2014 (1) TMI 900 - AT - Income Tax

Deletion made on notional interest - Interest free security deposit into rental income Unexplained expenditure Held that - Despite the directions by the CIT(A), the Assessing Officer did not choose to determine the fair/market rental value of the property by making necessary enquiries, the rental income offered by the assessee is to be treated as the fair/market rental income or the Annual Letting Value of the property Relying upon COMMISSIONER OF INCOME TAX, Versus MONI KUMAR SUBBA & Miracle Exporters P. Ltd. 2011 (3) TMI 497 - DELHI HIGH COURT - the notional interest on the interest free security deposit cannot be taken as determining factor to arrive at the fair rent - The AO did not choose to comply the same and to make enquiries regarding the fair rental value of the property, the assessee cannot be harassed by prolonging the matter further on the issue, especially when, the AO himself has chosen not to make such enquiry - even for the previous year as well as for the subsequent year no objection has been raised by the revenue regarding the Annual Letting Value and the amount of rental income shown by the assessee has been accepted for the said years - There is no evidence on the file that annual rental value of the property was higher during the relevant year than that declared by the assessee the order of the CIT(A) upheld Decided against Revenue. Unexplained expenditure Held that - Though the CIT(A) has observed that the transactions as noted above were made by the assessee, has deleted the addition made by the AO in this respect - the finding portion of the order of learned CIT(A) is in contradiction to the factual finding - the matter on this issue is restored back to the learned CIT(A) to verify as to whether there was any mistake while giving the factual findings given in this respect and to give his findings afresh on the issue after giving both the parties opportunity of hearing Decided partly in favour of Assessee.

Summary

Issues:
1. Deletion of notional interest on interest-free security deposit from rental income.
2. Addition of unexplained expenditure based on credit card transactions.

Issue 1: Deletion of notional interest on interest-free security deposit from rental income:

The case involved an individual assessee declaring rental income from a property rented out to a company. The Assessing Officer (A.O.) added notional interest on the interest-free security deposit of Rs. 50 lakhs into the rental income, disputing the declared amount. The assessee contested this, stating the A.O.'s valuation was based on a report prepared by an Inspector via telephonic conversation with a Real Estate Broker. The CIT(A) directed the A.O. to determine the fair rent of the property and allow cross-examination of the Inspector. Despite this, the A.O. did not conduct any enquiry and reported no necessity to do so. The CIT(A) observed the A.O.'s actions as arbitrary and deleted the notional interest addition. The Revenue appealed, arguing for the addition based on the high security deposit relative to the monthly rent. The Tribunal referred to the Delhi High Court's ruling in 'Moni Kumar Subba,' emphasizing fair rent determination under Section 23(1)(a) and upheld the CIT(A)'s decision, stating notional interest cannot be added back to rental income without proper enquiry.

Issue 2: Addition of unexplained expenditure based on credit card transactions:

Regarding the unexplained expenditure addition based on credit card transactions, the assessee disputed the purchases alleged by the Revenue, presenting evidence to the contrary. The CIT(A) mentioned a remand report by the A.O. showing transactions made by the assessee, leading to the addition. However, despite this observation, the CIT(A) deleted the addition. The Tribunal found a contradiction between the factual finding and the conclusion in the CIT(A)'s order. Therefore, the matter was remanded back to the CIT(A) to verify the factual findings and provide a fresh decision after hearing both parties. Consequently, the appeal of the Revenue was partly allowed for statistical purposes, and the cross objections of the assessee were also allowed for statistical purposes.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the notional interest addition to rental income based on the fair rent determination principle. The matter of unexplained expenditure based on credit card transactions was remanded back to the CIT(A) for verification and a fresh decision. The judgment provides clarity on the proper valuation of rental income and emphasizes the need for thorough enquiries and factual accuracy in tax assessments.