Case Law Details
ACIT Vs Instant Traders Pvt. Ltd. (ITAT Mumbai)
ITAT Deletes ALV Addition Because Revenue Failed to Prove Rent Suppression; Separate Amenities Charges Cannot Be Added to Rental Income Without Evidence of Tax Avoidance: ITAT; Interest Deduction Under Section 24(b) Allowed Because Loans Were Used for Property Acquisition; Section 14A Disallowance Deleted Because Assessee Earned No Exempt Income During the Year; ITAT Upholds Deletion of Additions Because Assessment Was Based on Presumptions Rather Than Evidence; Market Rent Cannot Replace Actual Rent Unless Lease Arrangement Is Proven Sham: ITAT; Registered Lease Agreements Prevail Over Notional Rent Estimates in ALV Determination: ITAT; Commercial Realty Structure With Separate Rent and Amenities Agreements Upheld by ITAT; Revenue Cannot Recharacterise Genuine Rental Transactions Based on Market Perception Alone: ITAT.
The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, dismissed a batch of appeals filed by the Revenue against orders of the Commissioner of Income Tax (Appeals) [CIT(A)] relating to Assessment Years 2013-14, 2014-15, 2015-16 and 2017-18. Since all appeals involved common issues arising from substantially similar facts, the Tribunal disposed of them through a consolidated order, treating Assessment Year 2013-14 as the lead year.
The Revenue challenged the CIT(A)’s deletion of additions and disallowances made by the Assessing Officer (AO) on three issues: enhancement of Annual Letting Value (ALV) under Section 23(1)(a), disallowance of interest expenditure incurred on borrowed funds used for acquiring commercial properties, and disallowance under Section 14A read with Rule 8D despite the assessee having earned no exempt income during the relevant years.
The assessee was engaged in leasing commercial premises and providing allied commercial facilities and amenities to tenants. It had entered into separate agreements with tenants, one for lease or licence of commercial premises and another for providing facilities such as centralized HVAC systems, common area maintenance, power backup, security services, escalators and other related amenities.
The AO rejected the actual rental receipts disclosed by the assessee and determined ALV based on estimated market rent, holding that bifurcation of receipts between rent and amenities was an artificial arrangement designed to suppress taxable income from house property. The AO also disallowed interest expenditure on borrowed funds, alleging that the assessee failed to establish a direct nexus between borrowings and acquisition of properties. Additionally, disallowance under Section 14A was made even though no exempt income had been earned during the relevant years.
The CIT(A), after examining agreements, financial records and judicial precedents, deleted all the additions and disallowances. The Revenue challenged these findings before the Tribunal.
The Tribunal observed that the assessment order was largely founded on assumptions, generalized notions and hypothetical perceptions rather than tangible evidence. It noted that the agreements executed by the assessee with independent third-party tenants were registered documents and that the AO had not alleged that the tenants were related parties or that the transactions lacked commercial genuineness. Importantly, no evidence had been brought on record to establish receipt of unaccounted consideration or suppression of rent.
Regarding ALV, the Tribunal held that the AO had impermissibly substituted actual rent with estimated market rent based on unspecified enquiries and broad market perceptions. Relying on judicial precedents, it observed that actual rent received under genuine agreements cannot be disregarded unless cogent evidence establishes that the arrangement is sham, manipulated or influenced by extraneous considerations. Since no such evidence existed, the enhancement of ALV was held to be unjustified.
The Tribunal further held that separate agreements for rent and amenities represented a commercially recognised practice in modern commercial real estate transactions. The amenities provided by the assessee had independent utility and commercial value. In the absence of evidence suggesting that the bifurcation was a colourable device, there was no basis to merge amenity receipts with rental income for computing ALV.
On the issue of interest expenditure, the Tribunal found merit in the CIT(A)’s observation that the AO had adopted a contradictory approach. While rental income from the properties was assessed under the head “Income from House Property”, deduction for interest incurred on acquisition of those very properties was denied. The Tribunal held that once income from property is assessed under Section 22, deduction under Section 24(b) follows, provided borrowed capital was utilised for acquisition, construction or reconstruction of the property. The Tribunal found that the assessee had furnished sufficient material establishing the nexus between borrowings and acquisition of commercial properties, and there was no finding regarding diversion of funds for non-income-generating purposes.
