2012 (5) TMI 736 - AT - Income Tax

Summary

Issues involved: Determination of annual letting value of property u/s 24 and attribution of interest expenses to earning dividend income u/s 36(1)(iii).

Issue 1 - Determination of annual letting value of property u/s 24:
The appeal concerns the addition made by the AO and sustained by the CIT(A) regarding the annual letting value of the assessee's property at 8.5% of the total investment. The AO added notional interest on interest-free security deposit received by the assessee to the actual rent declared, resulting in a higher income chargeable to tax under "Income from house property." The CIT(A) disagreed with the AO's approach, stating that standard rent under the Bombay Rent Control Act should be considered. The CIT(A) determined the standard rent at 8.5% of the total investment in the property, directing the AO to use this figure as the annual letting value. The Tribunal, following a previous decision in the assessee's case for another assessment year, held that the annual letting value could not exceed the municipal ratable value. Therefore, the municipal ratable value was taken as the annual letting value for tax computation purposes.

Issue 2 - Attribution of interest expenses to earning dividend income u/s 36(1)(iii):
The appeal also addressed the attribution of proportionate interest expenses to earning dividend income, with the AO allowing exemption only on the net dividend amount. The assessee claimed the interest as legitimate business expenses u/s 36(1)(iii). The Tribunal, citing a previous decision for another assessment year, upheld the AO's decision to allocate interest expenses on a prorate basis towards dividend income, allowing exemption only on the net dividend income. The Tribunal reasoned that interest expenditure on funds used for investment in shares for earning exempt dividend income could not be allowed as a business expenditure.

In conclusion, the Tribunal partly allowed the assessee's appeal, determining the annual letting value based on municipal ratable value and upholding the allocation of interest expenses towards dividend income.