THE ITO 9(3)(2), MUMBAI v. M/S. SPHINX HOTELS & PROPERTIES PVT. LTD, MUMBAI

ITA 4191/MUM/2007 | 2001-2002
Pronouncement Date: 09-09-2011 | Result: Dismissed

Appeal Details

RSA Number 419119914 RSA 2007
Assessee PAN AAACS5819C
Bench Mumbai
Appeal Number ITA 4191/MUM/2007
Duration Of Justice 4 year(s) 3 month(s) 7 day(s)
Appellant THE ITO 9(3)(2), MUMBAI
Respondent M/S. SPHINX HOTELS & PROPERTIES PVT. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 09-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 09-09-2011
Date Of Final Hearing 29-08-2011
Next Hearing Date 29-08-2011
Assessment Year 2001-2002
Appeal Filed On 01-06-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.4191/MUM/07(A.Y. 2001-02) THE ITO 9(3)(2) ROOM NO.227 2 ND FLOOR AAYKAR BHAVAN MK ROAD MUMBAI -20. (APPELLANT) VS. M/S. SPHINX HOTELS & PROPERTIES PVT. LTD. 101 RAJKAMAL 2 ND HASNABAD LANE SANTACRUZ (WEST) MUMBAI -54. PAN:AAACS 5819C (RESPONDENT) APPELLANT BY : SHRI M.P.NAIK RESPONDENT BY : NONE ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 2.3.2007 OF CIT(A)-IX MUMBAI RELATING TO AY 2001-02. THE GROU NDS RAISED BY THE REVENUE READS AS FOLLOWS: 1.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE CIT(A) ERRED IN DELETING THE ADDITION OF NOTIONAL I NTEREST ON SECURITY DEPOSIT TO THE ANNUAL LETTING VALUE WITHOUT APPRECI ATING THAT THE ASSESSEE HAD TAKEN HUGE INTEREST FREE DEPOSIT AND T HEREBY KEPT THE ANNUAL LETTING VALUE OF THE PROPERTY LOWER THAN HE MARKET VALUE. 2.ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) ERRED IN DELETING THE ADDITION OF NOTIONAL INTEREST WITHOUT APPRECIATING THAT THE ANNUAL LETTING VALUE OF THE PROPERTY OF TH E ASSESSEE IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SEC TION 23(1)(A) AND THE QUESTION OF TAXING THE NOTIONAL INCOME U/S. 23( 1)(A) HAS BEEN KEPT OPEN FOR CONSIDERATION BY THE HONBLE HIGH COURT IN THE CASE OF CIT VS. J.K. INVESTORS (BOMBAY) LTD. (2000) 112 TAXMAN 107( MUM). ITA NO.4191/MUM/07(A.Y. 2001-02) 2 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF LETTING OUT PROPERTIES AND DEALING IN REAL ESTATE. THE ASSESSE E OWNED SHOP NO.1(PART) AND SHOP.NO.2 ADMEASURING 370 SQ.FT. CARPET AREA AN D 529 BUILT UP AREA AND BASEMENT ADMEASURING 300 SQ.FT. CARPET AREA AND 429 SQ.FT. BUILT UP AREA IN THE PREMISES KNOWN AS MICASA 24 TH ROAD BANDRA(W) MUMBAI-400 050 HEREINAFTER REFERRED TO AS THE PROPERTY. TH E ASSESSEE LET OUT THE PROPERTY TO ICICI BANK LTD. UNDER AN AGREEMENT DT. 23.7.1998. THE ANNUAL RENT PAYABLE BY THE LESSEE WAS RS.3 74 724/-. THE LESSEE HAD ALSO GIVEN AN INTEREST FREE SECURITY DEPOSIT OF RS.59.48 LACS TO THE ASSSESSEE. THE ASSESSEE CLAIMED THE INCOME FROM LETTING OF THE PROPERTY WAS INCOME FROM BUSINESS. THIS WAS REJECTED BY THE AO AND HE ASSESSED THE INC OME FROM LETTING OF THE PROPERTY AS INCOME FROM HOUSE PROPERTY. THIS ISS UE IS NOT IN DISPUTE IN THIS APPEAL. THE ISSUE WHICH IS IN DISPUTE IN THIS APPEAL IS THE DETERMINATION OF THE ANNUAL VALUE OF THE PROPERTY F OR THE PURPOSE OF DETERMINING INCOME UNDER THE HEAD INCOME FROM HOUS E PROPERTY. ACCORDING TO THE AO THE ANNUAL VALUE OF THE PROPER TY HAS TO BE DETERMINED TAKING INTO CONSIDERATION SEVERAL FACTORS LIKE RENT PAYABLE BY THE TENANT MUNICIPAL VALUATION OF THE PROPERTY FAIR RENT OF