With respect to Section 14A, the Tribunal noted that it was an undisputed fact that the assessee had not earned any exempt income during the relevant years. It held that, in the absence of exempt income, the very foundation for invoking Section 14A ceased to exist. The Tribunal rejected the Revenue’s reliance on CBDT Circular No. 5 of 2014 and the Explanation inserted by the Finance Act, 2022, observing that the amendment was prospective and not applicable to the years under consideration.
Finding that the CIT(A)’s orders were based on proper appreciation of facts, documentary evidence and settled legal principles, the Tribunal upheld the deletion of all additions and disallowances. Consequently, all appeals filed by the Revenue were dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid batch of appeals has been preferred by the Revenue against separate impugned orders passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, dated 21.10.2025 and 22.10.2025 for Assessment Years 2013-14, 2014-15, 2015-16 and 2017-18 respectively. Since common issues are involved in all these appeals arising out of an identical factual matrix and involving substantially similar additions/disallowances, all these appeals were heard together and are being disposed of by way of this consolidated order for the sake of convenience, consistency and brevity. Assessment Year 2013-14 has been taken as the lead year and the findings rendered therein shall apply mutatis mutandis to the remaining assessment years also.
2. The Revenue in the present batch of appeals has challenged the action of the learned CIT(A) in deleting the additions/disallowances made by the Assessing Officer on three common issues, namely, firstly, determination of enhanced Annual Letting Value under section 23(1)(a); secondly, disallowance of interest expenditure relatable to borrowed funds utilized for acquisition of commercial properties; and thirdly, disallowance made under section 14A read with Rule 8D despite the admitted position that no exempt income had been earned by the assessee during the relevant years. The issue-wise additions involved in the respective years are reproduced herein below:
i. Assessment Year 2013-14 – Addition on account of ALV of Rs.1,08,92,616/-, disallowance of interest expenditure of Rs.1,23,60,853/- and disallowance under section 14A of Rs.16,79,804/-;
ii. Assessment Year 2014-15 – Addition on account of ALV of Rs.1,08,92,616/-, disallowance of interest expenditure of Rs.1,80,95,099/- and disallowance under section 14A of Rs.13,97,249/-;
iii. Assessment Year 2015-16 – Addition on account of ALV of Rs.1,43,19,062/-, disallowance of interest expenditure of Rs.1,39,25,014/- and disallowance under section 14A of Rs.62,11,813/-; and
iv. Assessment Year 2017-18 – Addition on account of ALV of Rs.1,27,72,301/-, disallowance of interest expenditure of Rs.69,77,361/- and disallowance under section 14A of Rs.10,00,000/-.
3. Briefly stated, the facts borne out from the records are that the assessee company is primarily engaged in the business of leasing and exploitation of commercial premises and deriving income from letting out commercial properties on leave and license basis along with provision of allied commercial facilities and amenities to tenants occupying such premises.
3.1. The assessee had entered into separate agreements with tenants, namely, one agreement towards lease/license fees for the bare-shell commercial premises and another agreement for provision of amenities and commercial facilities such as centralized HVAC systems, common area maintenance, power backup infrastructure, security services, escalators and other related facilities.
4. For Assessment Year 2013-14, the assessee filed its return of income declaring loss of Rs.71,15,701/-. The case was selected for scrutiny and assessment under section 143(3) was completed wherein the Assessing Officer assessed the total income at Rs.1,86,48,325/- after making three major additions/disallowances. Firstly, the Assessing Officer rejected the actual rent declared by the assessee and proceeded to determine the Annual Letting Value on the basis of estimated market rent by holding that bifurcation of receipts between rent and amenities charges constituted a device to suppress taxable ALV. Secondly, the Assessing Officer disallowed the interest expenditure incurred on borrowed funds utilized for acquisition of commercial properties by alleging that the assessee had failed to establish that the borrowings were utilized wholly and exclusively for business purposes and also failed to establish direct nexus between borrowed funds and acquisition of property. Thirdly, the Assessing Officer invoked section 14A read with Rule 8D and made disallowance despite the admitted factual position that no exempt income had been earned by the assessee during the relevant previous year.
