A.H. MAHESHWARI (HUF), MUMBAI v. ITO 14(2)(1), MUMBAI

1 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES G BEFORE SHRI P.M. JAGTAP A.M. AND SHRI N.V. VASUDEV AN JM ITA NOS. 4953/MUM/ ASSESSMENT YEAR 2005-06 A.H. MAHESHWARI (HUF) 402 DALAMAL CHAMBERS 29 NEW MARINE LINES MUMBAI 400 020. PAN AAGHA 4346M VS. THE ITO- 14(2)(1) 3 RD FLOOR EARNEST HOUSE NARIMAN POINT MUMBAI. 21 APPELLANT RESPONDENT APPELLANT BY SHRI SAMEER DALAL RESPONDENT BY MRS. MALATI SHRIDHARAN ORDER PER P.M. JAGTAP A.M. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF LD. CIT(A) XIV MUMBAI DATED 5.6.09 WHEREBY HE SUSTAINED THE ADDITI ON MADE BY THE A.O. ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT TO DETERMINE THE ANNUAL VALUE U/S 23(1)(A). 2. THE ASSESSEE IN THE PRESENT CASE IS AN HUF WHICH DERIVES INCOME INTER ALIA FROM HOUSE PROPERTY. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 31.10.05 DECLARING TOTAL INCOME OF ` 2 43 620/-. IN THE SAID YEAR THE ASSESSEE HAD LE T OUT HIS FLAT AT JOLLY MAKER APARTMENT CUFFE PARADE MU MBAI TO M/S STANDARD CHARTERED BANK FOR A PERIOD OF 33 MONTHS COMMENCING FROM IST MAY 2002. AS PER THE LEASE AGREEMENT MONTHLY RENT WAS FIXED AT ` 20 000/- AND THE ASSESSEE HAD RECEIVED INTEREST FREE SECURITY DEPOSIT OF ` 80 LACS. ACCORDING TO THE A.O. CONSIDERING THE SI ZE OF ASSESSEES FLAT AND ITS LOCATION THE RENT CHARGED WAS ON A VERY LOWER SIDE AND THE SHORTFALL 2 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF IN RENT WAS CONVENIENTLY COMPENSATED BY TAKING HUGE INTEREST FREE SECURITY DEPOSIT. HE THEREFORE REQUIRED THE ASSESSEE TO EXPLAIN AS TO WH Y NOTIONAL INTEREST ON THE SECURITY DEPOSIT SHOULD NOT BE TAKEN INTO CONSIDERATION WHIL E DETERMINING THE ANNUAL VALUE OF THE PROPERTY AS PER THE PROVISIONS OF SECTION 23(1)(A). IN REPLY A DETAIL SUBMISSION WAS FILED BY THE ASSESSEE BEFORE THE A.O. IN SUPPORT OF HIS C ASE THAT NOTIONAL INTEREST ON SECURITY DEPOSIT COULD NOT BE TAKEN INTO CONSIDERATION WHILE DETERMINING THE ANNUAL VALUE OF THE PROPERTY U/S 23(1)(A). IN THE SAID SUBMISSION REL IANCE WAS ALSO PLACED BY THE ASSESSEE ON THE VARIOUS JUDICIAL PRONOUNCEMENTS INCLUDING THE D ECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. J.K. INVESTORS (BOMBAY ) LTD. REPORTED IN 248 ITR 723. THE A.O. DID NOT FIND MERIT IN THE STAND TAKEN BY THE A SSESSEE ON THIS ISSUE AND DISCUSSING THIS MATTER ELABORATELY IN THE LIGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS HE HELD THAT NOTIONAL INTEREST ON SECURITY DEPOSIT HAS A DEFINITE ROLE TO PLAY IN DETERMINING THE SUM OF RENT FOR WHICH PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR AS ENVISAGED IN SECTION 23(1)(A). ACCORDINGLY HE WORKED OUT SUCH N OTIONAL INTEREST AT ` 9 60 000/- BEING 12% ON ` 80 LACS AND ADDED THE SAME TO THE RENT ACTUALLY RE CEIVED BY THE ASSESSEE TO DETERMINE THE ANNUAL VALUE OF THE ASSESSEES PROPER TY. ON APPEAL THE LD. CIT(A) UPHELD THE ACTION OF THE A.O. ON THIS ISSUE IN PRINCIPLE. HE HOWEVER HELD THAT INTEREST RATE OF 12% ADOPTED BY THE A.O. FOR WORKING OUT THE NOTIONA L