1994 (9) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of notional rental income under "Income from house property."
2. Adoption of annual letting value exceeding municipal valuation.
3. Levy of interest under sections 139(8) and 217 of the I.T. Act.
4. Deduction for maintenance expenditure under section 23(1)(c).
5. Cancellation of interest under section 217.

Detailed Analysis:

1. Assessment of Notional Rental Income under "Income from House Property":
The assessee, a private limited company, constructed a multi-storeyed building and allotted the apartments to its shareholders. The Assessing Officer (AO) assessed the company on notional rental income despite the company not deriving any rental income from the shareholders. The AO determined the income from house property and brought the same to tax, which was contested by the assessee. The CIT (Appeals) upheld the AO's decision, confirming the assessment of the company in respect of the flats allotted to its shareholders.

The Tribunal, however, held that the substance of the transaction showed that the shareholders, who paid the full cost of the flats, were the real owners. Thus, the company could not be considered the owner of the flats for the purpose of assessing income from house property. The Tribunal emphasized that the ownership should be considered in light of the particular facts of the case and concluded that the company was not liable to be assessed under the head "Income from house property."

2. Adoption of Annual Letting Value Exceeding Municipal Valuation:
The AO adopted an annual letting value at Rs. 2.25 per sq. ft. per month, which was contested by the assessee. The CIT (Appeals) reduced it to Rs. 2 per sq. ft. per month but did not accept the assessee's contention that the annual letting value should not exceed the municipal valuation. The Tribunal upheld the assessee's contention that the annual letting value should be based on the municipal valuation, citing relevant case laws. It was concluded that if the company were to be assessed, the annual letting value should start with the municipal valuation of Rs. 1,50,885.

3. Levy of Interest under Sections 139(8) and 217:
The AO levied interest under sections 139(8) and 217, which was contested by the assessee. The CIT (Appeals) confirmed the levy of interest under section 139(8) but canceled the interest under section 217. The Tribunal held that since the charge under section 23 failed against the assessee-company, resulting in 'nil' taxable income, the levy of interest was not justified. Consequently, the assessee's appeal against the levy of interest was upheld, and the revenue's appeal against the cancellation of interest under section 217 was dismissed.

4. Deduction for Maintenance Expenditure under Section 23(1)(c):
The CIT (Appeals) directed the AO to grant deduction for maintenance expenditure under section 23(1)(c) of the I.T. Act, which was contested by the revenue. The Tribunal upheld the CIT (Appeals)'s decision, noting that the annual letting value, once determined, should not have further additions. The Tribunal found no material evidence from the revenue to suggest that the charges collected by the assessee-company were in lieu of rent or by way of addition to rent.

5. Cancellation of Interest under Section 217:
The CIT (Appeals) canceled the interest levied under section 217 in an order passed under section 154 of the Act, which was contested by the revenue. The Tribunal upheld the cancellation of interest, stating that the revenue's appeal lacked substance.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the company was not liable to be assessed under the head "Income from house property" and dismissed the department's appeals. The Tribunal emphasized the importance of considering the substance of the transaction over its form and concluded that the shareholders were the real owners of the flats. The Tribunal also upheld the assessee's contention regarding the adoption of municipal valuation for annual letting value and found the levy of interest unjustified due to the 'nil' taxable income.