5. Aggrieved by the assessment order, the assessee preferred appeal before the learned CIT(A). The learned CIT(A), after examining the documentary evidences, registered agreements, financial records and the judicial precedents governing the controversy, deleted all the additions/disallowances made by the Assessing Officer. Against such deletion, the Revenue is now in appeal before us.
6. Before us, the learned Departmental Representative strongly relied upon the assessment order and submitted that the Assessing Officer was justified in rejecting the rental structure adopted by the assessee and in determining the Annual Letting Value on the basis of fair market rent prevailing in the locality. According to the Revenue, the bifurcation of receipts into rent and amenities charges was merely an artificial arrangement intended to reduce taxable income assessable under the head “Income from House Property”. It was further contended that the assessee had failed to establish direct nexus between borrowed funds and acquisition of property and therefore the learned CIT(A) erred in allowing deduction of interest under section 24(b). With regard to section 14A disallowance, the learned DR submitted that the provisions of section 14A apply irrespective of actual earning of exempt income and reliance was placed upon CBDT Circular No.5 of 2014 as well as the Explanation inserted by the Finance Act, 2022.
7. Per contra, the learned counsel for the assessee reiterated the submissions advanced before the lower authorities and submitted that the transactions entered into by the assessee with independent third-party tenants were genuine arm’s length commercial arrangements duly evidenced through registered agreements. It was submitted that the Assessing Officer had neither brought any material on record to establish suppression of rent nor demonstrated existence of any unaccounted consideration flowing from the tenants to the assessee. According to the learned counsel, execution of separate agreements for rent and amenities is a normal commercial practice prevalent in commercial real estate transactions and therefore the bifurcation of receipts could not be treated as a colourable device merely because different tax treatment arose therefrom.
8. The learned counsel further submitted that the Assessing Officer had adopted a fundamentally contradictory approach because while he assessed the rental receipts from the properties under the head “Income from House Property” and simultaneously enhanced the Annual Letting Value, he denied deduction of interest expenditure incurred for acquisition of those very properties. It was submitted that once the income from the properties was assessed under section 22, the statutory deduction available under section 24(b) necessarily followed. The assessee had duly established nexus between the borrowed funds and acquisition of the commercial properties and there was no diversion of borrowed funds for non-business purposes.
9. On the issue of section 14A disallowance, the learned counsel submitted that admittedly no exempt income had been earned during the relevant previous years and therefore the very foundation for invocation of section 14A was absent. Reliance was placed upon the judgments of the Hon’ble Supreme Court in State Bank of Patiala, Hon’ble Bombay High Court in Ballarpur Industries Ltd., Hon’ble Delhi High Court in Cheminvest Ltd., IL86FS Energy Development Company Ltd. and subsequent judicial precedents holding that in absence of exempt income, no disallowance under section 14A can be made. It was further submitted that the Explanation inserted to section 14A by Finance Act, 2022 is prospective in operation and cannot be applied retrospectively to the years under consideration.
10. We have heard the rival submissions, perused the orders of the authorities below and carefully examined the entire material placed on record including the leave and license agreements, amenities/facilities agreements, details of rental receipts, computation of income, interest expenditure details, balance sheet, ledger extracts and the judicial precedents relied upon by both the parties. At the very threshold, we find that the entire assessment framed by the Assessing Officer proceeds more on presumptions, generalized notions of commercial conduct and hypothetical market perceptions rather than on any tangible material demonstrating suppression of income, receipt of unaccounted consideration or diversion of borrowed funds by the assessee. The assessee company is engaged in leasing and exploitation of commercial properties coupled with provision of various commercial facilities and amenities to tenants occupying such premises. The record clearly reveals that the assessee had entered into duly executed and registered leave and license agreements for letting out the bare-shell commercial premises and separate agreements for provision of amenities and facilities such as centralized HVAC systems, power backup infrastructure, common area maintenance, security services, escalators, electrical fittings and other commercial support facilities. These agreements were executed with independent third-party corporate entities and there is not even a whisper in the assessment order alleging that the tenants were related concerns or that the transactions lacked commercial genuineness. The Assessing Officer has also not brought any material whatsoever on record to establish that any amount over and above the documented contractual receipts had flown from the tenants to the assessee in the form of unaccounted cash or concealed consideration. In absence of any such material, the entire foundation of the Assessing Officer’s conclusion that the bifurcation of receipts between rent and amenities was a colourable device remains completely unsupported by evidence and rests purely upon conjectures and suspicion.
