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Issues Involved:
1. Determination of rental income for ground and first floor properties. 2. Consideration of notional interest on interest-free deposits. 3. Addition of accrued discounting charges. Detailed Analysis: 1. Determination of Rental Income for Ground and First Floor Properties The primary issue revolves around the rental income estimation for the ground and first floor properties. The assessee argued that the CIT(A) upheld an estimated rental income of Rs. 1.24 crores instead of the actual receipt of Rs. 3,80,160. The assessee contended that the rental income was based on an agreement with the previous property owners and had been accepted by the Department in prior assessments. The assessee cited the case of CIT v. Indra & Co. [2004] 268 ITR 240 (Cal.), where the court held that the actual rent received constituted the annual value if the agreement was genuine. The Assessing Officer (AO) observed that the rental value should have been higher due to an interest-free loan of Rs. 90 lakhs and added notional interest to the rental income. The AO also noted that the rent from the second floor was significantly higher, at Rs. 1.2 crores, compared to the ground and first floors. The AO concluded that the fair market rent was not shown for the ground and first floors and estimated the rental income at Rs. 1.24 crores based on the rent received from subletting by the Directors. The CIT(A) upheld the AO's decision, noting that the rental agreements with the Directors were not at market rates and that the property was sublet at significantly higher rents. The CIT(A) dismissed the assessee's argument that the rent was fixed by an overriding condition in the dissolution agreement and protected by the Rent Control Act. The Tribunal found that the assessee was bound by the dissolution agreement, which stipulated a rent of Re. 1 per sq. ft. The Tribunal also noted that the property was tenanted since 1984, and the standard rent should be considered as per the Rent Control Act. The Tribunal allowed the appeal, stating that the annual value should be determined based on the standard rent fixed at the time of letting out the property. 2. Consideration of Notional Interest on Interest-Free Deposits The AO added notional interest of Rs. 16.2 lakhs to the rental income, arguing that the rental value should have been higher without the interest-free deposit. The assessee objected, citing several court decisions that notional interest cannot be charged. The Tribunal referred to the decision of the Hon'ble Jurisdictional High Court in J.K. Investors (Bombay) Ltd., which held that notional interest on interest-free deposits does not form part of the actual rent under section 23(1)(b) of the Income-tax Act. The Tribunal deleted the addition of notional interest. 3. Addition of Accrued Discounting Charges The AO added Rs. 18,11,010 as accrued discounting charges, observing that the assessee followed the mercantile system of accounting and should have accounted for the charges on an accrual basis. The CIT(A) upheld the addition, stating that the assessee was supposed to offer the income on an accrual basis. The assessee argued that the parties from whom the discounting charges were due were declared sick, and recovery was doubtful. The Tribunal considered the Notification declaring M/s. Lok Housing and Construction Ltd. as a Relief Undertaking and the stay on recovery proceedings by the High Court for M/s. Vitara Chemicals Ltd. The Tribunal found no justification for the addition and allowed the appeal on this ground. Conclusion The Tribunal allowed the appeal of the assessee, concluding that the rental income should be based on the standard rent as per the Rent Control Act, notional interest should not be added to the rental income, and the addition of accrued discounting charges was not justified given the circumstances.
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