2005-VIL-376-ITAT-MUM

Equivalent Citation: [2006] 7 SOT 609 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NOS. 4620 AND 4621 (MUM.) OF 1996 AND 1294 (MUM.) OF 1997

Date: 20.07.2005

DEPUTY COMMISSIONER, SPECIAL RANGE-22

Vs

SHRIPAL S. MORAKHIA

BENCH

 K.K. BOLIYA AND MS. SUSHMA CHOWLA, JJ.

JUDGMENT

Sushma Chowla, Judicial Member. - This appeal by the revenue is against the order of the CIT(A)XX dated 25-4-1994, 24-4-1995 and 27-12-1996 for assessment years 1991-92, 1992-93 and 1993-94 respectively. Since all these appeals relating to the same assessee were heard on the same date, hence being decided by a consolidated order.

2. The only issue in assessment year 1991-92 and the first ground of appeal in assessment years 1992-93 and 1993-94 raised by the revenue is regarding direction of the CIT(A) who has erred in directing the Assessing Officer to accept Rs. 7,000 as income from property of Prithvi Apartment as against Annual Value determined at Rs. 13,65,475 by the Assessing Officer.

3. The facts of the case are that during the year under consideration the assessee had purchased a flat at Prithvi Apartment, Altamount Road measuring 2242 Sq.ft. for a total consideration of Rs. 1 crore from Mr. M.B. Kapadia. The assessee leased out the said flat to M/s. Oman International Bank on leave and license basis on monthly lease rental of Rs. 7,000 with effect from 1st day of October, 1990. The assessee also received interest-free security deposit amounting to Rs. 30 lakhs from the Bank which is refundable at the time of vacation of the flat premises. The assessee had shown income of Rs. 42,000 in assessment year 1991-92 for a period of six months and Rs. 84,000 in assessment years 1992-93 and 1993-94 for the period of 12 months each under the head ‘Business income’. The Assessing Officer questioned the determination of annual value of the property as according to him the cost of acquisition of the flat being about Rs. 1 crore, the income shown by the assessee was low and also was not assessable as business income but income from house property.

4. The Assessing Officer during the assessment proceedings has questioned the determination of annual value of the property by invoking the provisions of section 23 of the IT Act. The Assessing Officer held that as per section 23 the annual value of the property is the sum for which the property may be expected to be let out or the actual rent received by the assessee, whichever is higher. For working out the standard or fair rent the Assessing Officer rejected the Municipal Rateable Value received being too low and the Actual Rent received was also too low. He worked out the annual value of the property by applying 12 per cent return on the cost of the property being Rs. 1,13,78,961 including the furniture and worked out the ALV at Rs. 13,65,475. The CIT(A) following the decision of Hon’ble Calcutta High Court in the case of CIT v. Prabhavati Bansali [1983] 141 ITR 419 and decision of Hon’ble Bombay High Court in the case of M.V. Sonawala v. CIT [1989] 177 ITR 246 held that the assessee was not looking for a higher rent but was interested in accretion of value, and the said rent of Rs. 7,000 was directed to be adopted for working out the annual letting out value.

5. Revenue is aggrieved and hence this appeal.

6. The Ld. Departmental Representative placed strong reliance on the order of the Assessing Officer and argued that the assessee had purchased the property for about Rs. 1 crore during the year and gave the same on Leave licence basis to M/s. Oman International Bank on a monthly lease of Rs. 7,000 which is very less as compared to the return on the investment made by the assessee. He further argued that for the determination of annual letting value by adopting 12 per cent return in investment made is the correct method and the same should have been adopted.

7. The AR for the assessee submitted that along with monthly lease of Rs. 7,000 received by the assessee from M/s. Oman International Bank interest-free security of Rs. 30 lakhs was also received by the assessee at the start of the agreement. He further submitted that under the provisions of section 23 of the Income-tax Act the basis for working out the annual letting value is either Municipal Rateable Value or actual rent received by the assessee, whichever is more. The property purchased by the assessee is an old building and not a new construction and he also furnished certificate from Prithvi Apartment Co-operative Hsg. Society Ltd. stating that the annual rateable value of the flat is Rs. 10,875 and the lease rent received is Rs. 42,000 for assessment year 1991-92 and Rs. 84,000 for assessment years 1992-93 and 1993-94. As per section 23 of Income-tax Act, higher of the two is to be adopted as ALV of the property and the assessee has correctly shown the same at Rs. 42,000, and Rs. 84,000 respectively. He further placed reliance on the decision of Hon’ble Calcutta High Court in the case of Prabhavati Bansali (supra), and brought to our attention the fact that the property in consideration in the said decision is situated in Bombay and the Hon’ble Calcutta High Court had considered the provisions of Bombay Municipal Act before deciding the issue of determination of annual letting value. He placed reliance on the decision of Jurisdictional High Court in the case of M.B. Sonawala (supra). He also relied on the decision of Mumbai Bench of the Tribunal in the case of Bhargava Estates P. Ltd. in IT Appeal Nos. 2242 and 2203 (Mum.) of 2001 for assessment years 1996-97 and 1997-98 dated 18th July, 2002, wherein on similar facts the Tribunal has held that the rateable value determined by the Municipal authorities should be adopted as the ALV of the property.