11. Insofar as the addition made on account of determination of Annual Letting Value under section 23(1)(a) is concerned, we find that the Assessing Officer has discarded the actual rent received by the assessee and substituted the same with an estimated “fair market rent” based upon broad market perceptions and unspecified enquiries allegedly made in the locality. Such an approach, in our considered opinion, is directly contrary to the settled legal position laid down by the Hon’ble jurisdictional Bombay High Court in the case of CIT vs. Tip Top Typography reported in 368 ITR 330, wherein it has been categorically held that the Assessing Officer cannot arbitrarily reject the actual rent received under genuine agreements and determine hypothetical ALV merely on suspicion or generalized market assumptions unless there exists cogent material demonstrating that the transaction is sham, manipulated or influenced by extraneous consideration. The ratio laid down by the Hon’ble Bombay High Court becomes fully applicable to the facts of the present case because here also the Assessing Officer has not demonstrated any suppression of rent, receipt of black money, collusive arrangement or artificial deflation of rental income. The leave and license agreements are duly registered documents carrying substantial evidentiary value and the actual rent received thereunder constitutes the best evidence of the sum for which the property might reasonably be expected to let from year to year. The Hon’ble Delhi High Court in Moni Kumar Subba and the Hon’ble Bombay High Court in J.K. Investors (Bombay) Ltd. have also consistently held that actual rent received under genuine arm’s length arrangements cannot be displaced merely on notional considerations or by imputing hypothetical additions unsupported by evidence. The Assessing Officer, in the garb of determining ALV, cannot assume unto himself the role of a rent control or valuation authority based merely upon subjective market perceptions. Taxation under the Income Tax Act has to proceed upon real income and legally admissible evidence and not upon hypothetical commercial expectations conceived in the mind of the Assessing Officer.
12. We further find considerable substance in the contention of the assessee that execution of separate agreements for rent and amenities is a normal, commercially recognized and legally permissible practice in modern commercial real estate transactions, particularly in the case of business centres, IT parks and high-end commercial premises where significant value-added infrastructure and facilities are provided independently from the bare letting of the premises. The amenities provided by the assessee were not incidental or illusory in nature but constituted substantial commercial facilities having independent utility and commercial value. Therefore, the Assessing Officer was wholly unjustified in forcibly merging the amenity receipts with rental income solely for the purpose of artificially inflating the ALV assessable under the head “Income from House Property”. In fact, this precise issue has been examined by coordinate benches of the Tribunal in various cases including Pankaj Enterprises, wherein it has been held that receipts relatable to distinct commercial facilities and infrastructure cannot automatically be treated as part of house property income merely because they arise in connection with occupation of premises. Once the assessee has transparently accounted for rent and amenity charges separately in the books of account and offered them to tax under their respective heads, and the Revenue has failed to establish any sham or camouflage, there remains absolutely no legal basis for the impugned enhancement of ALV. We are, therefore, in complete agreement with the learned CIT(A) that the Assessing Officer’s action was founded entirely on conjectures, surmises and hypothetical assumptions unsupported by any cogent material and consequently the addition made on account of enhanced Annual Letting Value deserved to be deleted.
13. Coming to the issue relating to allowability of interest expenditure, we find that the Assessing Officer adopted a fundamentally self-contradictory and legally unsustainable approach. On one hand, the Revenue taxed the income generated from the commercial properties under the head “Income from House Property” and simultaneously sought to enhance the annual value thereof; yet on the other hand, when it came to the borrowing cost incurred for acquisition of those very properties, the Assessing Officer denied deduction by alleging that the acquisition was not for business purposes and that the claim under section 36(1)(iii) was not allowable. In our considered opinion, the learned CIT(A) has very correctly appreciated the inherent contradiction embedded in the assessment order. Once the Revenue itself accepts and assesses the rental income arising from the properties under section 22, then the statutory deduction specifically contemplated under section 24(b) for interest on borrowed capital utilized for acquisition of such property becomes a natural and inevitable corollary flowing from the scheme of the Act itself. Section 24(b) does not require that the property should be used for business purposes; it merely requires that the borrowed capital should have been utilized for acquisition, construction or reconstruction of the property whose annual value is assessed to tax. From the records before us, we find that the assessee had duly furnished complete details demonstrating nexus between the borrowings and acquisition of the commercial properties. There is no finding by the Assessing Officer that the borrowed funds were diverted to sister concerns, utilized for personal purposes or siphoned away for non-income generating activities. Therefore, the denial of deduction was wholly unjustified.
