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TMI Blog2017 (9) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... al by the Revenue against the order dated 04.03.2014 of CIT(A)-VIII, Kolkata relating to AY 2010-11. 2. Grounds of appeal raised by the Revenue reads as follows :- 1. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the addition made by the Aa in treating the income of ₹ 12,00,000/- received towards service charges under the head 'income from house property'. 2. That on the facts and circumstances of the case and in law the Ld.CIT(A) erred in deleting the disallowance made by the Aa on account of various administrative expenses incurred for earning the income from rendition of service. 3. That on the facts and circumstances of the case and in law the Ld. CIT(A) erred in deleting the action of AO in determining the annual value of the property let out at ₹ 13,06,61,131/-. 4. That the appellant craves leave to add, modify and/or rescind any of the ground(s) of appeal at the time of hearing of the case. 3. The Assessee is a Company. Its main source of income is income from house property and income from business. For A.Y.2010-11, the assessee filed return of income declaring a loss of ₹ 8, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y has been compensated by subsidised rent. He was of the view that the whole purpose was to avoid payment of legitimate tax payable had the transaction been done in the normal course. The holding as well as the Assessee company were controlled by Shri L. N. Mittal and hence the affairs have been arranged in such a manner to derive benefit of payment of lesser tax. 6. The AO in the above circumstances was of the view that on a conservative estimate interest @10% on the interest free loan by the holding company to the Assessee has to be construed as income which the Assessee ought to have charged as rent from Mr.L.N.Mittal. The AO held that the notional interest on the above loan @ 10% P.A. being ₹ 12,94,61,131/- was the expected rent for the property owned by the Assessee and let out to Mr.L.N.Mittal. The Assessee declared a sum of ₹ 60 lacs as rent from the property. The AO brought to tax the difference between the sum of ₹ 12,94,61,131 and ₹ 60 lacs as Annual Value of the property chargeable to tax under the head Income from House property and allowed statutory deduction of 30% on the sum so arrived at and added the same to the Income from House Prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nil Total Income Rs.9,14,41,674/- Rounded off Rs.9,14,41,670/- 10. Before CIT(A) the Assessee submitted that agreement between the Assessee and Shri.L.N.Mittal specifically provided for bifurcation between the rent for property and service charges for provision of car, furniture fixtures, telephone, electricity, gym, swimming pool, etc. Since inception of the lease, assessee was separately charging rent service charges. In the assessment order U/S 143(3) for AY 2006-07, being the first year of lease, the AO had accepted the contractual bifurcation of the monthly sum payable between the rent service charges. In this order AO however held that the service charges received were' assessable under the head 'Other Sources' and not under the head 'Profits Gains of Business'. The AO did not allow deduction for any of the expenses claimed nor allowed depreciation on the actual cost of the plant equipments provided to the tenant. The CIT(A)- VIII, Kolkata in his appellate order dated 28.09.2012 considered the issue of assessability of service charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted by the AO, was of the view that the issue as to whether income by way of service charges 'is assessable under the head Business was no longer res integra. He held that in the first 'year of the lease the AO had disputed assessee's classification of such income under the head Business . On appeal however the first appellate authority held that service charges collected separately from the tenant were assessable under the head Business and the decision of the appellate authority was accepted by the Revenue. The CIT(A) was of the view that it was a settled proposition of law that principle of consistency has to be followed when factual matrix of the case permeating through the years remains constant. In the circumstances following the order of his predecessor for AY 2006-07, the CIT(A) held that income by way of service charges was chargeable under the' Profits Gains from Business . The AO was accordingly directed to re-compute the assessee's total income. 13. With regard to the action of the AO in disallowing expenses incurred in providing various services to the Assessee of ₹ 62,13,063/-, the Assessee submitted before the CIT(A) that the aud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at New Delhi and subjected to levy of municipal taxes levied by New Delhi Municipal Corporation ('NDMC'). The annual value of the property was earlier assessed by NDMC at ₹ 69,500/- and by an order dated 27.03.2012, NDMC revised the assessable value of the property at 22, Aurangzeb Road, New Delhi to ₹ 1,80,15,700/-. By subsequent rectification order dated 27.09.2012 the annual value of the said property was however revised by NDMC to Rs.l,16,83,790/- with effect from FY 2009-10. It was submitted that at the material time when the assessee entered into lease agreement contemporaneous assessment of the annual value of the property was not made by the local authority. In absence of the assessment of the annual value by the municipal authorities the parties had negotiated and agreed on the annual rent of ₹ 60 lacs which was substantially higher than ₹ 69,500/- which was the annual value assessed by NDMC in relation to the said property at the relevant time. Therefore the adoption of annual value on the basis of actual rent received was justified. It was contended that the AO in arriving at the true fair annual value of the property assessable, under S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Delhi High Court in its decision in the case of CIT Vs M.K. Subba 333 ITR 38(del) held that in arriving at the fair rent there is no provision in law for inclusion of any notional interest on interest free deposit received from tenant. The Full Bench of the High