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TMI Blog2003 (12) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... r computing the standard rent of the portion let out by the assessee. Therefore, even if we apply provisions of section 23(1)(a) of the Act, the annual letting value of the entire property cannot be more than 21,22,380. Since we are of the opinion that the provisions of sub-clause (b) to sub-section (1) of section 23 is applicable to the present case, this issue stands directly covered by the decision of the Hon ble Bombay High Court in the case of CIT v. J.K. Investors (Bom.) Ltd. [ 2000 (6) TMI 9 - BOMBAY HIGH COURT] and Calcutta High Court in the case of CIT v. Satya Co. Ltd.[ 1993 (8) TMI 293 - CALCUTTA HIGH COURT] . We are of the opinion that notional interest on the interest-free deposit cannot be taken into consideration while determining the annual letting value of the building u/s 23 of the Income-tax Act, 1961. Therefore, we adopt the same reasoning as has been in the order of the ITAT in Ruchi Properties Ltd. s case for arriving at the above conclusion. In the case of Tivoli Investment Trading Co. (P.) Ltd.[ 2003 (6) TMI 463 - ITAT MUMBAI] , the Bench itself has observed that the assessee received only deposit and no rent was stipulated. Similarly, the case of Apart Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n' situated at Peddar Road, Mumbai. Since 1987 the assessee company had two tenants. The assessee company purchased this property when it was already under tenancy of Jindal Strips Ltd. and Jindal Iron & Steel Co. Ltd. on a monthly rent of ₹ 5,000 and ₹ 6,500 respectively on the basis of ₹ 1 per sq. ft. in respect of the area occupied by them. These tenants continued as tenants of the assessee on the same terms and conditions. In the financial year 1995-96 relevant to assessment year 1996-97, the assessee reconstructed the property which now consists of ground plus 5 upper floors. The assessee let out the property to Jindal Iron & Steel Co. Ltd., Jindal Strips Ltd. and Jindal Vijaynagar Steel Ltd. under a lease agreement for three years and received security deposit totalling ₹ 58 crores. Further, during the year, the assessee had received another interest-free deposit of ₹ 10 crores from Jindal Iron & Steel Co. Ltd. and Jindal Vijaynagar Steel Ltd. as per the renewal of the lease agreement made during this year. In this way, the assessee has received a sum of ₹ 78 crores by way of interest-free security deposit. As per the terms of the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of annual value. Accordingly, the interest-free deposit is nothing but good basis to determine the annual letting value of the property. He further mentioned that security deposits were received from lessees, all Jindal group of companies and the said deposits were reinvested in the shares of the said companies. Therefore, it was a modus operandi to recycle the funds to the lessee companies. 6. As regards the lease rent fixed @ ₹ 1 per sq. ft. in a posh locality of Peddar Road, the Assessing Officer was of the view that no prudent businessman would ever let out such a property in a posh locality on throw-away price. Therefore, in order to compensate the lesser rent, interest-free security deposits were received. He further mentioned that perusal of the record shows that the interest-free deposit so received have been re-invested in the equity shares of the lessee-companies. Therefore, what follows is that the interest-free deposits were received with the ulterior motive of purchasing the shares of their company through the conduit mechanism of leasing transaction. On the one hand, the assessee has received a nominal rent of Re. 1 per sq. ft. while on the other hand, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company Dividend i.Jindal Strips (8,18,048 shares) Rs.24,54,144 ii.Jindal Iron & Steel Co. Ltd. (19,51,467 shares) Rs.39,02,934 iii.Saw Pipes (62,400 shares) Rs.62,400 iv.Others (370) Rs.964 Total Rs.64,20,442 The above amount was claimed as exempt under section 10(33) of the Act. He observed that in assessment year 1998-99 the assessee claimed exemption under section 10(33) on gross receipt of dividend without deducting interest expenses incidental to such income. He further observed that the assessee debited interest expense of 92,92,510 in its P&L Account which is payable to various Jindal Group of companies. The interest bearing funds so received by the assessee were utilised on purchase of shares of the Jindal Group of companies and trading in shares of Jindal Group of companies. Thus, he concluded that the interest-bearing fund has been utilised by the assessee towards investment in loans and advances and work-in-capital for trading in shares. It was observed that the assessee had borrowed interest-bearing funds from various Jindal Group of companies and the same is utilised working capital for purchase of shares in those very same lender companies. The details ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot; for which clarification was given in the above circular. Therefore, it will follow that such exemption is available only on net dividend. 