The ACIT, GNR Circle,, Gandhinagar v. Paras Projects Pvt.Ltd.,, Gandhinagar

ITA 2107/AHD/2006 | 2003-2004
Pronouncement Date: 31-01-2011 | Result: Partly Allowed

Appeal Details

RSA Number 210720514 RSA 2006
Assessee PAN AACCP7394K
Bench Ahmedabad
Appeal Number ITA 2107/AHD/2006
Duration Of Justice 4 year(s) 3 month(s) 26 day(s)
Appellant The ACIT, GNR Circle,, Gandhinagar
Respondent Paras Projects Pvt.Ltd.,, Gandhinagar
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 31-01-2011
Date Of Final Hearing 16-11-2010
Next Hearing Date 16-11-2010
Assessment Year 2003-2004
Appeal Filed On 04-10-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' [BEFORE SHRI MAHAVIR SINGH JM & SHRI A N PAHUJA AM] ITA NO.2107/AHD/2006 (ASSESSMENT YEAR:-2003-04) ASSISTANT COMMISSIONER OF INCOME-TAX GANDHINAGAR CIRCLE BLOCK NO.14 4 TH FLOOR UDHYOG BHAVAN SECTOR-11 GANDHINAGAR V/S PARAS PROJECTS PRIVATE LIMITED PLOT NO.16 MEGH MALHAR SECTOR-11 GANDHINAGAR [PAN: AACCP7394 K] [APPELLANT] [RESPONDENT] REVENUE BY :- SMT. NEETA SHAH DR ASSESSEE BY:- SHRI S N DIVATIA AR O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 26- 07-2006 OF THE LD. CIT(APPEALS) GANDHINAGAR RAISE S THE FOLLOWING GROUNDS: 1 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF RENTAL IN COME OF RS.4 94 328/-. 2 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF T HE CASE IN DELETING THE ADDITION MADE BY THE AO OF RS.1 47 892/- ON ACCOUNT OF DISALLOWANCE OUT OF INTEREST PAID ON BORROWED FUNDS. 3 ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE AO. 4 IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. C IT(A) MAY BE SET ASIDE AND THAT OF THE AO BE RESTORED TO THE ABOVE EXTENT. 2 FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.8 40 954/-FILED ON 30-11-2003 BY THE A SSESSEE ENGAGED IN CONSTRUCTION ACTIVITIES AFTER BEING PRO CESSED U/S 143(1)(A) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS THE ACT] WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ON 30-11-2004. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ITA NO.2107/AHD/2006 . 2 ASSESSEE HAD RENTED OUT THEIR OFFICE PREMISES NO.50 2 MEGH MALHAR COMPLEX SOUTH WING PLOT NO. 16 SECTOR-11 GANDHINA GAR TO ASIAN DEVELOPMENT BANK (ADB) @ RS.70 000/- PER MONTH WITH EFFECT FROM 1-7-2001. HOWEVER AS PER THE RENT ACCOUNT FURNISHE D BY THE ASSESSEE ONLY AN AMOUNT OF RS.3 45 672/- HAD BEEN SHOWN AS RENTAL INCOME INSTEAD OF RS.8 40 000/- (RS.70000 X 12). TO A QUERY BY THE ASSESSING OFFICER[AO IN SHORT] THE ASSESSEE WHILE SUBMITTING A COPY OF THE LEDGER ACCOUNT OF THE RENT INCOME RE PLIED THAT THE LESSOR IS OWNER OF PROPERTIES MENTIONED IN ANNEXURE -1 TO THE LEASE AGREEMENT WHILE OWNERSHIP OF ASSETS DESCRIBED IN SCHEDULE-II IS WITH THE LESSEE. THE ASSESSEE FURTHER REFERRED TO CLAUSE 11 OF THE AGRE EMENT WHICH READS AS UNDER:- 11. THAT THE LESSORS SHALL PROVIDE IN THE PREMISE S FIXTURES AND FURNITURES AS GIVEN IN SCHEDULE-II. FIRST PARA OF SCHEDULE -II READS AS UNDER:- THE LESSOR IS REQUIRED TO INCUR FOLLOWING EXPENSE S ON BEHALF OF LESSEE FOR SANITARY ELECTRICAL AND OTHER FITTINGS FIXTURES AND FURNITURES & OTHER RELATED EXPENSES AND ALL SUCH EX PENSES INCURRED ON BEHALF OF LESSEE SHALL BE RECOVERED BY LESSORS O UT OF THE RENT PAYABLE BY THE LESSEE TO THE LESSORS TO THE EXTENT MONTHLY RENT PAYABLE BY THE LESSEE TO THE LESSORS WILL BE CONSID ERED AS REDUCED. 