2017 (2) TMI 1191 - AT - Income Tax

Disallowance of salary expenses - increase in salary is manyfold, but there is decrease in turnover during the year - Held that - CIT (Appeals) considering the submissions of the assessee and the findings of the assessing officer deleted the addition observing that assessing officer has not doubted the fact of payment of salary and that there was no allegation that these employees are relatives of assessee or they are covered under 40A(2)(b) of the Act, the assessing officer has only disallowed these expenses observing that there was no commensurate increase in turnover. Before the ld. CIT (Appeals), the assessee relied on the decision of Supreme Court in the case of CIT Vs. Walchand and Co.(P) Ltd. 1967 (3) TMI 2 - SUPREME Court as held that the rule that increased remuneration can only be justified if there is corresponding increase in the profits of the employer was erroneous. It is the finding of the ld. CIT (Appeals) that the assessee has demonstrated that these expenses were actually incurred which are evidenced from the bank statement and the confirmations from the employees and even the assessing officer has not doubted the fact of incurring of expenses. In the circumstances, we do not see any valid reason to disallow the said expenses. We agree with the view of the ld. CIT (Appeals).- Decided against revenue Assessability of rental income - income from letting out of the properties - income from house property OR income from other sources - Held that - The issue has been considered by the tribunal in the assessment year 2008-09 and it was held that lease rent in respect of the property situated in Village Kolkhe, Taluk Panvel, District Raigad (within the limits of gram panchayat Kolkhe) should be assessed under the head Income from House Property. Thus we direct the assessing officer to assess the rental income in respect of the said properties under the head Income from House Property. The grounds raised by the revenue on this issue are rejected. Restricting the notional income from house properties on the unoccupied house properties - Held that - From the perusal of the assessment order, we find that the assessing officer said to have estimated the rental values for the vacant properties looking at the location and area of the property. However, assessing officer did not cite any instances of similar properties deriving rent where the rental income is similar to the estimated value in respect of the properties of the assessee. We find that the ld. CIT (Appeals) has estimated the rental value of the current assessment year based on actual rent received by the assessee during the assessment year 2015-16. The ld. CIT (Appeals) has taken similar values of rental income of the assessment year 2015-16 for the current assessment year i.e.2010-11 and arrived at the rental value at ₹ 7,79,658/- which in our opinion is reasonable and has some basis. Therefore, we sustain the valuation arrived at by the ld. CIT(Appeals). The grounds raised by the revenue on this issue are rejected. Notional interest from security deposit while computing the rental income - Held that - Hon ble Bombay High Court in the case of JK Investors (2000 (6) TMI 9 - BOMBAY High Court ) held that section 23(1)(b) of the I.T. Act provides that when actual rent received is more than the fair rent the actual rent would be the annual value and therefore the notional interest would not form part of actual rent received or receivable under section 23(1)(b) of I.T.Act. Therefore respectfully following the decision of the jurisdictional High Court we hold that notional interest should not form part of annual value. This ground of the revenue is rejected.

Summary

Issues Involved:
1. Disallowance of salary expenses.
2. Assessability of rental income.
3. Notional income from unoccupied house properties.
4. Notional interest from security deposit.

Issue-wise Detailed Analysis:

1. Disallowance of Salary Expenses:
The first issue concerns the disallowance of salary expenses incurred by the assessee, which were significantly higher compared to the previous year despite a decrease in turnover. The Assessing Officer (AO) restricted the salary expenditure to the amount incurred in the preceding year, citing a lack of explanation for the increase. The CIT (Appeals) deleted this disallowance, noting that the AO did not dispute the actual incurrence of the expenses nor allege that the employees were related to the assessee or covered under section 40A(2)(b) of the Act. The CIT (Appeals) relied on the Supreme Court's decision in CIT Vs. Walchand and Co.(P) Ltd. [65 ITR 381], which held that increased remuneration does not need to correspond with increased profits. The Tribunal agreed with the CIT (Appeals), finding no valid reason to disallow the expenses since the payments were evidenced and not disputed by the AO.

2. Assessability of Rental Income:
The second and third grounds pertain to the classification of rental income. The AO treated the lease rent received by the assessee as income from other sources, while the CIT (Appeals) and the Tribunal held it should be assessed as income from house property. The Tribunal referenced a previous decision in the assessee’s own case for the assessment year 2008-09, where it was determined that the lease rent from properties with RCC structures and godowns should be classified under income from house property. The Tribunal upheld the CIT (Appeals)'s decision, directing the AO to assess the rental income under the head Income from House Property.

3. Notional Income from Unoccupied House Properties:
The fourth issue involves the estimation of notional income from unoccupied house properties. The AO estimated the rental value of vacant properties based on their location and area, arriving at a figure of ?20,65,000/-. The CIT (Appeals) revised this estimation based on the actual rent received by the assessee in the assessment year 2015-16, reducing the rental value to ?5,45,760/-. The Tribunal found the CIT (Appeals)'s method more reasonable and based on actual data, thus upholding the revised valuation.

4. Notional Interest from Security Deposit:
The final issue concerns the addition of notional interest from an interest-free security deposit while computing rental income. The AO added ?7,20,000/- as notional interest on a security deposit of ?72,00,000/-. The CIT (Appeals) deleted this addition, citing decisions from the jurisdictional High Court, including CIT Vs. Tip Top Typography and CIT v JK Investors (Bombay) Ltd, which held that notional interest cannot be added to the annual value unless it is shown that the security deposit was a device to reduce rent and tax incidence. The Tribunal agreed, noting that the security deposit was not disproportionately high relative to the rent and there was no allegation of tax avoidance. Consequently, the Tribunal rejected the revenue's ground on this issue.

Conclusion:
The appeal of the revenue was dismissed in its entirety, with the Tribunal upholding the CIT (Appeals)'s decisions on all grounds. The Tribunal emphasized the importance of evidence and reasonable estimations, aligning with established legal precedents and factual matrices.