12. In view of the above he held that the interest expenses on fund utilised for investment in shares for the purposes of earning dividend income, which is exempt under section 10(33), the corresponding interest expenses on such borrowings cannot be allowed as business expenses and have to be deducted out of the gross dividend income. Besides, he also held that the allocation of interest expenses computed on pro rata basis by allocation of interest-bearing funds on its utilization towards cost of equity shares appearing in the closing stock of the assessee and giving the details, he mentioned that such interest expenses claimed as business expenses cannot be allowed as deduction and not to be reduced out of the gross dividend declared under section 10(33) of the Act. 13. Aggrieved by this order of the Assessing Officer, the assessee filed appeal before the first appellate authority. However, the first appellate authority concurred with the view taken by the Assessing Officer basically on the same grounds and further mentioned that section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 5(10(b)(iii ) applies in the present case and the said sub-section provides that the standard rent, in the instant case, will be the rent at which the premises were first let, where such first letting is after 1-4-1940. 15. It was submitted, therefore, that on a plain reading of section 23(1)(a) of the Act, if the same is to be applied, the annual value is to be ascertained in accordance with the phrase "the sum for which the property might reasonably be expected to let" can never exceed ₹ 2,54,400. Therefore, if section 23(1)(a) of the Act is to be applied, the annual of these rented properties can never exceed this amount. 16. The learned counsel for the assessee then submitted that the proposition that the said phrase "the sum for which the property might reasonably be expected to let" cannot exceed the standard rent in areas where rent control legislation is in force applies in a case where the standard rent in respect of the premises has actually been fixed. It is established law that where for any reason the standard rent has not been fixed and/or cannot be fixed, whether by virtue of limitation having expired to apply for fixation of stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 5(10)(b)(iii ) of the BRCA. 17. The learned counsel for the assessee further submitted that section 23(1)(b) of the Act provides that annual value of any property computed under this sub-clause shall be annual rent received or receivable in respect of the property where the sum exceeds the sum computed under section 23(1)(a) of the Act. It was pointed out that in the present case, the amount of annual rent received or receivable is ₹ 2,54,400 being @ Re 1 per sq. ft. pm. and the assessment order of the property tax for a period of 6 months w.e.f. 1-10-1998 to 31-3-1999 show a rateable value of ₹ 10,61,190 (please refer page 166 of the paper book). It was submitted that though the case of assessee falls under section 23(1)(b), however, even if the department applies provisions of section 23(1)(a), it cannot determine the annual letting value beyond the standard rent fixed by the BRCA. It was further submitted that the case of the assessee falls under section 23(1)(b) which is directly covered by the decision of the jurisdictional High Court in the case of CIT v. JK Investors (Bom.) Ltd. [2001] 248 ITR 723 1 (Bom.). It is pointed out that while deciding this case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and even if the department considers it that the case is covered under section 23(1)(a), even then, the standard rent already fixed prior to 1940 cannot be altered by taking notional interest on security deposit. 20. It is submitted that the assessee-company is an investment company. Its business is of trading in equity shares and investment & financing. Accordingly some of the shares are held as stock-in-trade for buying and selling securities. From the financial statement it can be observed that the assessee had earned dividend income from scrips held as stock-in-trade and from investments. The amount borrowed is a legitimate business necessity and the interest payable on it is allowable under section 36(1)(iii) of the Income-tax Act, 1961. Even though dividend income is exempt under the Income-tax Act, the assessee held substantial amount of shares as stock-in-trade and thus, interest paid is not only to earn dividend but also to hold the stock which will earn income for the assessee on the future date. Referring to sub-section 2(24)(ii) of the Act it is submitted that income includes dividend whereas section 10(33)(i) of the Act exempts from tax any such income earned by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rateable value at 8.5 per cent of the cost of construction for rateable value and it will reach ₹ 18 to ₹ 20 lakhs which should be taken as ALV under section 23(1)(a). In this connection our attention was drawn to the decision CIT v. R. Dalmia [1987] 163 ITR 525 (Delhi) wherein it has been mentioned that if the assessee has understated the value, the Assessing Officer could fix the value. It is reiterated that as per the assessee's own valuation report, rateable value comes to ₹ 34.54 per sq.ft. 22. With regard to grounds 4 & 5, the learned departmental representative submitted that the same arguments as has been mentioned in the assessment order. 23. In reply, the learned counsel for the assessee invited our attention to the fact that in the present case, the tenants are paying all sorts of Municipal taxes, cess, etc. and the rent is over and above the taxes paid by them which is clear from pages 23 to 25 of the paper book and clause 6(d) of the agreement. It is submitted that as per the decision of the Hon'ble Supreme Court in the case of Dewan Daulat Rai Kapoor (supra) value of the property cannot exceed standard rent since Bombay Rent Control Act is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same rent of ₹ 1 per sq. ft., at the time when the assessee has purchased this property. Now, the question arise, whether notional interest on the interest-free deposit can be considered while determining the annual letting value of the building under section 23 of the Income-tax Act. 26. Section 22 of the Income-tax Act, 1961 reads as under:- "22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'." The method of computation of annual letting value is provided in section 23 of the Income-tax Act, 1961. According to this section, the sum for which the property might reasonably be expected to let from year to year and where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a) of sub-section (1) of section 23, the amount so received or receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and would it be proper for the court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant." In the case of Mrs. Sheila Kaushish (supra), the same principle was followed wherein it was observed that after the rent control legislation came into force the standard rent would be the rent which will be determinative of the factor of annual letting value of the building and not the actual rent received by the landlord from the tenants. This principle was further followed in Amolak Ram Khosla's case (supra). In Dr. Balbir Singh's case (supra), the Hon'ble Supreme Court considered its earlier decision in the case of Dewan Daulat Rai Kapoor (supra); Mrs. Sheila Kaushish (supra) and Amolak Ram Khosla's case (supra) and it was held that the rent control does not enjoy unfettered discretion to do what he likes and he is bound to take into account the standard rent payable in respect of similar or nearly similar premises in the locality. The standard rent determinable on the principles is the guiding principle for fixation of annual letting value. The Supreme Court has gone to the extent that where for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Since we are of the opinion that the provisions of sub-clause (b) to sub-section (1) of section 23 is applicable to the present case, this issue stands directly covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. J.K. Investors (Bom.) Ltd. [2001] 248 ITR 723 1 and Calcutta High Court in the case of CIT v. Satya Co. Ltd. [1994] 75 Taxman 193. We find that this issue was also considered at length by the Tribunal, in favour of the assessee, in which one of us was a party to the order, in the case of M/s. Ruchi Properties Ltd. v. Jt. CIT [IT Appeal No. 3407 (Mum.) of 1999] for assessment year 1994-95 to which our attention was invited by the learned counsel at the time of argument. Therefore, we are of the opinion that notional interest on the interest-free deposit cannot be taken into consideration while determining the annual letting value of the building under section 23 of the Income-tax Act, 1961. Therefore, we adopt the same reasoning as has been in the order of the ITAT in Ruchi Properties Ltd.'s case (supra) for arriving at the above conclusion. 32. The learned departmental representative invited our attention to the decisions of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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