14. The learned CIT(A), in our opinion, has rightly observed that taxation of rental receipts while simultaneously denying the corresponding borrowing cost incurred for acquisition of the income generating asset amounts to taxation of gross receipts divorced from commercial reality and contrary to the settled principle that the Income Tax Act seeks to tax real income and not artificial or inflated figures. Merely because the assessee initially claimed the expenditure under section 36(1)(iii), the Assessing Officer could not refuse to grant deduction under the correct statutory provision once the facts necessary for such allowance were already available on record. The CBDT Circular No.14 of 1955 itself casts a duty upon the Revenue authorities to assist the taxpayer in granting lawful reliefs and not to exploit technical mistakes or incorrect nomenclature adopted in the return of income. The learned CIT(A), therefore, rightly re-characterized the claim under the proper provision of law, namely section 24(b), after appreciating the true nature of the transaction and the statutory framework governing income from house property. We thus find no infirmity whatsoever in the deletion of the disallowance of interest expenditure.
15. Insofar as the disallowance under section 14A read with Rule 8D is concerned, the factual position emanating from the record is undisputed that the assessee had not earned or received any exempt income during the relevant previous years. The investments appearing in the balance sheet were old and strategic investments and no dividend or other exempt income had accrued or arisen therefrom during the year under consideration. Once this foundational factual position is accepted, then in our considered opinion the very machinery provision of section 14A collapses. The statutory language employed in section 14A itself makes it abundantly clear that expenditure can only be disallowed if incurred “in relation to” income which does not form part of the total income. In absence of such exempt income, there can logically and legally be no corresponding expenditure to disallow. This proposition is now conclusively settled by a catena of judicial precedents including the judgment of the Hon’ble Bombay High Court in Ballarpur Industries Ltd., the Hon’ble Delhi High Court in Cheminvest Ltd. and IL86FS Energy Development Company Ltd., all of which have consistently held that where no exempt income is earned during the relevant previous year, no disallowance under section 14A can be made. The Revenue’s reliance upon CBDT Circular No.5 of 2014 is wholly misplaced because it is a settled principle that a circular cannot override the express language of the statute or nullify binding judicial precedents rendered by constitutional courts.
16. Equally untenable is the Revenue’s reliance upon the Explanation inserted to section 14A by the Finance Act, 2022. The constitutional and legal validity of retrospective application of the said Explanation has already been examined by various High Courts including the Hon’ble Delhi High Court in Era Infrastructure (India) Ltd. and the Hon’ble Calcutta High Court in Avantha Realty Ltd., wherein it has been categorically held that the amendment is prospective in operation and cannot be applied to earlier assessment years. The memorandum explaining the provisions of the Finance Bill itself clearly stipulates that the amendment would apply from Assessment Year 2022-23 onwards. Thus, for the years under consideration, the settled judicial position prevailing prior to the amendment continues to govern the field. The learned CIT(A), therefore, in our considered opinion, has correctly appreciated both the factual and legal aspects while deleting the disallowance made under section 14A read with Rule 8D.
17. In view of the foregoing discussion and respectfully following the binding judicial precedents referred to hereinabove, we find no infirmity in the well-reasoned orders passed by the learned CIT(A) deleting the additions made on account of enhancement of Annual Letting Value under section 23(1)(a), disallowance of interest expenditure and disallowance under section 14A read with Rule 8D. The findings recorded by the learned CIT(A) are based on proper appreciation of facts, documentary evidences and settled principles of law, whereas the additions made by the Assessing Officer are largely founded on assumptions, conjectures and legally unsustainable presumptions unsupported by cogent material. Accordingly, the orders of the learned CIT(A) for all the assessment years under consideration are upheld and the appeals filed by the Revenue are dismissed.
18. In the result, all the appeals filed by the Revenue stand dismissed.
Order pronounced on 27th May, 2026.
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