2016 (1) TMI 1360 - AT - Income Tax

Income from house property Estimation of annual value by adding notional interest on interest free security security deposit - Held that - As decided in assessee s own case for the assessment year 2007-08 we find the identical issue on the basis of which the FAA upheld the order of AO was decided in favour of the assessee wherein held that the determination of the ALV by the Revenue authorities is erroneous as the Municipal rateable value exhibited is much less than the annual let out value disclosed by the assessee. We, therefore, do not find any reason for making the impugned addition. - Decided in favour of assessee. Disallowance of interest expenses - assessee advanced interest free loans out of interest bearing funds - Held that - As decided in assessee s own case for the assessment year 2007-08 we find that the loan was given on the grounds of commercial expediency and therefore the proportionate disallowance of interest is uncalled for and deserves to be deleted. In so far as the proportionate disallowance of interest on the debit balance of the partners is concerned, the same has to be considered in the light of the partnership deed and as the partnership deed is silent on charging of such interest, we do not find any reason for such disallowances - Decided in favour of assessee.

Summary

Issues Involved:

1. Estimation of annual value of profit by adding notional interest on interest-free security deposit.
2. Disallowance of interest expenditure on the grounds that the appellant had given interest-free loans and advances.

Issue 1: Estimation of Annual Value of Profit by Adding Notional Interest on Interest-Free Security Deposit

The appellant contested the decision of the CIT(A) which upheld the Assessing Officer's (AO) estimation of the annual value of profit at Rs. 34,22,500/- instead of Rs. 6,60,000/-. The AO added notional interest on the interest-free security deposit, resulting in an addition of Rs. 27,62,500/-.

Facts and Findings:
- The assessee, a firm, filed its return of income declaring a loss of Rs. 47,67,568/-. The firm owned property let out at a monthly rent of Rs. 25,000/- with an interest-free security deposit of Rs. 3,30,62,710/-.
- The AO observed that the rent was significantly lower than the market rate and issued a show cause notice. The AO calculated the annual letting value (ALV) by adding interest at 8.5% on Rs. 3,25,00,000/-, resulting in an additional Rs. 27,62,500/-.
- The CIT(A) upheld the AO's order by following the previous year's decision.
- The Tribunal found that the identical issue had been decided in favor of the assessee in a previous case (ITA No.286/Mum/2014 for AY 2007-08). The Tribunal noted that the AO's determination of ALV was erroneous and based on a cryptic report without comparable cases.
- The Tribunal directed the AO to accept the annual let-out value as offered by the assessee, setting aside the addition.

Conclusion:
The Tribunal allowed the appeal, directing the AO to accept the annual let-out value without adding notional interest on the security deposit.

Issue 2: Disallowance of Interest Expenditure on Grounds of Interest-Free Loans and Advances

The appellant challenged the CIT(A)'s decision which upheld the AO's disallowance of Rs. 35,93,937/- and Rs. 17,60,084/- out of interest expenditure, arguing that the appellant had given interest-free loans and advances.

Facts and Findings:
- The assessee had taken secured and unsecured loans, paying interest on them, but had advanced loans to M/S MSN Enterprises without receiving interest.
- The AO disallowed the interest expenditure, arguing that the assessee had raised interest-bearing funds but advanced interest-free loans.
- The CIT(A) upheld the AO's disallowance by following the previous year's decision.
- The Tribunal referred to the Supreme Court's decision in S.A. Builders Ltd. Vs CIT, which held that the relevance is the measure of commercial expediency, not whether the amount was advanced for earning profits.
- The Tribunal found that the loan was given on commercial grounds and thus, the proportionate disallowance of interest was uncalled for. The Tribunal directed the AO to delete the addition.

Conclusion:
The Tribunal deleted the disallowance of Rs. 53,54,021/- by following the Supreme Court's decision, allowing the appeal of the assessee.

Additional Appeals:

For the assessment year 2010-11 (ITA No.3728/M/2015), the issues were identical to those in ITA No.3727/M/2015 for the assessment year 2009-10. The Tribunal applied the same findings and conclusions, allowing the appeal of the assessee and directing the AO accordingly.

Final Order:
The appeals of the assessee for both assessment years were allowed, and the AO was directed to comply with the Tribunal's findings. The order was pronounced in the open court on 21.1.2016.