2003 (12) TMI 636 - AT - Income Tax

Determination of the annual letting value of the let out portion of the building - Addition of notional interest on security deposit for calculating Income from House Property - HELD THAT - It is an admitted position that the company purchased Jindal Mansion which was previously owned by Kamla Metals and the said property was under the tenancy of two companies viz. Jindal Strips Ltd. and Jindal Iron Steel Co. Ltd. right from 1983 onwards at the same rent of 1 per sq. ft. at the time when the assessee has purchased this property. In the present case the municipal rateable value of the building as per the copy of receipt placed on paper book for a period of 6 months from 1-10-1998 to 31-3-1999 is 10, 61, 190. Thus the yearly municipal rateable value of the entire property Jindal Mansion can only be 21, 22, 380. Therefore if this value was to be adopted as a guide for the determination of the standard rent then appropriate proportion of this amount shall have to be taken for computing the standard rent of the portion let out by the assessee. Therefore even if we apply provisions of section 23(1)(a) of the Act the annual letting value of the entire property cannot be more than 21, 22, 380. Since we are of the opinion that the provisions of sub-clause (b) to sub-section (1) of section 23 is applicable to the present case this issue stands directly covered by the decision of the Hon ble Bombay High Court in the case of CIT v. J.K. Investors (Bom.) Ltd. 2000 (6) TMI 9 - BOMBAY HIGH COURT and Calcutta High Court in the case of CIT v. Satya Co. Ltd. 1993 (8) TMI 293 - CALCUTTA HIGH COURT . We are of the opinion that notional interest on the interest-free deposit cannot be taken into consideration while determining the annual letting value of the building u/s 23 of the Income-tax Act 1961. Therefore we adopt the same reasoning as has been in the order of the ITAT in Ruchi Properties Ltd. s case for arriving at the above conclusion. In the case of Tivoli Investment Trading Co. (P.) Ltd. 2003 (6) TMI 463 - ITAT MUMBAI the Bench itself has observed that the assessee received only deposit and no rent was stipulated. Similarly the case of Apart Ltd. was also a case where no actual rent was received by the assessee and the Bench was concerned with the application of sub-clause (a) of sub-section (1) of section 23 of the Act. Therefore both these cases are distinguishable. In the case of R. Dalmia 1981 (12) TMI 3 - DELHI HIGH COURT the question was whether municipal valuation can be considered as annual letting value of the property which is not the case in the instant case. Thus we are of the opinion that the revenue authorities cannot take into consideration the notional interest on the interest-free advances received by the assessee while determining the annual letting value of the rented property. We accordingly set aside the orders of the authorities below on this issue. Grounds 1 to 3 of the assessee are allowed.

Summary

Issues Involved:

1. Addition of notional interest on security deposit for calculating "Income from House Property".
2. Attribution of proportionate interest expense to dividend income and its exemption u/s 10(33).
3. Allowance of interest expenses as a legitimate business expense u/s 36(1)(iii).

Summary:

Issue 1: Addition of Notional Interest on Security Deposit

The primary issue was whether Rs. 14,04,00,000, being the notional interest on an interest-free deposit of Rs. 78 crores, should form part of the rent received by the assessee. The assessee, a company engaged in trading equity shares and investment, owned a commercial property 'Jindal Mansion' and received a nominal rent of Rs. 1 per sq. ft. from tenants, along with substantial interest-free deposits. The Assessing Officer (AO) added notional interest @ 18% on these deposits to the "Income from House Property". The Tribunal held that the annual letting value (ALV) of the property cannot exceed the standard rent as per the Bombay Rent Control Act (BRCA). The Tribunal referenced the Supreme Court's decisions in Dewan Daulat Rai Kapoor and Mrs. Sheila Kaushish, which established that the ALV should be based on standard rent, not hypothetical rent. Consequently, the Tribunal concluded that notional interest on interest-free deposits cannot be considered while determining the ALV u/s 23 of the Income-tax Act, 1961. Grounds 1 to 3 were allowed in favor of the assessee.

Issue 2: Attribution of Proportionate Interest Expense to Dividend Income

The AO attributed proportionate interest expenses to the earning of dividend income and allowed net dividend income to be exempt u/s 10(33). The AO observed that the assessee borrowed funds at interest and invested in shares of Jindal Group companies, claiming dividend income as exempt without deducting interest expenses. The Tribunal noted that the assessee had borrowed funds for legitimate business purposes, including holding shares as stock-in-trade. The Tribunal referred to the decision in Mafatlal Holdings Ltd. and concluded that the department could not establish a direct nexus between borrowing and purchase of shares. Therefore, the disallowance of proportionate interest expenditure was unjustified, and the interest expenses should be allowed u/s 36(1)(iii). Grounds 4 and 5 were decided in favor of the assessee.

Issue 3: Allowance of Interest Expenses as Legitimate Business Expense

The AO disallowed interest expenses on funds utilized for investment in shares, arguing that the interest-bearing funds were used for non-business purposes. The Tribunal, however, found that the assessee's business involved trading in shares and investment, and the borrowed funds were used for business purposes. The Tribunal held that the interest expenses were legitimate business expenses u/s 36(1)(iii) and should be allowed. The Tribunal set aside the orders of the authorities below on this issue.

Conclusion:

The Tribunal ruled in favor of the assessee on all major issues, disallowing the addition of notional interest on security deposits and allowing the interest expenses as legitimate business expenses. The Tribunal emphasized the application of standard rent under the BRCA and the legitimate business purpose of the borrowed funds.