2.1 IN TERMS OF THE AFORESAID PARA IN SCHEDULE -II THE ASSESSEE PLEADED THAT THEY RECEIVED RS.70 000/- PER MONTH TOWARDS TWO PUR POSES:- I. ONE TOWARDS RECOVERY OF EXPENSES INCURRED ON BEH ALF OF THE LESSEE; AND II SECOND TOWARDS RENT AMOUNT RECEIVABLE. SINCE THE ASSESSEE HELPED ASIAN DEVELOPMENT BANK TO MAKE PREMISES AS PER THEIR REQUIREMENTS AND THE LESSOR WAS NOT OWNER OF ASSETS MENTIONED IN SCHEDULE - II AND THE EXPENSES INCURRED ON BEHALF OF THE L ESSEE HAVE TO BE DEDUCTED FROM THE AMOUNT OF RS. 10.50 LACS RECEIVED FROM THE LESS EE. THE RENTAL VALUE HAS TO BE REDUCED BY THE EXPENSES ADJUSTED AGAINST THE RENT THE ASSESSEE SUBMITTED. WHILE RELYING UPON DECISION IN OSWAL SUGAR LTD. V. ASSTT. C1T (CHD. - TRIB. ) THE ITA NO.2107/AHD/2006 . 3 ASSESSEE PLEADED IN THE ASSESSMENT ORDER FOR THE A Y 2002 2003 THE AO IGNORED ALL THE CLAUSES OF THE LEASE AGREEMENT ONL Y BECAUSE THEY COULD NOT PRODUCE THE ORIGINAL LEASE AGREEMENT. HOWEVER THEI R CLAIM WAS ACCEPTED BY THE LD. CIT(A). ALTERNATIVELY THE ASSESSEE CLAIMED THA T BUSINESS LOSS OF RS.1235820/- MAY BE ALLOWED. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE IN VIEW OF FOLLOWING CLAUSE IN THE AGREEME NT: 1 THE LESSEE SHALL PAY TO THE LESSORS FOR THE PREM ISES RS.70 000/- (RS. SEVENTY THOUSAND ONLY) PER MONTH O N ACCOUNT OF RENT EXCLUSIVE OF ALL TAXES NOW LEVIED OR THAT MAY BE LEVIED IN FUTURE. AND THERE BEING NO PROVISION FOR DEDUCTION OF SUCH EXPENSES U/S 24 OF THE ACT. THE AO ACCORDINGLY ADOPTED ANNUAL RENT OF RS.8 40 000/-AS ALV OF THE SAID PROPERTY AND ALLOWED RELATED DEDUCTION. 3. ON APPEAL THE ASSESSEE RELIED UPON THE ORDER OF THE LD. CIT(A) IN THE ASSESSEES OWN CASE IN THE AY 2002-03 WHER EIN THE LD. CIT(A) VIDE ORDER DATED 27-03-2006 ALLOWED THE CLA IM OF THE ASSESSEE. THEREFORE THE LD. CIT(A) ALLOWED THE C LAIM IN THE FOLLOWING TERMS:- 2.3 THE ISSUE HAS BEEN HEARD. THE CLAIM OF DEDUCTI ON OF EXPENSES INCURRED ON BEHALF OF THE ASIAN DEVELOPMENT BANK AN D DEDUCTED FROM THE RENTAL RECEIPTS WAS DISCUSSED IN DETAIL IN APPEAL O RDER FOR ASSESSMENT YEAR 2002-03 AND IT WAS HELD THAT THE APPELLANT WAS ENTI TLED TO DEDUCT THE ABOVE AMOUNT IN COMPUTING INCOME. THE ABOVE DECISIO N IS APPLICABLE TO THE PRESENT FACTS AS WELL. FOLLOWING THE ABOVE DECI SION THE AO IS DIRECTED TO ALLOW THE CLAIM. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).AT THE OUTSET THE LEARN ED DR POINTED OUT THAT SINCE TAX EFFECT WAS BELOW RS. 2 LACS FURTHER APPEAL AGAINST THE FINDINGS OF THE LD. CIT(A) IN THE AY 2002-03 WAS NO T PREFERRED. WHILE CARRYING US THROUGH THE IMPUGNED ORDERS THE LD. DR SUBMITTED THAT THE INCOME UNDER THE HEAD HOUSE PROPERTY HAS TO BE COMPUTED AS PER THE PROVISIONS OF ACT AND ONLY DEDUCTIONS PERMI SSIBLE U/S 24 OF ITA NO.2107/AHD/2006 . 4 THE ACT COULD BE ALLOWED. RELYING UPON THE DECISION IN ITO VS. PURSHOTTAMLAL DHINGRA FAMILY WELFARE TRUST 58 ITD 19(SB) THE LD. DR PLEADED THAT THE CLAIM OF THE ASSESSEE DID NOT F ALL UNDER THE PROVISIONS OF SECTION 24 OF THE ACT. ON THE OTHER H AND THE LEARNED AR ON BEHALF OF THE ASSESSEE SUPPORTED THE ORDER OF THE CIT(A) AND CONTENDED THAT AMOUNT RECOVERED OUT OF RENT WAS CHA RGE ON THE RENTAL INCOME. THE ACTUAL RENT RECEIVED WAS NOT RS . 70 000/- PM AS ADOPTED BY THE AO. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. THE IS SUE BEFORE US RELATES TO DETERMINATION OF ALV OF THE AFORESAID I MMOVABLE PROPERTY LET OUT IN TERMS OF AN AGREEMENT DATED 1.7.2001.AT THE OUTSET WE MAY HAVE A LOOK AT THE RELEVANT PROVISIONS OF S.22 OF THE ACT WHICH READ AS UNDER: 22. INCOME FROM HOUSE PORPERTY. THE ANNUAL VALUE OF PROPERTY CONSISTING OF ANY BUIL DINGS OR LANDS APPURTENANT THERETO OF WHICH THE ASSESSEE IS THE OWNER OTHER T HAN SUCH PORTIONS OF SUCH PROPERTY AS HE MAY OCCUPY FOR THE PURPOSES OF ANY B USINESS OR PROFESSION CARRIED ON BY HIM THE PROFITS OF WHICH ARE CHARGEABLE TO IN COME-TAX SHALL BE CHARGEABLE TO INCOME-TAX UNDER THE HEAD 'INCOME FROM HOUSE PRO PERTY'. 5.1 THE PROVISIONS OF SEC. 23 READ AS UNDER: '23.(1) FOR THE PURPOSES OF S. 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 THER EOF IS IN EXCESS OF THE SUM REFERRED TO IN CL. (A) THE AMOUNT SO RECEIVED OR R ECEIVABLE; 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 THER EOF IS LESS THAN THE SUM REFERRED TO IN CL. (A) THE AMOUNT SO RECEIVED OR R ECEIVABLE: ITA NO.2107/AHD/2006 . 5 PROVIDED THAT THE TAXES LEVIED BY ANY LOCAL AUTHORI TY IN RESPECT OF THE PROPERTY SHALL BE DEDUCTED (IRRESPECTIVE OF THE PREVIOUS YEA R IN WHICH THE LIABILITY TO PAY SUCH TAXES WAS INCURRED BY THE OWNER ACCORDING TO T HE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY HIM) IN DETERMINING THE ANNUA L VALUE OF THE PROPERTY OF THAT PREVIOUS YEAR IN WHICH SUCH TAXES ARE ACTUALLY PAID BY HIM. EXPLANATION-FOR THE PURPOSES OF CL. (B) OR CL. (C) OF THIS SUB-SECTION THE AMOUNT OF ACTUAL RENT RECEIVED OR RECEIVABLE BY THE OWNER SHA LL NOT INCLUDE SUBJECT TO SUCH RULES AS MAY BE MADE IN THIS BEHALF THE AMOUNT OF RENT WHICH THE OWNER CANNOT REALISE. 5.2 IN THE INSTANT CASE THE AFORESAID PROPERTY H AD BEEN LET OUT W.E.F 1.7.2001. WHAT IS CHARGEABLE IN TERMS OF PROVISIONS OF SEC. 2 2 OF THE ACT IS ANNUAL VALUE. ANNUAL VALUE IS DEEMED IN TERMS OF PROVISIONS OF SEC.23 OF THE ACT. IN TERMS OF CLAUSE (A) OF SECTION 23(1) OF THE ACT ALV HAS TO B E DETERMINED ON THE BASIS OF SUM FOR WHICH PROPERTY MIGHT BE REASONABLY EXPECTED TO LET FROM YEAR TO YEAR. CLAUSE (B) STIPULATES THAT WHERE THE PROPERTY OR A NY 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 CL. (A) THE AMOUNT SO RE CEIVED OR RECEIVABLE WOULD BE THE ANNUAL VALUE . IN THE CASE BEFORE US WE ARE REQUIRED TO CONSIDER ONLY THE SCOPE OF S. 23(1)(B) OF THE ACT. SEC.. 23(1)(B) AP PLIES TO CASES WHERE THE ACTUAL RENT RECEIVED IS MORE THAN THE REASONABLE RENT UNDE R S. 23(1)(A) AND IT IS FOR THIS REASON THAT S. 23(1)(B) CONTEMPLATES THAT IN SUCH C ASES THE ANNUAL VALUE SHOULD BE DECIDED ON THE BASIS OF THE ACTUAL RENT RECEIVED . . THE SCHEME OF S. 23(1)(A) IN CONTRADISTINCTION TO S. 23(1)(B) SHOWS THAT FAI R RENT IS THE BASIS TO DETERMINE THE ANNUAL VALUE OF A PROPERTY. THIS WAS THE SOLE BASIS PRIOR TO THE ASST. YR. 1975-76 HOWEVER AFTER THE AMENDMENT OF S. 23(1) BY THE TAX ATION LAWS (AMENDMENT) ACT 1975 THE LEGISLATURE HAS CLEARLY LAID DOWN UN DER S. 23(1)(B) THAT WHEN THE ACTUAL ANNUAL RENT RECEIVED OR RECEIVABLE IS IN EXC ESS OF THE FAIR RENT DETERMINABLE UNDER S. 23(1)(A) THEN SUCH HIGHER ACTUAL ANNUAL R ENT WOULD CONSTITUTE THE ANNUAL VALUE OF THE PROPERTY. IT IS IMPORTANT TO BEAR IN M IND THAT UNDER S. 22 THE MEASURE OF INCOME FROM HOUSE PROPERTY IS ITS ANNUAL VALUE. THE ANNUAL VALUE IS TO BE DECIDED IN ACCORDANCE WITH S. 23(1) . WHERE AN ASSESSEE HAS LET OUT HIS PREMISES AND THE RENT THE TENANT HAS TO PAY IS A PARTICULAR AMOUNT THAT AMOUNT WOULD ITA NO.2107/AHD/2006 . 