8. We have heard the rival submissions and perused the material on record. During the course of assessment the Assessing Officer has not brought on record any material to prove that the rent received by the assessee is hypothetical except alleging that the rent received is very low considering the high investment made by the assessee in the purchase of the said flat. The Municipal rateable value has also been brushed aside by the Assessing Officer being too low. There is no doubt about the fact that the property being rented is situated in Mumbai and is governed by the Bombay Rent Control Act and the Mumbai Municipal Corporation Act. For the purpose of determining the annual value of the property recourse is to be made to section 23 of the Income-tax Act. The provisions and the applicability of the Bombay Municipal Corporation Act and the determination of rateable value has been elaborately considered by their Lordships of Calcutta High Court in the case of Prabhavati Bansali (supra) wherein the provisions of Bombay Municipal Corporation Act has been deliberated upon as the property in question is situated in Mumbai and it has been held that for determining the annual value of the property reference is to be made to the rateable value as determined by the Municipal Corporation. Their Lordships of Hon’ble Bombay High Court in the case of M.V. Sonawala (supra) following decision of Hon’ble Calcutta High Court and also Hon’ble Supreme Court in the case of Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 and Dr. Balbir Singh v. M.C.D. [1985] 152 ITR 388 held that :

"the income from house property has to be computed on the basis of the sum for which the property might reasonably be let from year to year or the annual municipal rateable value."

A similar view has been taken by Mumbai Tribunal in the case of Bhargava Estates P. Ltd. (supra).

9. The assessee has filed a certificate from Prithvi Apartment Co-operative Hsg. Society stating that the annual value of the flat is Rs. 10,875 but no corresponding documents from the Mumbai Municipality has been filed on record. Following the decision of Hon’ble Supreme Court and the High Courts of Calcutta and Bombay, we agree that for determining the annual value of property, the adoption of Municipal Rateable Value is the correct method and in cases where the actual rent received is higher than the Municipal Rateable Value, the rent so received is to be adopted as Annual Letting Value of the property. In the circumstances we direct the Assessing Officer to verify the annual rateable value of the flat as per the Bombay Municipal Corporation Act and adopt the annual letting value of the said flat being the actual rent received by the assessee or the Municipal Rateable Value whichever is higher.

10. This ground of appeal raised by the revenue for the assessment years 1991-92, 1992-93 and 1993-94 stands rejected.

11. The second ground of appeal in assessment years 1992-93 and 1993-94 is that the CIT(A) has erred in holding that no interest is disallowable on the ground that Assessing Officer has not established any nexus between loans and advances without appreciating the facts that disallowance were made under section 40A(2).

12. The assessee had advanced loans to its sister concern at the rate of 18 per cent whereas loans had been obtained from M/s. SSKI Pvt. Ltd. and Aroh Trading Pvt. Ltd. another sister concern of the assessee at the rate of 24 per cent and 30 per cent respectively. The Assessing Officer invoking the provision of section 40A(2)(b) disallowed the excess interest payment as the loans had been obtained at a higher rate but had been advanced at a lower rate to the sister concern. The CIT(A) deleted the addition as no nexus had been established between the borrowings and advances made and according to him the assessee may have borrowed the funds on emergency basis at a higher rate of interest but the utilization of the same for advancing the loan is not established.

13. The revenue is aggrieved and hence this appeal.

14. The Ld. Departmental Representative submitted that the assessee is a sharebroker and has borrowed interest bearing funds at the rate of 24 per cent and 30 per cent and advanced loans to its sister concern at the rate of 18 per cent. He placed strong reliance on the order of the Assessing Officer and pointed that even before the CIT(A) no explanation has been filed to prove that the loans advanced during the year are not out of borrowed funds obtained at high rate of interest. The Ld. Authorised Representative submitted that the assessee has not only obtained loan at the rate of 30 per cent but also advanced loan at the rate of 30 per cent and he claimed that no interest should be disallowed on such transaction. He further submitted that there is no nexus between other borrowings made at higher rate of interest but advanced at lower rate of interest. In any case the borrowings at higher rate of interest were made for business purposes when the bank limits were exhausted.

15. We have heard the rival submissions. In the facts and circumstances of the case the fact that there is direct nexus between the borrowings made at higher rate of interest and advanced at lower rate of interest has not been established during the assessment proceedings. Similarly the fact that certain borrowings were made at the rate of 30 per cent and also advanced at the same rate has not been verified by the Assessing Officer. Therefore, in the light of principles of natural justice we deem it fit to restore the matter to the file of the Assessing Officer to verify the contentions of the assessee w.r.t. borrowings and advances made during the year under consideration. In case of establishment of direct nexus between the borrowings at higher rate of interest and advances at lower rate of interest the proportionate interest is to be disallowed. In case the borrowings and advances bear the same rate of interest or the advances are not out of such borrowings at high rate of interest, no interest is to be disallowed and the same may be verified by the Assessing Officer after affording a fair and proper opportunity to the assessee. Therefore, this ground of appeal of the revenue is allowed.

16. In the result, the appeal for assessment year 1991-92 is dismissed and that of assessment years 1992-93 and 1993-94 is partly allowed.

 

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