Court specifically rejected the Revenue's contention that a reasonable interest can be included in arriving at the true correct annual value of a house property. The Full Bench of the Delhi High Court thereafter made the following observation: Since the provisions of fixation-of annual rent under Delhi Municipal Corporation Act are pari materia of Section 23, the view of the Calcutta High Court in Satya Co Ltd (supra) was to be accepted thatin sucn circumstances, the annual value fixed by the municipal authorities can be retionei yardstick. However, it would be subject to the condition that the annual value fixed bears a close proximity with the assessment year in question in respect of which the assessment is to be made under the Income-tax laws, 18. The CIT(A) was of the view that the judgments of the Calcutta, Bombay Delhi High Court therefore supports the submission of the Assessee that in ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee entered into an agreement with the lessee for revision of rent with retrospective effect from 2006. Copy of the revised rent agreement was also filed before the AO as well as before CIT(A). It appeared from the documents on record that the annual rent for the year under consideration was revised upwards to ₹ 1,17,00,000/-. The revision in the annual rent was made effective retrospectively from AY 2006-07. The arrears of rent amounting to ₹ 3,54,31,400/- was offered as income of the assessee in AY 2013-14 in conformity with Section 25B of the Income- tax Act, 1961. In the remand report the AO admitted these facts. 21. Based on the above facts, the CIT(A) was of the view that after the revision of the annual value was carried out by NDMC, the assessee also correspondingly revised the annual rent payable by the tenant. For the relevant. year the assessee ultimately received annual rent of ₹ 1,17,00,000/- in respect of its property at 22, Aurangzeb Road, New Delhi. The CIT(A) therefore held that annual value of the property has to be assessed at ₹ 1,17,00,000 which is the actual rent received which was much higher than the Municipal Valuation. The CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The relevant portion of section 23 is as follows :- 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be-- (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of 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; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable : Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him. Explanation.- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Vs Prabhavati Bhansali 141 ITR 419 has consistently held that the annual value of a House Property under Section 23 is to be assessed at higher of the actual rent or the annual value determined by the municipal/local authority. The Full Bench of the Delhi High Court in the case of CIT Vs M.K. Subba (supra) in principle accepted the ratio laid down by the Calcutta High Court and held that in arriving at the annual value of the property the annual value determined by the municipal authorities is the relevant factor provided however assessment by the local authority was contemporaneous and reflected true annual value. 29. In the present case the facts as it transpired before CIT(A) shows that the Municipal Valuation determined by the NDMC for the relevant previous year was a sum of ₹ 1,16,83,790. The determination of annual valuation by NDMC happened by an order dated 27.9.2012 much after the AY 2010-11. Based on the revision in the Municipal Valuation, the Assessee and Mr.L.N.Mittal revised the terms of the lease and the tenant revised annual rent to ₹ 1,17,00,000/-. The higher of the municipal valuation or the actual rent received has to be adopted as the annual val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of CIT Vs Hemraj Mahavir Prasad 279 ITR 522(Cal) wherein it was held that notional interest on interest free loan given by the tenant would neither be a determining factor nor a component to be considered in assessing the true fair annual value of house property in terms of Section 23 of the Income-tax Act, 1961. The Hon'ble Calcutta High Court in the case of CIT Vs. Satya Co. Ltd. 75 Taxman 193(Cal) has held that notional interest cannot be added to the interest free security deposit to arrive at the annual value of the property while determining income under the head income from House Property . Similar view was also expressed by the Bombay High Court in the case of CIT Vs J.K. Investors (Born.) Ltd 248 ITR 723 and by the Delhi High Court in the case of CIT Vs Asian Hotels Limited 168 Taxman 59. The CIT(A) found that the Full Bench of the Delhi High Court in its decision in the case of CIT Vs M.K. Subba 333 ITR 38(del) held that in arriving at the fair rent there is no provision in law for inclusion of any notional interest on interest free deposit received from tenant. The Full Bench of the High Court specifically rejected the Revenue's content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Business and the decision of the appellate authority was accepted by the Revenue. In the circumstances, the issue was rightly held by the CIT(A) to have attained finality in the case of the Assessee. The CIT(A) was therefore right in concluding that income by way of service charges was chargeable under the' Profits Gains from Business . 34. The loan which the assessee received had no connection with the tenancy of Shri L.N. Mittal. The amount in question was received by the assessee from the holding company and not from the tenant. Interest free loan was received during the period when construction of the property was in progress. The loans were received from the holding company in order to meet the cost of construction and cost of acquisition of the property. Therefore the receipt of interest free loan from the holding company was an event which had occurred prior to grant of tenancy and as such these two events apparently did not have any connection. The CIT(A) therefore was right in holding that the very basis on which the AO concluded that the interest free loan was in the nature of interest free deposit from the tenant was factually unfounded. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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