INTEREST WAS ON THE HIGHER SIDE AND RESTRICTED THE SAME TO 7%. THE ADDITION MADE BY TH E A.O. ON THIS ISSUE THUS WAS PARTLY SUSTAINED BY HIM. AGGRIEVE BY THE ORDER OF THE LD. CIT(A) THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED D.R. HAS MAINLY RE LIED ON THE THIRD MEMBER DECISION OF THE TRIBUNAL IN THE CASE OF ITO VS. BECKER TECHNICA L SERVICES PVT. LTD. 126 TTJ 455 IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. THE LE ARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HAND HAS RELIED ON THE DECISION OF DIVISION BENCH OF THIS TRIBUNAL IN THE CASE OF M/S RECLAMATION REALTY (I) PVT. LTD. PASSED IN ITA NO. 1411 TO 1413 1733 & 1434/MUM/07 DATED 26.6.10 IN SUPPORT OF THE ASSESSE ES CASE ON THIS ISSUE. HE HAS ALSO 3 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF FILED A COPY OF THE SAID ORDER AND A PERUSAL OF THE SAME SHOWS THAT THE THIRD MEMBER DECISION IN THE CASE OF THE BECKER TECHNICAL SERVIC ES PVT. LTD. (SUPRA) HAS BEEN TAKEN INTO CONSIDERATION BY THE DIVISION BENCH WHILE DECI DING A SIMILAR ISSUE IN FAVOUR OF THE ASSESSEE IN THAT CASE. 4. AS ALREADY MENTIONED THE A.O. AS WELL AS THE LD . CIT(A) HAS RELIED ON THE PROVISIONS OF SECTION 23(1)(A) TO TAKE THE ANNUAL V ALUE OF THE ASSESSEES PROPERTY AT A HIGHER AMOUNT THAN THE RENT ACTUALLY RECEIVED BY TH E ASSESSEE HOLDING THAT THE SAME REPRESENTED THE SUM FOR WHICH THE PROPERTY OF THE ASSESSEE MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. IT IS PERTINENT TO NOTE HERE THAT AS PER THE RELEVANT PROVISIONS OF SECTION 23(1) AS APPLICABLE UP TO A.Y. 1975-76 THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR ALO NE REPRESENTED ACTUAL VALUE OF THE PROPERTY FOR THE PURPOSE OF COMPUTING INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THEREAFTER AMENDMENT WAS MADE AND AS PE R THE AMENDED PROVISIONS OF SECTION 23(1)(B) MADE APPLICABLE FROM A.Y. 1976-77 THE ACTUAL RENT RECEIVED WAS TREATED TO REPRESENT THE ANNUAL VALUE PROVIDED IT EXCEEDS T HE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. T HE LEGISLATIVE INTENTION OF THE SAID AMENDMENT WAS EXPLAINED BY CBDT IN CIRCULAR NO. 204 DTD. 24.7.76 AND AFTER TAKING NOTE OF THE SAID CIRCULAR AND AFTER REPRODUCING THE RELEVANT PORTION THEREOF IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. L TD. (SUPRA) THE TRIBUNAL HELD THAT THE POSITION OF LAW PRIOR TO INTRODUCTION OF SECTION 23 (1)(B) AS CLARIFIED BY THE BOARD ITSELF WAS THAT THE ANNUAL VALUE WAS EQUAL TO THE MUNICIPA L VALUATION OF THE PROPERTY. THE TRIBUNAL HELD THAT THIS IS HOW THE BOARD SOUGHT TO INTERPRET THE EXPRESSION THE SUM FOR WHICH THE PROPERTY MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR USED IN SECTION 23(1)(A). 