2016 (7) TMI 1387 - AT - Income Tax

Determination of ALV of the property - Held that - CIT (A) has thoroughly discussed the factual aspects and has found that the AO has determined the fair market value on the basis of a vague and general report of the Inspector. There was no credible and reliable evidence before the AO for arriving at the fair market value of the properties. Even the municipal valuation of the properties was much lower than the actual rent received by the assessee. There was no evidence on record that similarly placed properties like that of the assessee were having higher rental value than that was offered by the assessee. The impugned order of the learned CIT (A) is quite elaborative and is based on a very well reasoning. We do not find any infirmity in his order while deleting the addition made by the AO in respect to the ALV of the properties question. Accordingly we uphold the same and dismiss these grounds of appeal of the Revenue. Disallowance of expenditure u/s 14A r.w.r. 8D - assessee had claimed the netting of the interest income & expenditure and then to consider the net interest expenditure for disallowance u/s 14A - Held that - For assessment year 2008-09 wherein the Tribunal on identical facts and circumstances as are in the year under consideration has allowed the netting of interest and has held that the disallowance of interest should be made with reference to the net interest only. The Tribunal upheld the findings of the CIT (A) directing the AO to verify the figures given by the assessee and to take into consideration only net interest if any for computation of disallowance of expenditure under Rule 8D of the Rules. The Tribunal has further upheld the findings of the learned CIT (A) allowing bifurcation of the expenses between the Head Office and Regional Offices and to re-compute the disallowance on proportionate basis relatable to the Head Office only. It has been further noted by the CIT (A) in the impugned order that the AO has followed the aforesaid decision of the Tribunal while completing the re-opened assessment for assessment year 2007-08 and regular assessment for assessment year 2010-11. The learned CIT (A) accordingly has directed the AO to verify the allocation of the expenses as well as calculation of disallowance u/s 14A of the Act read with Rule 8D of the Rules with the same methodology which has been directed to be adopted in the assessment year 2008-09. Even similar method has been adopted by the AO for earlier assessment year 2007-08 and subsequent assessment year 2010-11. In view of the above we do not find any infirmity in the order of the learned CIT (A) in this issue also and the same is accordingly upheld. There is no merit in the appeal of the Revenue.

Summary

Issues Involved:
1. Determination of Annual Letting Value (ALV) of properties.
2. Disallowance of expenditure under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
3. Confirmation of disallowance of lease rent paid to Bombay Port Trust while computing income under the head "income from house property."

Issue-wise Detailed Analysis:

1. Determination of Annual Letting Value (ALV) of Properties:
The Revenue's appeal raised three grounds (Grounds No. 1 to 3) regarding the determination of ALV. The Assessing Officer (AO) noted discrepancies in the rental income reported by the assessee for properties at Corporate Park and Kamala Mills Compound. The AO suspected that interest-free deposits received might have influenced the rental value and conducted an enquiry through an Inspector. Based on the Inspector’s report, which provided notional fair market rates for the financial year 2011-12, the AO made an addition to the ALV of the properties.

The Commissioner of Income Tax (Appeals) [CIT (A)] found the Inspector's report to be vague and lacking specific details such as names and addresses of property agents or comparable instances of commercial properties. The CIT (A) emphasized that the actual rent received is a reliable yardstick unless influenced by extraneous circumstances and noted that the municipal valuation was much lower than the actual rent received by the assessee. Relying on judicial precedents, the CIT (A) held that the AO did not have credible evidence to prove suppression of the prevailing market rate by the assessee. Consequently, the addition made by the AO was deleted.

The Tribunal upheld the CIT (A)’s order, agreeing that there was no credible evidence to support the AO's determination of the fair market value. The Tribunal found the CIT (A)’s reasoning to be thorough and well-founded, leading to the dismissal of the Revenue's grounds on this issue.

2. Disallowance of Expenditure under Section 14A read with Rule 8D:
The Revenue’s appeal also challenged the disallowance of expenditure under Section 14A read with Rule 8D. The assessee had claimed netting of interest income and expenditure and proportionate allocation of expenses between the Head Office and Manufacturing Unit. The CIT (A) noted that this issue had been decided in favor of the assessee in the assessment year 2008-09 by the Tribunal, which allowed the netting of interest and proportionate allocation of expenses.

The Tribunal, in its order dated 12th March, upheld the CIT (A)’s findings for the assessment year 2008-09, directing the AO to verify the figures and consider only net interest for disallowance under Rule 8D. The CIT (A) in the present case directed the AO to follow the same methodology for the assessment year 2009-10. The Tribunal found no infirmity in the CIT (A)’s order and upheld it, dismissing the Revenue’s grounds on this issue.

3. Confirmation of Disallowance of Lease Rent Paid to Bombay Port Trust:
The assessee’s appeal raised five grounds, but only Ground No. 2, concerning the confirmation of disallowance of lease rent paid to Bombay Port Trust while computing income under "income from house property," was found to be effective. During the hearing, the assessee’s representative stated that due to the smallness of the amount involved, this ground would not be pressed. Consequently, Ground No. 2 of the assessee’s appeal was dismissed as not pressed.

Conclusion:
Both the Revenue’s appeal and the assessee’s appeal were dismissed. The Tribunal upheld the CIT (A)’s orders on the determination of ALV and disallowance of expenditure under Section 14A read with Rule 8D, finding no merit in the Revenue’s grounds. The assessee’s ground regarding lease rent was dismissed as not pressed.