the rent was much higher than what the assesse actually received. Hence, the AO estimated the market value of rent of these flats at Rs. 4,50,000/- p.m. and enhanced the ALV at Rs. 76,40,000/- as computed below:
| Particulars | Name of the Tenant | Estimated rent – Rent recd (Rs.) | Enhanced ALV (Rs.) |
| Flat no. 4 | Johnson & Johnson (1st Tenant) | (4,50,000-20,0000)*8 Months | 3,440,000 |
| Flat no. 4 | Futura Polyester (2nd Tenant) | 5,00,000 | 0 (Already considered by assesse) |
| Flat no. 5 | Centurion Bank (3rd Tenant) | (4,50,000-1,00,000)*12 Months | 4,200,000 |
| Total enhanced ALV | 7,640,000 | ||
2nd Matter –Disallowance of R & D expenditure prior to the date of approval:
The assessee had incurred an expenditure of Rs. 86,89,000/- which was claimed as deduction u/s 35(2AB). The impugned claim has been incurred on the Scientific Research for which it has made an application for in-house approval in R & D Unit to the Department of Scientific and Industrial Research (DSIR) and has also completed all the necessary formalities, however formal approval was pending. The certificate was issued from 03.02.2007. Hence, the AO disallowed the claim for the expenditure incurred prior to03.02.2007.
Held by CIT (A):
- 1st Matter – The CIT(A) confirmed the action of AO of enhancing the ALV of such properties by adopting market value of rent of such flats.
- 2nd Matter – The CIT(A) held that the expenditure incurred throughout the year qualifies for weighted deduction as there is no cutoff date mentioned in section 35(2AB) for expenditure.
Question of Law:
- Whether Muncipal rateable value can be accepted as a bonafide rental value when the market value of rent is available and such rent is higher than the Muncipal value.
- Whether deduction u/s 35(2AB) can be allowed to Assessee for the whole previous year even though such R & D project was approved from a certain date of the previous year.
Contention of the Revenue:
1st Matter – The Revenue noted that the prevailing rent in the neighbourhood for such properties was much higher than what the assesse received. Alsowhen there was a direct comparable case in the same building, then it is implicit that assessee was required to determine the ALV of the flat, as percomparable case.Further, assesse had received huge interest free security deposits from the 1st and 3rd Had assessee not received such deposits, the assesse would have fetched much higher rent i.e. market value of rent as received in the case of 2nd tenant.
2nd Matter – The Revenue argued that once it has been brought on record that the approval has been granted from a particular date and for particular period by the prescribed authority, then prior to the said date the claim of deduction cannot be allowed.
Contention of the Assessee:
1st Matter –The assessee contented that the annual letting value shown was as per the actual rent received as mentioned above, which was far more than municipal valuation rate, therefore actual rent received as mentioned above should be accepted.(Hon’ble High Court in the case of CIT vs Tip Top Typography [2012] 368 ITR 330 (Bom). Also the interest free deposit which was received from the tenant was credited to Overdraft account and thus reduced the burden of interest cost. If these deposits had not been received then the interest cost would have gone to great extent which is an admissible expenditure.
2nd Matter – The assessee contented that it has incurred the expenditure on in-house facility which is admittedly approved u/s 35(2AB). The said section nowhere provides any cutoff date for approval and hence the expenditure incurred throughout the year is eligible or qualifies for weighted deduction (Hon’ble Gujarat High Court in the case of CIT vs Claris Lifesciences Ltd, reported in 326 ITR 251).
Held by the ITAT:
1st Matter – The ITAT relied on the judgement of CIT vs Tip Top Typography [2012] 368 ITR 330 (Bom) in which the Hon’ble High Court held that municipal rateable value cannot be rejected straightway.To reject the same, there must be reliable material on record.The market rate in the locality is an approved method for determining the fair rental value but it is only when the AO is convinced that the case before him is suspicious. It may happen that facts and circumstances may vary from property to property. Municipal valuation rate for determining the ALV is also an accepted method of valuation. The ITAT held that the AO should consider such facts and determine the rent by applying the principles of fairness and justice.
Hence, ITAT restored back the matter to AO to determine the ALV as per the guidelines and after giving due opportunity to assessee to explain its case.
2nd Matter – The ITAT noted that the expenditure incurred by the assessee was otherwise eligible for deduction u/s 35(2AB) and he had complied with all the conditions mentioned there in except for the fact that approval from the prescribed Authority was received from 3rd February, 2007. As per section 35(2AB)(i) of the Act, the expenditure on Scientific Research on In-house R&D facilities is allowable as deduction if it has been approved by the prescribed Authority. Thus, if the entire expenditure incurred by the assessee on development of facility has been approved then the said expenditure to be allowed for the purpose of weighted deduction.Nowhere has it been provided under the section that R&D facility is to be approved from a particular date and then only it would be allowable from that date only. The legislative intent of the section was to encourage the development of the facility by providing deduction of weighted expenditure. Hence, the Revenue’s appeal is dismissed and deduction of such expenditure is allowed to the assessee.
There may be reasons where FMV can not be received or obtained from the tenant against let-out property considering the factors in the area and the tenant. In these circumstances Municipal vale can be the true value for making assessment.