2013 (12) TMI 234 - AT - Income Tax

Disallowance of Interest Nexus between interest received and interest paid - Held that - Following assessee s own case for A.Y. 2005-06 - Consistent with the past practice and in the absence of any justification for the departure, the interest claim ought to have been allowed Following CIT vs. Sridev Enterprises 1991 (1) TMI 52 - KARNATAKA High Court - If interest has been allowed as a deduction in the earlier years and there is no evidence to show that there were fresh borrowings during the relevant accounting year, the interest paid by the assessee on the opening balance of the creditors account should normally be allowed as a deduction Decided in favour of assessee. Income from house property - Annual rental value Held that - the annual rateable value as fixed by the Municipal Corporation Act, is taken as annual value because the same is based on the cost of construction of the building - Annual Municipal value if available itself could be the annual letting value and if the actual rent received or receivable is more than the annual Municipal value, then the actual rent may be taken as the annual value The authorities were not justified in recalculating the annual letting value of the Capri and Kodinar flats owned by the assessee, and which were vacant during the entire previous year - The assessee has furnished the certificates given by the Brihanmumbai Mahanagarpalika showing the rateable value of the flats Decided in favour of assesse. Valuation of rights Held that - The Assessing Officer was not given an opportunity by the CIT(A) before admitting the additional evidence and, therefore, the matter be restored to the file of the CIT(A) The issue was restored for fresh decision.

Summary

Issues:
1. Admission of additional evidence without affording opportunity to AO
2. Disallowance of interest by AO and CIT(A)
3. Determination of annual rental value of residential houses
4. Benefit obtained from allotment of shares at lower price
5. Valuation of rights attached to shares

Issue 1: Admission of Additional Evidence
The revenue raised concerns regarding the acceptance of additional evidence by CIT(A) without providing an opportunity to the AO, as required by Rule 46A of the I.T. Rules, 1962. The CIT(A) admitted an opinion by SSP & Co regarding the valuation of rights awarded to a third party without proper authorization. The revenue also contested the arbitrary valuation of rights by CIT(A) at Rs.27.63 without adequate reasoning. The matter was restored to the AO for fresh adjudication with consent from both parties.

Issue 2: Disallowance of Interest
The AO disallowed interest of Rs.30,000 claimed by the assessee, as the nexus between interest paid and received was not proven. The CIT(A) upheld this disallowance. However, a coordinate bench decision favored the assessee's claim based on consistent practice and legal precedent. Following this decision, the Tribunal directed the AO to delete the addition of Rs.30,000, ruling in favor of the assessee.

Issue 3: Determination of Annual Rental Value
The AO determined the annual rental value of residential houses based on fair market rent, leading to a dispute with the assessee. The CIT(A) upheld the AO's decision, but a similar issue in a previous assessment year was decided in favor of the assessee by a coordinate bench. Citing binding decisions, the Tribunal ruled that the AO was not justified in recalculating the annual letting value and directed acceptance of the income returned by the assessee for the properties in question.

Issue 4: Benefit from Allotment of Shares
The CIT(A) concluded that the appellant obtained benefits from the allotment of shares at a lower price, which should be taxed as income. The valuation of rights attached to the shares was a point of contention, with the CIT(A) valuing them at Rs.27.63 per share. The Tribunal, following precedent, upheld the assessee's contentions and directed the AO to accept the income returned by the assessee related to the shares.

Issue 5: Valuation of Rights Attached to Shares
The valuation of rights attached to shares allotted to a third party was a key issue. The CIT(A) valued these rights at Rs.27.63 per share, differing from the valuation of Rs.38.92 per share by SSPA & Co. The Tribunal, in line with previous decisions, upheld the assessee's contentions and directed the AO to accept the income returned by the assessee regarding the valuation of rights attached to shares.

This detailed analysis covers the various issues raised in the legal judgment, addressing the arguments presented by both parties and the decisions made by the Tribunal based on legal provisions and precedents.