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TMI Blog2018 (5) TMI 1854X X X X Extracts X X X X X X X X Extracts X X X X ..... mergency, relationship and other considerations which make it unreasonable must precede the undertaking of above exercise. Thus, under these circumstances keeping in view factual matrix of the case discussed in extenso above and recent decision in the case of Tip Top Typography (supra) we are of the considered view that this matter need to be restored back to the file of the AO for making making denovo assessment after make necessary enquires and investigation in line with decision of Hon‟ble Bombay High Court in the case of Tip Top Typography(supra) and after providing proper and adequate opportunity of being heard to the assessee. The evidences/explanation submitted by the assessee in its defence shall be admitted by the AO and adjudicated on merits in accordance with law. This ground no. 1 of the Revenue is allowed for statistical purposes. Addition u/s.68 - HELD THAT:- Mere suspicion on part of the AO that the assessee may claim this expenses of ₹ 35.07 lacs in some future distant point of time is not sufficient to fasten tax-liability merely on basis of suspicion of the AO that some event may happen in future at some point of time which is unknown wherein t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(3) of the Income-tax Act, 1961 (hereinafter called the Act ) for AY 2012-13. 2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) read as under:- 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is justified in deleting the addition of ₹ 87,05,760/- as the deemed annual lettable value of flats? 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of ₹ 35,07,000/- u/s.68 of the Act being amount of liability shown payable to Mr. Jimmy Parekh. 3. Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) is justified in deleting the additional disallowance to the tune of ₹ 2,35,62,191 /- u/s. 14A r.w.r.8D of the Act. 3. The brief facts of the case are that the assessee is Non Banking Finance Company (NBFC) registered with RBI under the category of Investment Company‟. The assessee mainly received income from dividend, property income and profits from partnership firm of which the assessee is partner. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A 2,41,07,023 4. Aggrieved by the assessment order dated 25-02-2015 passed by the AO u/s 143(3), The assessee filed first appeal with learned CIT(A) who accepted the contentions of the assessee and held that disallowance of ₹ 5,44,832/- as was made by the assessee suo motu is sufficient. It was noted by learned CIT(A) that the total expenditure debited to Profit and Loss Account is ₹ 15,03,151/- and hence the disallowance cannot exceed the amount of expenditure debited to Profit and Loss Account. The learned CIT(A) deleted the additions made by the AO by relying on the decision of ITAT,Mumbai dated 21.11.2014 in the case of DCIT v. Graviss Hospitality Ltd. in ITA no. 3542/Mum/2013, vide appellate orders passed by learned CIT(A) dated 18-07-2016. 5. Aggrieved by the relief granted by learned CIT(A), the Revenue has come in an appeal before the tribunal. 6. The Ld. DR supported the assessment order of the AO and submitted that only 0.5% of the average investment has been disallowed u/s. 14A r.w.r. 8D(2)(iii). The learned DR submitted that Rule 8D(2)(iii) is applicable and the AO has rightly invoked Rule 8D(2)(iii) of the 1962 Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to earning of an exempt income, thus total disallowance of ₹ 5,44,975/- was voluntarily offered suo motu keeping in view provisions of Section 14A of the 1961 Act. It was submitted that the total expenses incurred by the assessee and debited to Profit and Loss Account were only to the tune of ₹ 15,03,151/- for the entire year while disallowance of expenditure has been made by the AO to the tune ₹ 2,41,07,023/- which is incomprehensible, unheard of and unprecedented as the disallowance of the expenditure incurred in relation to the exempt income which can be disallowed by invoking provisions of Section 14A can never exceed actual expenditure incurred by the assessee as it does not called for disallowance of notional expenditure which has not at all been incurred by the assessee. It was submitted that there cannot be disallowance of any notional expenses within mandate of Section 14A which was never incurred by the assessee at all. Thus, it was submitted that Rule 8D cannot be applied in an manner to disallow notional expenditure which was never incurred or were never claimed in the Profit and Loss Account as an expenditure as no prejudice is caused to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee and never claimed as business deduction, while out of the balance remaining expenses to the tune of ₹ 10,89,665/-, 50% of the said expenses aggregating to ₹ 5,44,832/- were disallowed by the assessee voluntarily u/s 14A of the 1961 Act while rest 50% of the expenses were claimed by the assessee as an business expenses/deduction.(refer page 8-17/pb) . The assessee also disallowed ₹ 143/- towards demat charges being direct expenses for earning an exempt income which is not a matter of dispute between rival parties. The total disallowance of expenditure of ₹ 5,44,975/- u/s 14A is also certified by tax-auditors in their tax audit report to be correct disallowance of expenditure u/s 14A incurred in relation to earning of exempt income (refer page 63 and 75/pb). We have observed from the perusal of the Balance sheet that the assessee has investments in properties as well as in shares, debentures, partnership firms, mutual funds, and income is arising from these activities. The AO has not recorded any satisfaction u/s 14A(2) as to why disallowance offered by the assessee suo motu voluntarily is not a correct disallowance u/s 14A and the same needs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances and suo motu disallowance of 50% expenses offered by the assessee and non recording of satisfaction by the AO u/s 14A(2) before invoking Rule 8D, we are of the considered view that the appellate order of learned CIT(A) needs to be upheld/sustained which we sustain and hence the disallowance offered by the assessee u/s 14A suo-motu voluntarily to the tune of ₹ 5,44,975/- stood accepted. Revenue fails on this ground and hence ground no. 3 is adjudicated against Revenue. We order accordingly. 