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2010 (10) TMI 489 - AT - Income TaxFurther in consequence to the same the AO is also directed to allow credit for TDS for difference in such amount only in the year in which the appellant has shown such income Accordingle the the order of CIT(A) is hereby confirmed on this issue Addition of income on account of notional interest - The ld. D.R. relied upon the order of AO and submitted that the AO made out a case u/s 23 (1)(a) of the Act - The ld. A.R., on the other hand, relied upon the order of CIT (A) - The action of the Assessing Officer is not in accordance with section 23(1)(a) and also contrary to the judgment of jurisdictional high Court, therefore, the same is liable to be quashed. We accordingly set aside the order of AO and confirm the order of CIT(A) on this issue Addition of business income by way of estimation of profit @ 8% on the contemplated portion of construction - Merely because the appellant company had made advances to the said Mr. Kishor Bajaj would not automatically allow the AO to make any addition on notional basis unless such notional income is chargeable under the provisions of Income-tax Act - since there is no such provision in the Act and as such addition made by the AO in this regard on notional basis is deleted This ground of appeal is allowed In the result, the appeal of the assessee is allowed and the appeal of the Revenue is partly allowed for statistical purposes
Issues Involved:
1. Disallowance of interest claimed as a deduction. 2. Addition of rental income based on TDS certificates. 3. Addition of notional interest on interest-free deposits. 4. Estimation of profit on construction. Detailed Analysis: Issue 1: Disallowance of Interest Claimed as a Deduction The assessee claimed a deduction of Rs. 24,98,205/- as interest against property income. The AO disallowed this claim, stating that the property was not acquired or constructed with the borrowed capital from Kotak Mahindra Bank, as the loan was sanctioned after the property was ready for lease. The CIT(A) upheld this disallowance, noting that the loan was secured against the property and not used for its acquisition. The Tribunal, however, referred to CBDT Circular No. 28 dated 20-08-1969, which allows interest deduction on a second loan if it is used to repay the original loan taken for property acquisition or construction. Since the original loan from Corporation Bank was used for construction and the subsequent loan from Kotak Mahindra Bank was partly used to repay this original loan, the Tribunal allowed the interest deduction, reversing the CIT(A)'s decision. Issue 2: Addition of Rental Income Based on TDS Certificates The AO added Rs. 18,55,886/- to the rental income, noting a discrepancy between the rent credited in the P&L account and the TDS certificates. The CIT(A) deleted this addition, accepting the assessee's explanation that the TDS certificate included rent for 13 months due to the tax deduction timing by ICICI Bank, while the rental income for 12 months was correctly reported. The Tribunal upheld the CIT(A)'s decision, confirming that the rental income should be based on the actual 12-month period and not the TDS certificate, which included an additional month due to timing differences. Issue 3: Addition of Notional Interest on Interest-Free Deposits The AO added Rs. 8,90,825/- as notional interest on an interest-free deposit received from ICICI Bank, arguing that it should be included in the annual value under Section 23(1)(a) of the Act. The CIT(A) deleted this addition, citing the Bombay High Court judgment in CIT vs. J.K. Investor (Bombay) Ltd., which held that notional interest cannot form part of the actual rent under Section 23(1)(b). The Tribunal agreed with the CIT(A), stating that the AO's calculation of annual value by adding notional interest was incorrect and contrary to the jurisdictional High Court's judgment. The Tribunal confirmed that the actual rent received should be considered without adding notional interest. Issue 4: Estimation of Profit on Construction The AO estimated a profit of Rs. 8,07,231/- based on 8% of Rs. 1,08,97,619/-, the amount recoverable from Mr. Kishore Bajaj for premises allotted to him. The CIT(A) deleted this addition, noting that notional income cannot be charged unless it is actually received or there is a specific provision in the Act. The Tribunal remitted this issue back to the CIT(A) for fresh consideration, noting that the CIT(A) did not fully appreciate the facts. The Tribunal directed the CIT(A) to verify the details of the construction cost and the practice of not charging profit from old property owners before making a decision. Conclusion: The Tribunal allowed the assessee's appeal regarding the interest deduction and upheld the CIT(A)'s deletion of additions related to rental income and notional interest. The issue of estimated profit on construction was remitted back to the CIT(A) for reconsideration. The appeal of the Revenue was partly allowed for statistical purposes.
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