5. THE TRIBUNAL ALSO TOOK NOTE OF THE DECISION OF H ONBLE SUPREME COURT IN THE CASE OF DIWAN DAULAT KAPOOR VS. NEW DELHI MUNICIPAL COMM ITTEE 122 ITR 700 (SC) WHEREIN THE QUESTION THAT HAD ARISEN FOR CONSIDERATION WAS AS TO WHAT SHOULD BE THE BASIS OF 4 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF DETERMINING THE ANNUAL VALUE FOR THE PURPOSE OF LEV Y OF PROPERTY TAX. THE EXPRESSION ANNUAL VALUE AS DEFINED IN THE DELHI MUNICIPAL CO RPORATION ACT 1957 AND PUNJAB MUNICIPAL ACT 1911 WAS GROSS ANNUAL RENT AT WHICH SUCH HOUSE OF BUILDING MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE HONBLE SUPREME COURT HELD THAT THE ANNUAL VALUE IS ALWAYS RENT REALIZABLE BY LANDL ORD AND THAT ACTUAL RENT IS ONLY AN INDICATOR WHAT THE LANDLORD MIGHT REASONABLY EXPECT TO GET FROM A HYPOTHETICAL TENANT. THE HONBLE SUPREME COURT FURTHER HELD THAT WHERE T ENANCY IS SUBJECT TO RENT CONTROL LEGISLATION STANDARD RENT WOULD BE A PROPER MEASUR E AND IN ANY EVENT ANNUAL VALUE CANNOT EXCEED SUCH STANDARD RENT. 6. THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. ALSO TOOK NOTE OF THE DECISION OF THE HONBLE SUPRE ME COURT IN THE CASE OF MRS. SHEILA KAUSHISH VS. CIT 131 ITR 435 (SC) WHEREIN THE QUES TION AROSE IN THE CONTEXT OF PROVISIONS OF SECTION 23 OF THE INCOME TAX ACT AND IT WAS HELD BY THE HONBLE SUPREME COURT THAT THE RATIO OF ITS DECISION IN THE CASE OF DEWAN DAULAT RAI KAPOOR (SUPRA) WOULD BE EQUALLY APPLICABLE IN INTERPRETING THE DEFINITIO N OF ANNUAL VALUE GIVEN IN SECTION 23(1) OF THE INCOME TAX ACT. IT WAS HELD THAT THESE DEFINITIONS ARE GIVEN IN IDENTICAL TERMS AND IT WAS IMPOSSIBLE TO DISTINGUISH THE DEFI NITION OF ANNUAL VALUE GIVEN IN SECTION 23(1) OF THE INCOME TAX ACT FROM THE DEFINI TION OF THAT TERM GIVEN IN THE DELHI MUNICIPAL CORPORATION ACT 1957 AND THE PUNJAB MUNIC IPAL ACT 1911. IT WAS THEREFORE HELD ADOPTING IDENTICAL LINE OF REASONING THAT EVEN IF THE STANDARD RENT OF A BUILDING HAS NOT BEEN FIXED BY THE CONTROLLER THE ANNUAL VALUE OF THE BUILDING AS PER SECTION 23(1) OF THE INCOME TAX ACT MUST BE HELD TO BE A STANDARD RE NT DETERMINABLE UNDER THE PROVISIONS OF THE RENT CONTROL ACT AND NOT THE ACTUAL RENT REC EIVED BY THE LANDLORD FROM THE TENANT. THE HONBLE APEX COURT ALSO OBSERVED THAT THIS INTE RPRETATION WHICH WAS BEING PLACED ON THE LANGUAGE OF SECTION 23(1) OF THE INCOME TAX ACT CAN BE SAID TO HAVE RECEIVED LEGISLATIVE APPROVAL BY THE AMENDMENT MADE IN THE SAID PROVISIONS WHEREBY IT WAS PROVIDED IN SECTION 23(1)(B) THAT WHERE THE PROPERT Y IS LET AND THE ANNUAL RENT RECEIVED OR RECEIVABLE BY THE OWNER IN RESPECT THEREOF IS IN EX CESS OF THE SUM FOR WHICH THE PROPERTY 5 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF MIGHT REASONABLY BE EXPECTED TO LET FROM YEAR TO YE AR THE AMOUNT SO RECEIVED OR RECEIVABLE SHALL BE DEEMED TO THE ANNUAL VALUE OF T HE PROPERTY. 7. THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) THEN WENT ON TO REFER TO THE DECISION OF HO NBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. PRABHABATI BANSALI 141 ITR 419 WHEREI N IT WAS HELD THAT RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F DEWAN DAULAT RAI KAPOOR (SUPRA) AND MRS. SHEILA KAUSHISH (SUPRA) WHILE DECIDING THE ISSUE RELATING TO DETERMINATION OF ACTUAL VALUE OF THE ASSESSEES PROPERTY IN MUMBAI T HE INCOME FROM HOUSE PROPERTY MUST BE COMPUTED ON THE BASIS OF THE SUM WHICH MIGHT REA SONABLY BE