9. The ground no. 1 is with respect to computing Annual Lettable Value (ALV) of the two residential flats owned by the assessee bearing flat no. 3 (2170 square feet) and flat no. 8 (3062 square feet) both situated in Sterling Bay Co-operative Housing Society Limited, 103, Walkeshwar Road, Mumbai-400006, under the head Income from House Property‟. The flat no. 8 was let out by assessee to its Director, Mr. Shapoorji Pallonji Mistry who is stated to be residing in the said flat since 01-03-1990 and paying monthly rental of ₹ 10,000/- to the assessee company, while flat no. 3 owned by the assessee was stated to be lying vacant. The AO made enquiries from various r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... com, magicbricks.com etc wherein the monthly rental was stated to be of ₹ 200 per square feet per month for similar flats in this area, vide assessment order dated 25-02-2015 passed by the AO u/s 143(3) of the 1961 Act. 10. The assessee went in appeal before learned CIT(A) who granted relief to the assessee and deleted the additions as were made by the AO by following the decision of the ITAT, Mumbai for AY 2004-05 in ITA no. 4036/Mum/2008,dated 09-07-2009 in assessee‟s own case and Hon‟ble Bombay High Court decision, vide appellate orders dated 18-07-2016 passed by learned CIT(A). However, learned CIT(A) did not refer to recent decision of Hon‟ble Bombay High Court in the case of Tip Top Typography (supra) relied upon by the AO, while adjudicating the appeal of the assessee. 11 Being aggrieved by decision of learned CIT(A), the Revenue has now filed an appeal before the tribunal. The learned DR submitted that the assessee erred in adopting municipal rateable value for computing ALV under the provisions of the 1961 Act. It was submitted that municipal valuation is for paying municipal taxes which is altogether different concept than computation of an A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the similar property in the area based on website information as downloaded from magicbricks.com, 99acres.com etc. for computing ALV under the 1961 Act. The learned counsel for the assessee relied upon the decision of tribunal for earlier years in assessee‟s own case which are placed in paper book wherein municipal valuation was adopted to compute ALV but since the actual rent received was higher than the said municipal valuation w.r.t. flat no. 8, actual rent received or receivable of flat no. 8 was brought to tax under the head income from house property‟. Our attention was drawn to tribunal decision dated 09.07.2009 for AY 2004-05 in ITA no. 4036/Mum/2008 in assessee‟s own which followed the decision of the tribunal for AY 2003-04 in ITA no.1228/Mum/2008 dated 18-05-2009 wherein actual rent received or receivable was brought to tax and the contentions of the assessee were accepted. It was also submitted that tribunal has for AY 1995-96 vide orders dated 17-09-2003 in the case of JCIT v. Shapoorji Co.(Rajkot) Private Limited in ITA no. 40/Mum/1999 has come to the conclusion that ALV has to be computed based on standard rent determined in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the tune of ₹ 87,91,056/-. The assessee relied upon the rateable value computed by municipal authorities which as per the assessee is the expected value for which these flats are expected to be let from year to year, thus satisfying conditions as stipulated u/s 23(1)(a) of the 1961 Act. The amendments were carried out in Section 23(1) by the Taxation Laws (Amendment) Act, 1975 by introduction of clause(b) to Section 23(1) wherein in case property is let and if the actual rent received or receivable by the taxpayer is higher than sum for which the property might reasonably be expected to be let from year to year, the amount so received or receivable shall be deemed to be annual value of the property. The newly inserted clause(b) postulated a situation where the amount of sum for which the property might be expected to be let from year to year could be lower than actual rent received or receivable from the said property by landlord and in that situation actual rent received or receivable shall be deemed to be annual value of the property for bringing the same to tax as income under the head Income from house property‟. We are concerned with the amended law as year u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned CIT(A) who accepted the contentions of the assessee and granted relief to the assessee based on earlier decisions of ITAT and jurisdictional High Court ruling in assessee‟s favour. This is the background of the entire issue before us. Revenue is in appeal before us challenging the relief granted by learned CIT(A). We have carefully gone through the entire case laws cited before us. The municipal rateable value adopted by the assessee as per computation of income filed in paper book translates into municipal rateable value of ₹ 1.61 per square feet per month which as per municipal valuation is the amount of sum which the property is expected to be let from year to year while the prevailing market rent as per websites of magicbrick.com 99acres.com etc. comes to ₹ 200 per square feet per month which reflects huge variation between the two valuation. It is pertinent to mention that the assessee has never disputed this market rate of ₹ 200 per square feet per month which the AO derived from websites but the contentions are only raised that this valuations cannot be accepted at law and contentions are advanced to apply municipal rateable value for computing A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, we make it clear that rateable value is not binding on the Assessing Officer. If the Assessing Officer can show that rateable value under municipal laws does not represent the correct fair rent, then he may determine the same on the basis of material/evidence placed on record. