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2018 (6) TMI 1280 - AT - Income TaxIncome from house property - Enhancing the ALV of the let out property - claim deduction of service tax from rental income - deduction of expenses towards professional charges against processing of loan application - Held that - The claim of assessee has been supported by opinion/report of M/s. Atharva Land Developers who have determined fair rent against which Ld. CIT(A) has not brought any report of expert. So, it could not be disputed. In the case of assessee and lessee, the rent paid in earlier year have not been disputed by the Revenue Authorities - we are of the view that the lessee has paid fair reasonable rent to the assessee. Therefore, there were no basis to enhance the fair rent paid by lessee to the assessee-company. We, accordingly, set aside the orders of the Ld. CIT(A) and delete enhancement in rent made CIT(A) while enhancing rental income, did not decide the issue of service tax paid by assessee. Ld. CIT(A) admitted the additional evidences which are service tax paid by the assessee through challan and service tax returns filed for assessment year under appeal. It would support the explanation of assessee that assessee paid service tax for assessment year under appeal, out of rent received from the lessee because there were no mention of the service tax in the rent agreement. Since the service tax is a liability upon the assessee-company which have been discharged as per Service Tax Act, therefore, it is an allowable deduction in favour of assessee, because in the service tax, assessee has no right to claim it as a rent. The authorities below were, therefore, not justified in making addition - decided in favour of assessee Disallowance of interest on borrowed funds - Held that - Assessee has given complete details before CIT(A) to show how much own funds are available to assessee and how much amounts have been borrowed from the Bank and other institutions. The assessee claimed that the borrowings as on 31.03.2010 were only ₹ 25,13,58,904/-, on which, above interest have been paid. The assessee has invested a sum of ₹ 43,46,57,917/- in the school land and building. This itself proves that assessee utilized the entire borrowed funds for construction of school building. Learned Counsel for the Assessee also referred to page-10 of the synopsis to show bifurcation of the land and building of the demise property and other assets and submitted that the other net addition on other assets in assessment year under appeal is only ₹ 60,35,902/- which is not disputed by the CIT(A), because, such Schedule-5 of the fixed assets was also filed before authorities below. He has, therefore, rightly contended that the entire borrowed funds have been used for the purpose of acquisition and construction of the school building. Similar deduction of interest claimed in earlier year not disputed by authorities below. Therefore, interest is allowable - decided in favour of assessee Addition on account of professional charges paid to IDFC - assessee claimed professional charges paid to IDFC for processing of loan application - disallowed as business expenditure - Held that - CIT(A) confirmed this addition because assessee has not filed any evidence to show that professional charges claimed were towards loan which was actually utilized for assets yielding rental income. Learned Counsel for the Assessee submitted that the service fees or other charges falls in the definition of interest under section 2(28A) of the I.T. Act. Therefore, it is an allowable deduction under section 24(b) of the I.T. Act. However, it is a fact that assessee has not filed any evidence to show that professional charges claimed were towards loan which was actually utilized for assets yielding rental income. There is no infirmity in the orders of the authorities below. This ground of appeal of assessee is dismissed.
Issues Involved:
1. Enhancement of Annual Letting Value (ALV) and inclusion of Service Tax in rental income. 2. Disallowance of interest on borrowed funds. 3. Disallowance of professional charges paid to IDFC. Detailed Analysis: Issue 1: Enhancement of Annual Letting Value (ALV) and Inclusion of Service Tax in Rental Income - Enhancement of ALV: - The CIT(A) enhanced the ALV of the let-out property by ?1,67,74,073/- and omitted to give relief in respect of Service Tax. - The assessee derived rental income from a school building and claimed that a portion of the rental income included Service Tax, which was not mentioned in the lease agreement. - The CIT(A) applied 8% on the total investment to compute the ALV, which was contested by the assessee. - The Tribunal found that the CIT(A) did not undertake the necessary exercise to compute the ALV as per guidelines, and no comparable cases were brought on record. - The Tribunal referenced the Full Bench of the Delhi High Court in CIT vs. Moni Kumar Subba, which provided that the annual letting value should be the sum at which the property might reasonably be expected to let from year to year. - The Tribunal concluded that the rent paid by the lessee was fair and reasonable, and there was no basis for the CIT(A) to enhance the ALV. The enhancement made by the CIT(A) was deleted. - Inclusion of Service Tax: - The CIT(A) admitted additional evidence showing that the assessee paid Service Tax for the assessment year under appeal. - The Tribunal noted that the Service Tax is a liability upon the assessee-company and should be an allowable deduction. - The addition of ?16,80,870/- on account of Service Tax was deleted. Issue 2: Disallowance of Interest on Borrowed Funds - The assessee claimed interest on borrowed funds of ?2,20,46,017/- and the A.O. disallowed 50% of the interest due to the absence of specific bifurcation of funds used for land and building and other assets. - The assessee provided details showing that the borrowings were used for the construction of the school building. - The Tribunal found that the entire borrowed funds were utilized for the construction of the school building, and similar deductions in earlier years were not disputed. - The disallowance of interest was deleted, and the ground of appeal of the assessee was allowed. Issue 3: Disallowance of Professional Charges Paid to IDFC - The assessee claimed professional charges paid to IDFC for processing a loan application, which was disallowed by the A.O. and confirmed by the CIT(A). - The assessee argued that the service fees fall under the definition of interest under section 2(28A) of the I.T. Act and should be allowable under section 24(b). - However, the Tribunal noted that the assessee did not provide evidence to show that the professional charges were towards a loan utilized for assets yielding rental income. - The disallowance of professional charges was upheld, and this ground of appeal was dismissed. Conclusion: The appeal of the assessee was partly allowed. The enhancement of ALV and the inclusion of Service Tax in rental income were deleted, and the disallowance of interest on borrowed funds was also deleted. However, the disallowance of professional charges paid to IDFC was upheld.
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