6 CONSTITUTE THE AMOUNT OF RENT 'RECEIVABLE BY THE OW NER' IN RESPECT OF THE LETTING. A DIRECT APPLICATION THEREFORE OF THE PROVISIONS OF SECTION 23 TO THE PRESENT CASE WOULD INVOLVE APPLICATION OF SECTION 23(1)(B). THE ACTUAL AMOUNT RECEIVED IS NOT THE SOLE BASIS TO BE ADOPTED FOR DETERMINATION OF THE ANNUAL LETTING VALUE. IT IS THE ACTUAL RENT RECEIVED OR RE CEIVABLE IN RESPECT OF THE PROPERTY.. WE ARE OF THE OPINION THAT UNLESS T HE SUM FOR WHICH PROPERTY MIGHT BE REASONABLY EXPECTED TO LET FROM YEAR TO YE AR IS DETERMINED THE ACTUAL RENT RECEIVED OR RECEIVABLE CAN NOT BE STRAIGHT A WAY ADOPTED AS ANNUAL VALUE OF THE PROPERTY. IN THE INSTANT CASE THERE IS NOTHING TO SUGGEST THAT THE AO OR THE LD. CIT(A) HAVE DONE THAT EXERCISE. IN THE CASE OF CIT VS. SATYA CO. LTD. (1994) 75 TAXMAN 193 (CAL) A DIVISION BENCH OF THE HONBLE C ALCUTTA HIGH COURT HELD THAT WHEN THE ANNUAL VALUE IS DECIDED UNDER S. 23(1)(A) OF THE IT ACT WITH REFERENCE TO THE FAIR RENT THEN THE SAID FAIR RENT TAKES INTO C ONSIDERATION EVERYTHING. HOWEVER UNDER S. 23(1)(B) ONLY THE ACTUAL RENT RECEIVED OR RECEIVABLE CAN BE TAKEN INTO CONSIDERATION . SIMILARLY IN THE CASE OF CIT VS. M . RATANCHAND CHORDIA (1997) 139 CTR (MAD) 191: (1997) 228 ITR 626 (MAD): TC S40.3572 IT HAS BEEN HELD BY THE MADRAS HIGH COURT THAT IN CASES OF S. 23(1)( B) THE ANNUAL VALUE SHALL BE DETERMINED ONLY ON THE BASIS OF ACTUAL RENT RECEIVE D. HONBLE GUJRAT HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX. VS M. K. SHIVRAJ SINGHJ I. 192 ITR 120(GUJ) HELD THAT RENT CONTROL LAW IS IN FORCE IN GUJARAT AND THIS LAW PROVIDES FOR THE DETERMINATION OF THE STANDARD RENT. THE STANDAR D RENT UNDER THE RENT CONTROL LAW HAS TO BE ADOPTED AS THE BASIS FOR DETERMINING THE ANNUAL LETTING VALUE. ANNUAL LETTING VALUE MAY BE LESS BUT CANNOT EXCEED THE STANDARD RENT. IN DEWAN DAULAT RAI KAPOOR V. NEW DELHI MUNICIPAL COMMITTEE [1980] 122 ITR 700 THE HONBLE SUPREME COURT HELD THAT THE ANNUAL VALUE OF BUILDING FOR THE PURPOSES OF HOUSE TAX WHETHER UNDER SECTION 3(1)(B) OF THE PUN JAB MUNICIPAL ACT 1911 OR UNDER SECTION 116 OF THE DELHI MUNICIPAL CORPORATIO N ACT 1957 IS LIMITED TO THE MEASURE OF STANDARD RENT DETERMINABLE ON THE PRINCI PLES LAID DOWN IN THE RENT CONTROL ACT AND IT CANNOT EXCEED SUCH A MEASURE OF STANDARD RENT. THE ASSESSING AUTHORITY WOULD HAVE TO ARRIVE AT ITS OWN FIGURE OF STANDARD RENT BY APPLYING THE PRINCIPLES LAID DOWN IN THE RENT CONTROL ACT FOR DE TERMINATION OF THE STANDARD RENT AND DETERMINE THE ANNUAL VALUE OF THE BUILDING ON T HE BASIS OF SUCH FIGURE OF ITA NO.2107/AHD/2006 . 7 STANDARD RENT. EXPLAINING THIS DECISION OF THE SUPR EME COURT IN DEWAN DAULAT RAI KAPOOR'S CASE [1980] 122 ITR 700 THE SUPREME COURT IN BALBIR SINGH (DR.) V. M. C. D. [1985] 152 ITR 388 OBSERVED THAT IN DEWAN DAULAT RAI KAPOOR'S CASE [1980] 122 ITR 700 THE SUPREME COURT ONLY DECIDED THAT EVEN IF THE L ANDLORD WAS LAWFULLY ENTITLED TO RECEIVE THE CONTRACTUAL RE NT FROM THE TENANT SUCH CONTRACTUAL RENT COULD NOT BE TAKEN TO BE THE RATEA BLE VALUE OF THE BUILDING BECAUSE THE REASONABLE EXPECTATION OF THE LANDLORD TO RECEIVE RENT FROM A HYPOTHETICAL TENANT COULD NOT POSSIBLY EXCEED THE S TANDARD RENT DETERMINABLE IN ACCORDANCE WITH THE PROVISIONS LAID DOWN IN THE REN T CONTROL ACT. THE STANDARD RENT DETERMINABLE ON THE PRINCIPLES LAID DOWN IN TH E RENT CONTROL ACT WAS LAID DOWN BY THE COURT AS THE UPPER LIMIT OF THE RENT WH ICH THE LANDLORD MAY EXPECT TO RECEIVE FROM A HYPOTHETICAL TENANT IF THE BUILDING WERE LET OUT TO HIM FROM YEAR TO YEAR. THE COURT DID NOT HOLD THAT EVEN IF THE ACTU AL RENT RECEIVABLE BY THE LANDLORD FROM THE TENANT OR THE RENT WHICH THE OWNER MAY REA SONABLY EXPECT TO RECEIVE FROM A HYPOTHETICAL TENANT WERE LOWER THAN THE STAN DARD RENT DETERMINABLE IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN IN THE REN T CONTROL ACT THE STANDARD RENT MUST STILL BE TAKEN TO BE THE RATEABLE VALUE O F THE BUILDING. WE MAY HERE REFER TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF DR. BALBIR SINGH VS. MCD. IN THIS CASE THEIR LORDSHIPS HELD AS UNDER: 'UNDER THE PROVISIONS OF THE DMC ACT 195 7 THE CRITERIA FOR DETERMINING RATEABLE VALUE OF A BUILDING IS THE ANNUAL RENT AT WHICH SUCH BUILDING MIGHT REASONABLY BE EXPECTED TO BE LET FROM YEAR TO YEAR LESS CERTAIN DEDUCTIONS. THE WORD 'REASONABLY' IS VERY IMPORTANT. WHAT THE OWNER MIGHT REASONABLY EXPECT TO GET FROM A HYPOTHETICAL TENANT IF THE BUILDING WERE LET FROM YEAR TO YEAR AFFORDS THE STATUTORY YARDSTICK FOR DETERMINING THE RATEABL E VALUE. WHAT IS REASONABLE IS A QUESTION OF FACT AND IT DEPENDS ON THE FACTS AND CI RCUMSTANCES OF A GIVEN SITUATION. ORDINARILY 'A BARGAIN BETWEEN A WILLING LESSOR AND A WILLING LESSEE UNINFLUENCED BY ANY EXTRANEOUS CIRCUMSTANCES MAY AF FORD A GUIDING TEST OF REASONABLENESS' AND IN NORMAL CIRCUMSTANCES THE AN NUAL RENT PAYABLE BY A TENANT TO THE LANDLORD WOULD AFFORD RELIABLE EVIDEN CE OF WHAT THE LANDLORD MAY REASONABLY EXPECT TO GET FROM THE HYPOTHETICAL TENA NT UNLESS THE RENT IS INFLATED OR DEPRESSED BY REASON OF EXTRANEOUS CONSIDERATIONS SUCH AS RELATIONSHIP EXPECTATION OF SOME OTHER BENEFIT ETC. THERE WOULD ORDINARILY BE A CLOSE APPROXIMATION BETWEEN THE ACTUAL RENT RECEIVED BY T HE LANDLORD AND THE RENT WHICH HE MIGHT REASONABLY EXPECT TO RECEIVE FROM A HYPOTHETICAL TENANT. BUT IN THE CASE OF A BUILDING SUBJECT TO THE RENT CONTROL LEGISLATION THIS APPROXIMATION MAY AND OFTEN DOES GET DISPLACED BECAUSE UNDER THE RENT CONTROL LEGISLATION THE ITA NO.2107/AHD/2006 . 8 LANDLORD CANNOT CLAIM TO RECOVER FROM THE TENANT MO RE THAN THE STANDARD RENT AND HIS REASONABLE EXPECTATION MUST THEREFORE BE LIMI TED BY THE MEASURE OF THE STANDARD RENT LAWFULLY RECOVERABLE BY HIM.' 5.3 IN THE INSTANT CASE LEASE AGREEMENT EXECUTED ON 1. 7.2001 CLEARLY PROVIDES THAT THE LESSEE SHALL PAY TO THE LESSORS FOR THE PR EMISES RS.70 000/- (RS. SEVENTY THOUSAND ONLY) PER MONTH ON ACCOUNT OF RENT EXCLUSI VE OF ALL TAXES NOW LEVIED OR THAT MAY BE LEVIED IN FUTURE. THE PERIOD OF LEASE IS 1.7.2001 TO 31.12.2003.CLAUSE 3 OF THE AGREEMENT PROVIDES FOR PAYMENT OF RS. 10 50 000 I.E 15 MONTHS RENT IN ADVANCE. CLAUSE 4 OF THE SAID A GREEMENT DEED PROVIDES THAT ANY ADVANCE PAID ON BEHALF OF THE LESSOR WOULD BE DEDUCTED FROM THE ADVANCE. CLAUSE 11 OF THE AGREEMENT STIPULATES THAT THE LE SSORS SHALL PROVIDE IN THE PREMISES FIXTURES AND FURNITURE AS GIVEN IN SCHEDUL E-II. FIRST PARA OF SCHEDULE -II READS AS UNDER:- THE LESSOR IS REQUIRED TO INCUR FOLLOWING EXPENSE S ON BEHALF OF LESSEE FOR SANITARY ELECTRICAL AND OTHER FITTINGS FIXTURES AND FURNITURES & OTHER RELATED EXPENSES AND ALL SUCH EX PENSES INCURRED ON BEHALF OF LESSEE SHALL BE RECOVERED BY LESSORS O UT OF THE RENT PAYABLE BY THE LESSEE TO THE LESSORS TO THE EXTENT MONTHLY RENT PAYABLE BY THE LESSEE TO THE LESSORS WILL BE CONSID ERED AS REDUCED. BESIDES ANNEXURE-1 STIPULATES DETAILS OF ALL FIXTU RES AND FURNITURES. 5.4 FOR DETERMINATION OF THE ANNUAL LETTING VALUE U NDER CL. (A) OF S. 23(1) THE FIRST QUESTION IS AS TO WHETHER THE PROPERTY IS SUB JECT TO THE STATUTORY CONTROLS UNDER THE RELEVANT RENT CONTROL ACT. IN CASE THE RE LEVANT PROVISIONS OF THE RENT CONTROL ACT ARE APPLICABLE THE AO IS BOUND TO DETE RMINE THE STANDARD RENT OF THE PREMISES IN ACCORDANCE WITH PROVISIONS OF THAT ACT. HOWEVER WHERE THE STANDARD RENT HAS NOT BEEN DETERMINED BY THE RENT CONTROL AU THORITY THE AO IS DUTY BOUND TO DO THE EXERCISE HIMSELF AND DETERMINE THE STANDA RD RENT AS PER THE PROVISIONS OF THE RELEVANT RENT CONTROL ACT. WE FIND THAT THE PROPERTY IN THIS CASE IS SITUATE AT GANDHINAGAR WHILE THE ORDERS OF AO AND LD. CIT(A) ARE SILENT ON THIS ASPECT . AFTER THE AFORECITED DECISION OF HONBLE SUPREME CO URT S. 23 OF THE IT ACT 1961 HAS BEEN AMENDED W.E.F. 1ST APRIL 1985 WHICH PROV IDES FOR ASSESSMENT OF THE ANNUAL LETTING VALUE ON THE BASIS OF EXPECTED RENTA L VALUE OR THE ACTUAL RENT ITA NO.2107/AHD/2006 . 9 RECEIVED OR RECEIVABLE WHICHEVER IS HIGHER. THEREF ORE AFTER DETERMINATION OF THE STANDARD RENT AS PER THE PROVISIONS OF THE RELEVANT RENT CONTROL ACT THE ASSESSING AUTHORITY HAS GOT TO FIND OUT AS TO WHAT IS THE ACT UAL RENT RECEIVED OR RECEIVABLE BY THE OWNER. IF THE RENT RECEIVED OR RECEIVABLE IS MO RE THAN THE STANDARD RENT THEN THE ACTUAL RENT RECEIVED OR RENT RECEIVABLE HAS GO T TO BE ASSESSED AS THE ANNUAL LETTING VALUE OF THE HOUSE PROPERTY. IF THE RENT RE CEIVED OR RECEIVABLE IS LOWER THEN THE STANDARD RENT SHALL BE DEEMED TO BE THE ANNUAL VALUE OF THE HOUSE PROPERTY. NOW IN THIS CASE NEITHER THE AO OR NOR THE LD. CI T(A) HAVE UNDERTAKEN SUCH AN EXERCISE. ACCORDINGLY WE CONSIDER IT FAIR AND APPR OPRIATE TO VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO WITH THE DIRECTIONS TO DETERMINE ALV IN THE LIGHT OF AFORECITED POSITION IN LAW ENUNCIATED BY HONBLE SUPREME COURT AND HONBLE GUJRAT HIGH COURT AND OF COURSE AFTER ALLOWING AN OPPORTUNITY TO THE ASSESSEE. GROUND NO. 1 OF THE AP PEAL IS THUS ALLOWED AS INDICATED HEREIN BEFORE. 6. GROUND NO. 2 RELATES TO DISALLOWANCE OF INTE REST ON BORROWED FUNDS. THE AO NOTICED DURING THE ASSESSMENT PROCEED INGS THE ASSESSEE PAID INTEREST OF RS.1 84 190/- WHILE THEY HAD GIVEN ADVANCES/LOANS OF RS.29 42 615/- TO VARIOUS PERSONS WITHOUT CHARGING ANY INTEREST ON SUCH LOANS. TO A QUERY BY THE AO T HE ASSESSEE REPLIED THAT THEY HAD TAKEN CASH CREDIT LIMIT OF RS .15 LAKHS FROM GANDHINAGAR NAGRIK CO-OP. BANK LTD. WHILE THE DIRE CTORS AND THEIR RELATIVES INVESTED RS.48 00 000 TOWARDS SHARE CAPIT AL AND RS.153.30 LACS AS SHARE APPLICATION MONEY. OVER AND ABOVE THE COMPAN Y HAD RECEIVED RS.82.15 LACS FROM THE PERSONS BOOKING THE FLAT AND OTHER S UNDRY CREDITORS BESIDES HAVING RESERVES AND SURPLUS OF RS.30.12 LACS. IT WAS PLEA DED THAT SINCE THE CASH CREDIT OF RS.14.12 LACS FROM GANDHINAGAR NAGARIK CO .- OP. BANK LTD. HAD NOT BEEN ADVANCES TO ANY OTHER PERSON AS INTEREST FREE LOAN NO DISALLOWANCE COULD BE MADE. BESIDES ADVANCES TO M/S HERTZ COMPUTER P VT. LTD.-RS. 441591/- PATRON SECURITIES PVT. LTD.-RS. 30528./-AND PATRO N STOCK BROKING PVT LTD.-RS. 12613/- HAVING COMMON DIRECTORS WERE FOR BUSINE SS PURPOSES. INTER ALIA THE ASSESSEE WHILE RELYING ON DECISIONS REPORTED IN TA XMAN VOL.145 PAGE-98: VIJAI ITA NO.2107/AHD/2006 . 10 SHRI (P) LTD. VS. ACIT (DELHI- TRIB) TAXMAN VOL.1 40 PAGE- 124: HANDICRAFT EMPORIUM VS. ITO (AGRA TRIB) TAXMAN VOL. 142 PAG E 146: SHADI RAM & SONS VS. DY. CIT (LUCK TRIB) AND TAXMAN VOL. 142 PAGE 123 CIT VS. SESA KHAITAN LTD. (ALL) CONTENDED THAT EVEN IF ANY DISALLOWA NCE WAS MADE THAT WOULD REDUCE THE VALUE OF WORK IN PROGRESS . HOWEVER THE AO DI D NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE DI D NOT EXPLAIN THE PURPOSE OF INTEREST FREE LOANS GIVEN TO VARIOUS PERSONS AND HA D THIS MONEY NOT ADVANCED TO DIRECTORS/OTHERS IT WOULD BE AVAILABLE FOR ITS BUS INESS PURPOSE AND TO THAT EXTENT IT WOULD NOT HAVE BEEN NECESSARY TO BORROW FROM BAN KS. THEREFORE RELYING UPON DECISION IN CIT VS. H R SUGAR FACTORY PVT. LTD. 187 ITR 363 (ALLAHABAD) (HC) THE AO DISALLOWED INTEREST@ 13.04 % ON THE FOLLOWIN G ADVANCES PARTICULARS CLOSING BALANCE ASIAN BANK RENT HOLDER 3 76 131.63 BHOGILAL PATEL (NEW TELEPHONE) DIRECTOR 86 239.00 HERTZ COMPUTER LTD. 4 41 591.00 J C VYAS LAB LABOUR CONTRACTOR 60 770.00 MANGHAJI R THAKOR SUPERVISOR 1 000.00 M L CHARITABLE TRUST DIRECTOR TRUST 30 000.00 PATRON SECURITIES LTD. 30 528.00 PATRON STOCK BROKING PVT. LTD. 12 613.00 Y H PATEL DIRECTOR 95 271.00 11 34 144.00 THE ASSESSEE HAVING PAID INTEREST OF RS.1 84 190/- ON CASH CREDIT LIMIT OF RS.14.12 LACS @ 13.04%. AS A RESULT AN AMOUNT OF R S.1 47 892/- WAS DISALLOWED. 7. ON APPEAL THE LEARNED CIT(A) DELETED THE DISALL OWANCE IN THE FOLLOWING TERMS: 3.3 THE FACTS OF THE CASE AND THE SUBMISSIONS HAVE BEEN CONSIDERED. THE APPELLANT HAD AVAILED LOAN FROM BANK AND INTERE ST OF RS.1 84 190/- ON A SUM OF RS.14.12 LAKHS WAS PAID THIS INTEREST WAS CLAIMED AS EXPENDITURE ASSESSING OFFICER HELD THAT INTEREST-B EARING FUNDS WERE DIVERTED FOR NON-BUSINESS PURPOSES AND SUCH DIVERTE D FUNDS WERE COMPUTED AT RS.11 34 144/- (PAGE 9 OF ASSESSMENT OR DER). THE INTEREST ON ITA NO.2107/AHD/2006 . 11 SUCH FUNDS AT RS 1.47 892/- WAS DISALLOWED ' A PERU SAL OF THE COMPUTATION OF DIVERSION OF FUNDS SHOWED THAT THE COMPUTATION I S FLAWED CERTAIN NORMAL BUSINESS DEBTS LIKE ADVANCE GIVEN TO LABOUR CONTRAC TOR SUPERVISOR ETC. WERE INCLUDED IN THE COMPUTATION. IT IS ALSO NOTICE D THAT BALANCE OUTSTANDING ON ACCOUNT OF ASIAN DEVELOPMENT BANK FO R WORK CARRIED OUT WAS ALSO INCLUDED NONE OF THE ABOVE BALANCE COULD B E CONSIDERED AS DIVERSION OF FUNDS. AS POINTED OUT BY APPELLANT AD VANCES AMOUNTING TO RS.4.84 LAKHS WERE GIVEN TO SISTER CONCERNS FOR NON -BUSINESS PURPOSES HERE ALSO APPELLANT CLAIMED THAT THE ABOVE ADVANCE S WERE GIVEN FOR BUSINESS PURPOSES. HOWEVER THE ABOVE CLAIM IS NOT SUBSTANTIATED. EVEN THEN IT IS SHOWN THAT APPELLANT HAD SUFFICIENT NON- INTEREST-BEARING FUNDS FOR MAKING ADVANCES. THERE IS ALSO NO FINDING THAT THE LOAN FUNDS FROM BANKS WERE UTILIZED FOR MAKING ADVANCES TO SISTER CONCERN S. IN VIEW OF THE ABOVE FACTS IT IS HELD THAT THERE WAS NO DIVERSION OF IN TEREST-BEARING FUNDS FOR NON-BUSINESS PURPOSES. THE ADDITION IS DIRECTED TO BE DELETED. 8. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LEARNED DR WHILE SU PPORTING THE ORDER OF THE AO CONTENDED THAT BORROWED FUNDS WERE DIVERT ED FOR MAKING ADVANCES TO THE CONCERNS IN WHICH DIRECTORS AND SHA REHOLDERS WERE INTERESTED AND AS SUCH THE INTEREST PAID ON THE LOA NS / ADVANCES WAS LIABLE TO BE DISALLOWED TO THE EXTENT SUCH LOANS WE RE NOT UTILIZED FOR THE PURPOSE OF BUSINESS. INTER ALIA THE LD. DR REL IED UPON DECISIONS IN CIT VS. V I BABY & CO. 254 ITR 248 (KERALA) AND CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR1 (P&H). ON THE OTHER HAND THE LEARNED AR ON BEHALF OF THE ASSESSEE SUPPORTED THE FINDINGS OF THE LD. CIT(A) WHILE RELYING UPON THE DECISIONS IN MUNJAL SALES C ORPORATION VS. CIT 298 ITR 298(SC) & CIT(A) VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 340(BOM.). 