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. CIT (1975) 101 ITR 810. The above discussion leads to the following conclusions: (i) ALV would be the sum at which the property may be reasonably let out by a willing lessor to a willing lessee uninfluenced by any extraneous circumstances. (ii) An inflated or deflated rent based on extraneous consideration may take it out of the bounds of reasonableness. (iii) Actual rent received, in normal circumstances, would be a reliable evidence unless the rent is inflated/deflated by reason of extraneous consideration. (iv) Such ALV, however, cannot exceed the standard rent as per the Rent Control Legislation applicable to the property. (v) If standard rent has not been fixed by the Rent controller, then it is the duty of the Assessing Officer to determine the standard rent as per the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re applying the prevailing market rent of the property under question. The satisfaction of the AO that the bargains reveal inflated or deflated rent based on fraud, emergency, relationship and other considerations which make it unreasonable must precede the undertaking of above exercise. The Hon‟ble Bombay High Court then held in Tip Top Typography (supra) that the AO has to then comply with the principles of fairness and justice and make the disclosure to the taxpayer so as to obtain taxpayers view. The Hon‟ble Bombay High Court then held that market rate in the locality is an approved method for determining the fair rental value but it is only when the AO is convinced that the case before him is suspicious, determination by parties is doubtful and then the AO can resort to enquire about the prevailing rate in the locality. The Hon‟ble Bombay High Court in the said case held that municipal rateable value may not be binding on the AO in such case. It was also held that the AO cannot brush aside the Rent Control legislation if the same is applicable to premises in question. Then in that event the AO has to undertake the exercise contemplated by the Rent Control Leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also not indicative of the real position of market rental if compared with market rent as per websites of real estate companies which reflect market rent of ₹ 200 per square feet per month for which these flats might reasonably be expected to be let from year to year as is contemplated u/s 23(1)(a). The flat no. 3 is lying vacant and ALV is to be computed as per Section 23(1)(a) on similar lines as to the sum for which the said flat might reasonably be expected to be let on year to year basis. The plea that the municipal rateable value was finally accepted in earlier years while computing ALV u/s 23(1)(a) and since the actual rent of flat no. 8 was higher than the municipal rateable value, the same was adopted while computing ALV as is contemplated u/s 23(1)(b) is of no avail to the assessee as principles of Res judicata are not applicable to the income tax proceedings although we are aware that consistency is required to be maintained. Reference is drawn to the decision of Hon‟ble Supreme Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321(SC). The decisions as is referred to by the assessee cannot be accepted as these decisions in the case of CIT v. Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d adjudicated on merits in accordance with law. This ground no. 1 of the Revenue is allowed for statistical purposes. We order accordingly. 14. The ground no. 2 is with respect to the amount of liability shown payable to Mr. Jimmy J. Parekh of ₹ 35.07 lacs which was added to the income of the assessee on the grounds that he is no longer employee of the assessee and not even his salary was claimed to have been payable to him. The AO observed that the said gratuity which was shown to be payable is transferred from another group company. The AO observed that the said gratuity payable is not an expense of the current year and secondly the same was charged as an expense in the transferor company and hence the same cannot be claimed as an expenses once again. This led AO to a belief that unless the said amount of gratuity payable which was transferred from another group company on transfer of employee to assessee company is brought to tax as unexplained cash credit u/s 68, the assessee may claim this expense payable as an expenses in the following year, which finally led to an addition to the income of the assessee for the impugned AY 2012-13 made by the AO to the tune of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 103.65 lacs to ₹ 138.72 lacs, while employee benefit expenses debited to Profit and Loss Account is merely ₹ 5.58 lacs and the assessee may claim these increased amount payable in subsequent years as an expenses. The learned counsel for the assessee reiterated the stand of the assessee which was taken before the authorities below which has been discussed by us in extenso in this order. After hearing both the parties, we do not found any justification for upholding the addition as was made by the AO and we find that learned CIT(A) has rightly deleted additions of ₹ 35.07 lacs as was made by the AO. The learned DR could not point out any defect/ error in the contentions/pleadings of the assessee taken before the authorities below and also before us no such defect/errors in the pleadings/submissions of the assessee could be pointed but rather reliance is placed by learned DR on assessment order passed by the AO. One Mr Jimmy J Parakh was an employee of group company of the assessee namely Sterling Investments Corporation Limited from 01-01-1983 to 30-11-2008. The said employee stood transferred to the assessee company w.e.f. 01-01-2009. On being transferred to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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