2023 (10) TMI 394 - AT - Income Tax

Addition of rent receipt - properties sub-letted to sister concerns - Fair rental value u/s 23(1)(a) - assessee has received rent from unrelated entity at a higher rate vis- -vis rent received from its related sister concern lesser than the rent collected from unrelated parities - as per AO assessee has given 23 flats to its sister concerns which is nothing but a colorable devise and shifted its additional rental income to its sister concern - HELD THAT - We observe from the record that assessee has not submitted any information regarding the cost involved in furnishing of above flats to the tax authorities. We also observe that during the hearing bench has asked the assessee to submit the balance sheet of assessee company as well as sister concern but no such information was submitted subsequently and till date. Since assessee has not submitted any information related to furnishing of flats which was leased out to unrelated parties and assessee has leased out majority of the flats i.e., 23 flats to its sister concern at ₹.25,000/- per month. In absence of any information we are not able to determine the expenditure of furnishing made by the assessee in furnishing of flats leased out to M/s.Hover India Automotive and M/s.Anmol rice Mills Pvt. Ltd., and we also observe that the carpet area of all the flats are more or less similar and from the record we observe that Assessing Officer has made an addition per month for each flat. We observe that assessee has leased out ₹.1,50,000/- and ₹.60,000/- respectively to the unrelated parties the average comes to ₹.1,05,000/-. Since Assessing Officer has determined the monthly rent of ₹.69,790/- which is less than ₹.1,05,000/-, in our considered view which seems to be proper in absence of any information of furnishing of flats. The case of relative on which Ld. AR relied heavily are distinguishable as it is relating to individual and held only few flats. Whereas in this case, the assessee itself a company and the business carried on by the LLP can also be carried on by the assessee itself. Therefore, we are inclined to sustain the additions made by the Assessing Officer and accordingly, Ground No.1 raised by the assessee is dismissed. Municipal tax receipts - CIT(A) / AO denied the deduction due to the fact that the name of the assessee is not mentioned in the tax receipt - HELD THAT - We observe from the record that the municipal tax receipts are issued in the name of the land lord and the ownership of the flats are with Society. The taxes are borne by the society and collects the proportionate taxes from the flat owners. Accordingly, the assessee has paid the proportionate tax to the society. This system of collection of municipal taxes are common in the housing societies where the ownership of the building is with the society and the land belongs to 3rd parties as land owners. What is relevant is, whether the assessee has owned up the relevant taxes and remitted the same; in this case, the assessee has borned and paid the same through banking channels to the society. Therefore, the municipality register or receipt will not have the name of the flat owners, but the name of the land owners. Accordingly claim of the assessee is proper in this case and we direct the AO to allow the claim after verification. Accordingly, ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Estimation of rental income under Section 23(1a) of the Income Tax Act.
2. Disallowance of municipal tax deduction under Section 24 of the Income Tax Act.

Summary:

Issue 1: Estimation of Rental Income
The primary issue was the estimation of rental income under Section 23(1a) of the Income Tax Act. The assessee, engaged in dealing in shares, securities, and renting immovable properties, had rented out 24 flats, with one furnished flat leased to an unrelated party at Rs. 60,000 per month and 23 unfurnished flats leased to a related sister concern at Rs. 25,000 per month. The Assessing Officer (AO) observed that the rent received from the related sister concern was significantly lower than the market rate, deeming it a "colorable device" to shift rental income. Consequently, the AO added a difference of Rs. 5,37,500 per annum per flat, totaling Rs. 1,23,62,500, to the assessee's income.

The assessee argued that the lower rent was justified as the flats were unfurnished and the arrangement aimed at earning consistent income through the LLP. However, the AO and the CIT(A) dismissed this argument, citing a lack of provided information on the value of furniture and the intricate tax planning involved. The Tribunal upheld the AO's estimation, noting that the assessee failed to furnish necessary details and the average rent from unrelated parties was significantly higher.

Issue 2: Disallowance of Municipal Tax Deduction
The second issue pertained to the disallowance of municipal tax deduction under Section 24 of the Income Tax Act. The AO disallowed the claim of Rs. 10,77,100, stating that the taxes were paid by the sister concern, not the assessee. The CIT(A) upheld this disallowance, noting that the tax receipts were not in the name of the assessee.

The assessee contended that the taxes were paid through the society, which collected proportionate amounts from flat owners, and the payments were made through banking channels. The Tribunal found this argument valid, recognizing the common practice in housing societies where the land belongs to a third party, and directed the AO to allow the claim after verification.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the AO's estimation of rental income but directed the AO to allow the municipal tax deduction after verification.