2005 (7) TMI 576 - AT - Income Tax

Determination of annual value of the property - cost of acquisition of the flat - Business income Or Income from house property - Loans and advances - disallowance u/s 40A(2). HELD THAT - For the purpose of determining the annual value of the property recourse is to be made to section 23. The provisions and the applicability of the Bombay Municipal Corporation Act and the determination of rateable value has been elaborately considered by their Lordships of Calcutta High Court in the case of Prabhavati Bansali 1981 (9) TMI 21 - CALCUTTA HIGH COURT wherein the provisions of Bombay Municipal Corporation Act has been deliberated upon as the property in question is situated in Mumbai and it has been held that for determining the annual value of the property reference is to be made to the rateable value as determined by the Municipal Corporation. Their Lordships of Hon ble Bombay High Court in the case of M.V. Sonawala 1988 (12) TMI 82 - BOMBAY HIGH COURT following decision of Hon ble Calcutta High Court and also Hon ble Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee 1979 (12) TMI 3 - SUPREME COURT and Dr. Balbir Singh v. M.C.D. 1984 (12) TMI 64 - SUPREME COURT held that the income from house property has to be computed on the basis of the sum for which the property might reasonably be let from year to year or the annual municipal rateable value. Thus we agree that for determining the annual value of property the adoption of Municipal Rateable Value is the correct method and in cases where the actual rent received is higher than the Municipal Rateable Value the rent so received is to be adopted as Annual Letting Value of the property. In the circumstances we direct the Assessing Officer to verify the annual rateable value of the flat as per the Bombay Municipal Corporation Act and adopt the annual letting value of the said flat being the actual rent received by the assessee or the Municipal Rateable Value whichever is higher. This ground of appeal raised by the revenue for the assessment years 1991-92 1992-93 and 1993-94 stands rejected. Loans and advances - disallowance u/s 40A(2) - There is direct nexus between the borrowings made at higher rate of interest and advanced at lower rate of interest has not been established during the assessment proceedings. Similarly the fact that certain borrowings were made at the rate of 30 per cent and also advanced at the same rate has not been verified by the Assessing Officer. Therefore in the light of principles of natural justice we deem it fit to restore the matter to the file of the Assessing Officer to verify the contentions of the assessee w.r.t. borrowings and advances made during the year under consideration. In case of establishment of direct nexus between the borrowings at higher rate of interest and advances at lower rate of interest the proportionate interest is to be disallowed. In case the borrowings and advances bear the same rate of interest or the advances are not out of such borrowings at high rate of interest no interest is to be disallowed and the same may be verified by the Assessing Officer after affording a fair and proper opportunity to the assessee. Therefore this ground of appeal of the revenue is allowed. In the result the appeal for assessment year 1991-92 is dismissed and that of assessment years 1992-93 and 1993-94 is partly allowed.

Summary

Issues:
1. Determination of annual value of property for assessment years 1991-92, 1992-93, and 1993-94.
2. Disallowance of interest under section 40A(2) for assessment years 1992-93 and 1993-94.

Issue 1: Determination of annual value of property

The appeal concerned the determination of the annual value of a property leased out by the assessee, with the main contention being the direction of the CIT(A) to accept Rs. 7,000 as income from the property as opposed to the higher Annual Value determined by the Assessing Officer at Rs. 13,65,475. The Assessing Officer invoked section 23 of the IT Act to calculate the annual value, considering the cost of acquisition of the property and applying a 12% return on investment. However, the CIT(A) directed to adopt the lower rent amount based on the intention of the assessee for value accretion rather than higher rent. The Tribunal, following precedents, held that for determining the annual value, the Municipal Rateable Value should be adopted, and if the actual rent received is higher, that should be considered as the Annual Letting Value. The matter was directed back to the Assessing Officer to verify the rateable value and adopt the higher of the two values.

Issue 2: Disallowance of interest under section 40A(2)

The second ground of appeal related to the disallowance of interest under section 40A(2) for assessment years 1992-93 and 1993-94. The Assessing Officer disallowed excess interest payment due to loans obtained at higher rates but advanced at lower rates to sister concerns. The CIT(A) deleted the addition citing lack of nexus between borrowings and advances. The Tribunal found that the direct nexus between borrowings at higher rates and advances at lower rates was not established during assessment. The matter was remanded to the Assessing Officer to verify the contentions of the assessee regarding borrowings and advances. If a direct nexus is proven, proportionate interest is to be disallowed; otherwise, no interest should be disallowed. The ground of appeal by the revenue was allowed in this regard.

In conclusion, the Tribunal dismissed the appeal for the assessment year 1991-92 and partly allowed the appeal for assessment years 1992-93 and 1993-94, addressing the issues of determining the annual value of the property and the disallowance of interest under section 40A(2) comprehensively based on legal provisions and precedents.