T HE PROPERTY AND STANDARD RENT UNDER THE RENT CONTROL LAWS. HE WAS OF THE VI EW THAT THE RENT PAYABLE WAS VERY LOW COMPARED TO THE LOCATION OF THE PROPER TY WHICH WAS IN ONE OF THE SOUGHT AFTER AREAS OF MUMBAI. HE WAS OF THE VI EW THAT THE ASSESSEE HAS TAKEN HUGE INTEREST FREE SECURITY DEPOSIT IN LIEU O F LETTING OUT THE PROPERTY AT A LESSER RENT AND THE HUGE INTEREST FREE SECURITY D EPOSIT HAS ADVERSELY INFLUENCED THE LETTING OUT VALUE OF THE PREMISES. HE WORKED OUT NOTIONAL INTEREST ON SUCH INTEREST FREE SECURITY DEPOSIT AT 12% P.A. ON THE INTEREST FREE SECURITY DEPOSIT OF RS.59.48 LACS WHICH WAS A SUM O F RS.7 13 760/-. HE ADDED THE SAID SUM OF RS.7 13 760/- TO THE ACTUAL R ENT RECEIVED OF RS.3 74 724 AND DETERMINED THE ANNUAL VALUE OF THE PROPERTY AT RS.10 88 484/-. THE DETERMINATION OF ANNUAL VALUE AS ABOVE WAS DONE BY THE AO BY MAKING A REFERENCE TO THE PROVISIONS OF S EC.23(1)(A) OF THE INCOME ITA NO.4191/MUM/07(A.Y. 2001-02) 3 TAX ACT 1961 (THE ACT). THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF CIT VS. J.K. INVESTORS (BOMBAY) LTD. 248 ITR 723 (BOM) HAS TAKEN THE VIEW THAT WHILE COMPUTING ANNUAL VALUE U/S.23(1)(B) NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT SHOULD NOT BE ADDED TO ACTUAL RENT RECEIVED. THE AO HOWEVER HELD THAT HE WAS NOT ADDING NOTIONAL INTERE ST ON SECURITY DEPOSIT AND RENT RECEIVED IN ADVANCE TO THE ACTUAL RENT REC EIVED FOR DETERMINING THE ANNUAL VALUE U/S.23(1)(B) OF THE ACT BUT WAS TREAT ING THE SAME AS THE SUM FOR WHICH THE PROPERTY MIGHT BE EXPECTED TO LET FRO M YEAR TO YEAR U/S.23(1)(A) OF THE ACT. THE AO REFERRED TO THE ABOVE DECISION A ND WAS OF THE VIEW THAT THE HONBLE BOMBAY HIGH COURT IN THE SAID DECISION HAS OBSERVED THAT THE QUESTION WHETHER NOTIONAL INTEREST SHOULD BE ADDED WHILE DETERMINING ANNUAL VALUE U/S.23(1)(A) WAS LEFT OPEN AND THEREFO RE THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF J.K. INVES TORS (SUPRA) WOULD NOT APPLY. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT CANNOT BE ADDED TO T HE ACTUAL RENT RECEIVED FOR THE PURPOSE OF DETERMINING ANNUAL VALUE U/S.23(1)(A ) OF THE ACT. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE IS IN APPEA L BEFORE THE TRIBUNAL. 4. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED D.R . WHO RELIED ON THE ORDER OF THE AO. THE ISSUE RAISED BY THE REVENUE I N THIS APPEAL IS NO LONGER RES INTEGRA AND HAS BEEN DECIDED BY THE FULL BENCH OF THE HONBLE DELHI HIGH COURT. IN CIT VS.MONI KUMAR SUBBA IN ITA NO.499 OF 2008 WITH ITA NO.803 OF 2007 ITA NO.1113 OF 2008 ITA NO.388 OF 2010 I TA NO.516 OF 2010 ITA NO.1034 OF 2010 & ITA NO.1240 OF 2010 JUDGMENT DATE D 30.3.201 THE FACTS BEFORE THE FULL BENCH OF THE HONBLE DELHI HIGH CO URT WERE THE ASSESSEE LET OUT HOUSE PROPERTY FOR WHICH SHE RECEIVED A RENT OF RS. 6.95 LAKHS AND AN INTEREST-FREE SECURITY DEPOSIT OF RS. 10.78 CRORES. THE PROPERTY WAS NOT SUBJECT TO THE RENT CONTROL ACT. THE AO HELD THAT I N COMPUTING THE ANNUAL RENT U/S 23(1)(A) THE NOTIONAL INTEREST ON THE SEC URITY DEPOSIT (RS. 30.41 ITA NO.4191/MUM/07(A.Y. 2001-02) 4 LAKHS) HAD TO BE ADDED. THIS WAS REVERSED BY THE CI T (A) & TRIBUNAL. ON APPEAL BY THE DEPARTMENT THE MATTER WAS REFERRED TO A FULL BENCH . THE FULL BENCH HELD: (I) S. 23 (1)(A) REQUIRES DETERMINATION