9 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH T HE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. THOUGH THE LD. DR CONTENDED THAT BORROWED FUNDS WERE DIVERTED FOR MAK ING ADVANCES TO THE CONCERNS IN WHICH DIRECTORS AND SHAREHOLDERS WERE INTERESTED AND AS SUCH THE INTEREST PAID ON THE LOANS / ADVANC ES WAS LIABLE TO BE DISALLOWED TO THE EXTENT SUCH LOANS WERE NOT UTI LIZED FOR THE PURPOSE OF BUSINESS THE LD. CIT(A) FOUND THAT EXC EPT FUNDS OF ITA NO.2107/AHD/2006 . 12 RS.4.84 LACS ALL OTHER ADVANCES WERE FOR THE BUSI NESS PURPOSES. NEITHER BEFORE THE LD. CIT(A) NOR EVEN BEFORE US AN Y MATERIAL HAS BEEN PLACED THAT BORROWED FUNDS HAVE INDEED BEEN UT ILIZED FOR THE AFORESAID INTEREST FREE ADVANCES. RATHER THE LD. C IT(A) CONCLUDED THAT SUFFICIENT NON-INTEREST BEARING FUNDS WERE AVA ILABLE WITH THE ASSESSEE FOR MAKING INTEREST FREE ADVANCES. THE LD . DR APPEARING BEFORE US DID NOT CONTROVER THESE FINDING OF FACTS RECORDED BY THE LD. CIT(A). HONBLE KARNATAKA HIGH COURT IN BIT TUL (P. ) LTD. V. CIT (ITRC 141 OF 1977 DATED 29-7-1980) HELD THAT THERE SHOULD BE MAT ERIAL TO JUSTIFY THE CONCLUSION THAT ANY BORROWED MONEY BY THE ASSESSEE IN A YEAR I N WHICH INTEREST HAD BEEN PAID HAD BEEN DIVERTED FOR NON-BUSINESS PURPOSE BEF ORE MAKING ANY DISALLOWANCE. SINCE THE REVENUE HAVE NOT PLACED ANY MATERIAL BEFORE US THAT BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR ADVANC ING INTEREST FREE LOANS AND ADVANCES FOR NON-BUSINESS PURPOSES IN THE YEAR UNDE R CONSIDERATION OR EVEN IN THE EARLIER YEARS NOR ANY SUCH DISALLOWANCE IN REL ATION TO FUNDS ADVANCED IN THE PRECEDING YEARS IS STATED TO HAVE BEEN MADE APPAR ENTLY THERE WAS NO GROUND FOR MAKING ANY DISALLOWANCE OF INTEREST IN THE YEAR UNDER CONSIDERATION. 9.1 EVEN OTHERWISE HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM.) HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST -FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST-FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 9.2 AS REGARDS DECISIONS RELIED UPON BY THE LD. D R WE FIND THAT THESE DECISIONS HAVING BEEN RENDERED ON ALTOGETHER DIFFERENT FACT S AND CIRCUMSTANCES RELIANCE ON THESE DECISIONS IS TOTALLY MISPLACED. 9.3. IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISIONS ESPECIALLY WHEN IN THE INSTANT CASE THE REVENUE HAVE NOT PLACE D BEFORE US ANY MATERIAL THAT THE BORROWED FUNDS HAD INDEED BEEN UT ILIZED TOWARDS ITA NO.2107/AHD/2006 . 13 THE AFORESAID ADVANCES WHILE SUFFICIENT INTEREST F REE FUNDS WERE AVAILABLE WITH THE ASSESSEE FOR THESE ADVANCES WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). T HEREFORE GROUND NO.2 IN THE APPEAL IS DISMISSED. 10. NO OTHER SUBMISSION PLEA OR ARGUMENT WAS MAD E BEFORE US BY ANY OF THE PARTY. 11. GROUND NOS. 3 & 4 IN THE APPEAL BEING GENERAL IN NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE THEREFOR E DISMISSED. 12. IN THE RESULT APPEAL IS PARTLY ALLOWED BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 31-1-2011 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 31-01-2011 COPY OF THE ORDER FORWARDED TO: 1. PARAS PROJECTS PRIVATE LIMITED PLOT NO.16 MEGH MALHAR SECTOR-11 GANDHINAGAR 2. ASSISTANT COMMISSIONER OF INCOME-TAX GANDHINAG AR CIRCLE BLOCK NO.14 4 TH FLOOR UDHYOG BHAVAN SECTOR-11 GANDHINAGAR 3. CIT CONCERNED 4. CIT(A) GANDHINAGAR 5. THE DR BENCH-B ITAT AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD