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TMI Blog2016 (12) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... the income reported by the appellant under the facts and in the circumstances of the appellant's case. [3] Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case and the levy deserves to be cancelled. [4] For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs." 2. The main issue involved in these appeals relate to the computation of annual value of the property let out to the assessee's sister concern, M/s. Sobha Developers Ltd. The house property including land appurtenant thereto was let out to Sobha Developers ltd. vide lease deed dated 1.4.2006 for a market rent of Rs. 5 lakhs per month. By supplementary lease deed entered on 29.3.2007, the monthly rent was refixed and reduced to Rs. 25,000 per month from Rs. 5 lakhs per month. While re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect upon the revenue. He also examined the contentions of the assessee that on account of commercial expediencies the rent was reduced from Rs. 5 lakhs to Rs. 25,000 per month. The CIT(A) has examined the legal position for determination of ALV in the light of commercial expediencies and has come to the conclusion that the AO has rightly worked out the ALV in the light of first lease deed in which the rent was fixed at Rs. 5 lakhs per month. The relevant observations of the CIT(Appeals) is extracted hereunder for the sake of reference:- "4.12. On a consideration of the submissions, I find therein several glaring discrepancies. Firstly, the Advances from Customers represent trade advances and hence they are grouped under "Current Liabilities" in Schedule-9 of the Balance sheet. The appellant's claim that these were used for building the factory is neither borne out by the nature of the entry in the accounts, and neither by evidence at the time of assessment or appellate hearings. Infact, it is clear that the appellant has been a regular supplier of interior materials to M/s SDL over several years, and hence the entry in respect of Current Liabilities cannot per se be said to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 lakhs from M/s SOL with the rent being reduced from Rs. 60 lakhs per annum to Rs. 3,00,000/-. If the arrangement had included payment of interest @ 12% (the notional rate adopted by the appellant in his notes on arguments) by the appellant to the principal and also full payment of the agreed rent, M/s SDL would still have had to account for a net income of Rs. 2,40,00,000/- [Rs. 3,00,00,000 (-) Rs. 60,00,000 being the payment of rent claimed as business expenses]. At the same time, the appellant would have clocked up a house property income of Rs. 42,00,000/- (Rs 60 lakhs less 30% for repairs) since the interest payment would not be covered as a deduction u/s 24 in the absence of the so-called "loan" appearing in its books prior to 1.4.2006 at all; and in any case the so-called trade advances cannot automatically be termed a loan given for construction of the buildings, which were already very much in existence at the time of the lease deed coming into force, and never having been shown as such in the appellant's accounts earlier to 31.3.2007. 4.15. It is obvious to me therefore, that the cause of revenue has been completely subverted within this arrangement entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as adopted the rate of Rs. 7 on the basis of local enquiries and reference to a comparable case in the locality, since he found no consistency in the appellant's approach, as detailed at Para 3.4(k) of the assessment order. The comparable cases of MTR Food Products and MTR Foods Ltd. were taken by the AO since the type and constitution of the leased properties were similar to the appellant's case. On the other hand, the appellant in the course of the appeal could not adduce any specific reason why the comparison is invalid. Apart from stating that the two cases may not be comparable, no specific items of difference are pointed out. As such, I do not find the argument raised by the appellant in this matter to be sufficient. The appellant's alternative argument that the AO was bound to accept the ALV at Rs. 1.60 as per the municipal value is without basis, as held by the Ld. Supreme Court in the case of Mrs. Sheila Kaushish Vs CIT 131 ITR 435(SC) wherein the Ld. Court held that standard rents fixed by authorities or the Rent Control Act need not be binding while determining annual value where the actual rent is found to be far higher. In the present case, it is the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of this Bench in the case of DCIT v. Rajiv Chandrashekar in ITA No.1440/Bang/2013 and ITO v. Surge Enterprises Ltd., ITA No.1593/Mum/2010. 7. The ld. DR, on the other hand, has contended that the assessee has initially let out the property in question for Rs. 5 lakhs per month through lease deed dated 1.4.2006 which was later on reduced to Rs. 25,000 per month against the interest free security deposit of Rs. 25 crores. The ALV of the property is to be computed as per the provisions of section 23(1)(a) & (b) of the Act. As per section 23(1)(a), the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. Whereas as per section 23(1)(b), where the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable shall be the annual letting value. Therefore, while computing the ALV as per section 23(1)(b), actual rent received or receivable is to be taken into account. Undisputedly, the property was let out for a sum of Rs. 5 lakhs per month to its sister concern, SDPL, through lease deed da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of section 23(1)(a) of the Act. Section 23(1)(a) of the Act would apply where the property was not let out and the AO has worked out the ALV of the property which shall be deemed to be the sum for which the property shall be reasonably be expected to let from year to year. But, where the property has been let out, the ALV shall be deemed to be the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable. Undisputedly, the amount received or receivable is certainly higher than the annual rent as contended by the assessee on the basis of municipal value as per the provisions of section 23(1)(a) of the Act. The rent was reduced from Rs. 5 lakhs to Rs. 25,000 per month on account of interest free security deposit of Rs. 25 crores. Now the question arises whether the proportionate receipt of interest-free security deposit can be taken into account while computing the ALV or the ALV is to be computed on the basis of actual rent received, ignoring the other surrounding facts and circumstances. According to us, while computing the ALV all surrounding factors should be looked into and more pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lakhs where the value of the property let out was Rs. 17.62 lakhs, plant and machinery of Rs.l. 69 lakhs and furniture of Rs. 48,673 could not be held to be justified as a genuine transaction. Therefore the security deposit was a sham device to avoid tax and had no real basis with the actual rent that was received by the assessee. According to section 23(1)(b) of the Income-tax Act, 1961where the property was actually let out, the actual amount of rent received or receivable would form part of the income from house property. Ordinarily, the notional interest that may accrue on the security deposit would not form part of income from house property. However, where payment of the security deposit was to circumvent liability to tax on the real rent, it would fall within the ambit of income from house property. Therefore the interest on the security deposit amount of Rs. 35 lakhs would be treated as income of the assessee. Interest at the rate of 9 per cent per annum on the security amount of Rs. 35 lakhs would be just to meet the ends of justice and it would be treated as taxable income of the assessee under the head "Income from house property" relating to the land and building." 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms of lease were renegotiated and monthly rent reduced to Rs. 25,000 per month from Rs. 5 lakhs per month. In this case, interest-free security deposit was also negotiated whereby the lessee would pay the assessee a deposit of Rs. 11 crores. The assessee has computed the ALV as per reduced rent of Rs. 25,000 per month @ Rs. 3 lakhs, but it was not accepted by the AO and he assessed it at Rs. 24,12,039 on the estimated fair market value of the same at Rs. 7/- per sq.ft. on the basis of local enquiries made by him. 16. In this case also, it was contended that the assessee was financially helped by its sister concern, SDPL, and once the assessee was not able to return the amount, the liability was converted into interest-free security deposit. The facts of this case are almost similar to the earlier case and similar arguments were also raised before us. Under similar set of facts, we have examined the issue of determination of ALV and we have held in the foregoing appeals that interest-free security deposit is to be taken into consideration while computing the ALV. In the instant case also, the assessee has received interest-free security deposit of Rs. 11 crores which certainly ca ..... 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