EXPECTED TO LET FROM YEAR TO YEAR AND WITH THE ANNUAL MUNICIPAL VALUE PROVIDE D SUCH A VALUE IS NOT ABOVE THE STANDARD RENT RECEIVABLE AND THE SAME COULD BE ADOP TED AS THE SAFEST GUIDE FOR THIS PURPOSE. AS MENTIONED BY THE TRIBUNAL IN ITS ORDER PASSED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) THE SAID DECISION WAS RENDERED BY THE HONBLE CALCUTTA HIGH COURT AFTER TAKING INTO CONSIDERATION THE PROVISION S OF SECTION 154 OF THE BOMBAY MUNICIPAL CORPORATION ACT WHEREIN THE MANNER OF DET ERMINATION OF RATABLE VALUE WAS LAID DOWN WHICH WAS BASED ON THE ANNUAL RENT FOR WHICH T HE PROPERTY MIGHTY REASONABLY BE EXPECTED TO LET FROM YEAR TO YEAR. THE HONBLE CALC UTTA HIGH COURT HELD THAT THE MUNICIPAL VALUATION AND ANNUAL VALUE U/S 23(1)(A) O F THE INCOME TAX ACT THUS ARE ONE AND SAME. AS NOTED BY THE TRIBUNAL IN ITS ORDER PAS SED IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) THE SAID DECISION OF THE HON BLE CALCUTTA HIGH COURT IN THE CASE OF PRABHABATI BANSALI (SUPRA) HAS BEEN SUBSEQUENTLY FO LLOWED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF M.V. SONAVALA VS. CIT 177 ITR 246 (BOM) WHEREIN THE QUESTION POSED TO THEIR LORDSHIPS WAS WHETHER THE ACTUAL COM PENSATION RECEIVED COULD BE TAKEN AS ANNUAL VALUE OF THE PROPERTY AS AGAINST THE MUNI CIPAL RATABLE VALUE AND THE SAME WAS ANSWERED BY THE HONBLE BOMBAY HIGH COURT IN THE NE GATIVE THAT IS AGAINST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. 6 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF 8. IN OUR OPINION THE ISSUE INVOLVED IN THE PRESE NT CASE THUS IS SQUARELY COVERED BY THE DECISION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF RECLAMATION REALTY INDIA P. LTD. (SUPRA) WHICH IN TURN HAS RELIED ON AND FOL LOWED THE JUDGMENTS OF HONBLE APEX COURT AND JURISDICTIONAL HIGH COURT ON A SIMILAR IS SUE. WE THEREFORE RESPECTFULLY FOLLOW THE SAID JUDICIAL PRONOUNCEMENTS AND SET ASIDE THE IMPUGNED ORDER OF THE LD. CIT(A) SUSTAINING THE ADDITION MADE BY THE A.O. ON ACCOUNT OF NOTIONAL INTEREST ON INTEREST FREE SECURITY DEPOSIT FOR DETERMINING THE ANNUAL VALUE O F THE ASSESSEES PROPERTY AND DIRECT THE A.O. TO ADOPT THE RENT ACTUALLY RECEIVED BY THE ASS ESSEE AS ANNUAL VALUE OF THE PROPERTY BEING MORE THAN THE MUNICIPAL RATABLE VALUE. 9. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED ON 9 TH FEBRUARY 2011. SD/- SD/- (N.V. VASUDEVAN) (P.M. JAGTAP) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI DATED 9 TH FEBRUARY 2011. RK COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XIV - MUMBAI 4. THE CIT- 14 MUMBAI 5. THE DR BENCH G 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT MUMBAI 7 ITA 4953/MUM/09 A.H. MAHESHW ARI HUF DATE INITIALS 1 DRAFT DICTATED ON 1.2.11 SR. PS 2 DRAFT PLACED BEFORE THE AUTHOR 2.2.11 SR. PS 3 DRAFT PLACED BEFORE THE SECOND MEMBER 4 APPROVED DRAFT COMES TO THE SR. PS SR. PS 5 KEPT FOR PRONOUNCEMENT ON SR. PS 6 FILE SENT TO THE BENCH CLERK SR. PS 7 DATE ON WHICH FILE GOES TO THE HEAD CLERK 8 DATE ON WHICH FILE GOES TO THE AR 9 DATE OF DISPATCH OF ORDER