OF THE FA IR RENT BEING THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE AO HAS TO MAKE AN INQUIRY AS TO WHAT WOU LD BE THE POSSIBLE RENT THAT THE PROPERTY MIGHT FETCH. IF HE FINDS THA T THE ACTUAL RENT RECEIVED IS LESS THAN THE FAIR/MARKET RENT BECAUSE THE ASSESSEE HAS RECEIVED ABNORMALLY HIGH INTEREST FREE SECURITY DEP OSIT HE CAN UNDERTAKE NECESSARY EXERCISE IN THAT BEHALF. HOWEVE R BY NO STRETCH OF IMAGINATION THE NOTIONAL INTEREST ON THE INTEREST FREE SECURITY CAN BE TAKEN AS DETERMINATIVE FACTOR TO ARRIVE AT THE FAI R RENT . S. 23(1)(A) DOES NOT MANDATE THIS; (II) THE ALV FIXED BY THE MUNICIPAL AUTHORITIES CAN BE THE BASIS OF ADOPTING THE ALV FOR PURPOSES OF S. 23 BECAUSE THE PROVISIONS IN THE DELHI MUNICIPAL CORPORATION ACT FOR FIXING ALV ARE PARI MATERIA WITH S. 23. HOWEVER THE AO CAN IGNORE THE MUNICIPAL VALUAT ION FOR DETERMINING THE ALV IF HE FINDS THAT THE SAME IS NO T BASED ON RELEVANT MATERIAL FOR DETERMINING THE FAIR RENT IN THE MAR KET AND THERE IS SUFFICIENT MATERIAL ON RECORD FOR TAKING A DIFFEREN T VALUATION; (III) IN DETERMINING THE REASONABLE/FAIR RENT EXTR ANEOUS CIRCUMSTANCES MAY INFLATE/DEFLATE THE FAIR RENT. VARIOUS CIRCUM STANCES CAN BE TAKEN INTO CONSIDERATION BY THE AO WHILE DETERMINING THE FAIR RENT THOUGH NO PARTICULAR TEST CAN BE LAID DOWN AND IT WOULD DEPEN D ON FACTS OF EACH CASE. SIMILAR VIEW HAS BEEN EXPRESSED BY THE HONBLE BOMB AY HIGH COURT IN THE CASE OF M.V. SONAVALA VS. CIT 177 ITR 246 (BOM) IN THE CONTEXT OF SEC.22 OF THE ACT AND SMITABEN N. AMBANI VS. CWT 323 ITR 104 (BOM) IN THE CONTEXT OF RULE 1BB TO THE WEALTH TAX RULES WHICH USES THE SAME EXPRESSION THE SUM FOR WHICH THE PROPERTY MIGHT BE REASONABLY EXPE CTED TO LET FROM YEAR TO YEAR AS IS FOUND IN SEC.23(1)(A) OF THE ACT. IT H AS BEEN HELD IN THE AFORESAID CASES THAT RATEABLE VALUE AS DETERMINED BY THE MUNI CIPAL AUTHORITIES SHALL BE THE YARDSTICK TO DETERMINE THE SUM FOR WHICH THE PR OPERTY MIGHT BE REASONABLY EXPECTED TO LET FROM YEAR TO YEAR. ITA NO.4191/MUM/07(A.Y. 2001-02) 5 5. IN THE PRESENT CASE THE ACTUAL RENT RECEIVED IS MUCH MORE THAN THE MUNICIPAL VALUATION AND THEREFORE THE PROVISIONS OF SEC.23(1)(B) OF THE ACT WOULD BE APPLICABLE. THE AO HOWEVER DETERMINED ANN UAL VALUE BY ADDING TO THE ACTUAL RENT RECEIVED NOTIONAL RENT ON INTEREST FREE SECURITY DEPOSIT AND ARRIVED AT ANNUAL VALUE U/S.23(1)(A) OF THE ACT. S UCH A COURSE IS NOT PERMISSIBLE AND IT IS ONLY THE MUNICIPAL VALUE WHIC H WILL BE RELEVANT FOR DETERMINING ANNUAL VALUE U/S.23(1)(A) OF THE ACT. THUS THE ACTION OF THE AO WAS NOT IN CONFORMITY WITH THE LAW ON THE ISSUE AS LAID DOWN IN THE CASES REFERRED TO ABOVE. WE THEREFORE CONFIRM THE ORDER OF THE CIT(A) AND DISMISS THE APPEAL BY THE REVENUE. 6. IN THE RESULT THE APPEAL BY THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 9 TH DAY OF SEPT. 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 9 TH SEPT.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RE BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.4191/MUM/07(A.Y. 2001-02) 6 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 5/9/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 6/9/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. A PPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER