2022 (1) TMI 779 - AT - Income Tax

Income from House Property - as per the lease and licence agreement the property was let out for a monthly rent and the assessee has received interest free refundable security deposit - whether the departmental authorities can substitute the actual rent received by the assessee by computing notional rent? - HELD THAT - In case of J.K. Investors (Bom) Ltd 1999 (7) TMI 675 - ITAT MUMBAI the Tribunal has held that the benefit of the security deposit does not accrue to the lessor at the time of receipt but only on utilization of the same. The Bench observed when the income derived on utilization of the security deposit is otherwise taxable there is no justification to hold that the assessee received the security deposit anticipating that certain benefit would be received. See case of CIT vs Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT . In case of Shri Owais Hussain vs ITO 2018 (5) TMI 1817 - ITAT MUMBAI has followed the decision of Hon ble High Court in case of Tip Top Typography (supra) and has directed the assessing officer to compute the deemed rent as per municipal rateable value. The Hon ble Court has held that based on cogent material the assessing officer must come to a definite conclusion that parties have concealed the real position. The Hon ble Court has further held that Municipal rateable value cannot be discarded straightaway unless there is cogent and reliable material to do so. Thus the ratio that follows from the aforesaid decisions is the assessing officer cannot determine notional rent based on estimation / guess work. In the facts of the present appeal the assessee has furnished the municipal rateable value which is much less than the rental income offered - AO has not brought any concrete evidence on record to demonstrate that parties have concealed the real position. That being the case no further addition can be made to the rental income by computing notional rent based on the interest free security deposit. In view of the aforesaid we delete the addition made by the assessing officer. - Decided in favour of assessee. Disallowance u/s 14A - HELD THAT - As emerging from record reveals that during the year under consideration the assessee has not earned any exempt income. Therefore in absence of any exempt income earned by the assessee no disallowance under section 14A r.w.r.8D can be made. This is a fairly well settled legal principle enunciated in a number of judicial precedents including the decision of the Hon ble jurisdictional High Court in case of Principal Commissioner of Income-tax vs M/s Ballarpur Industries Ltd 2016 (10) TMI 1039 - BOMBAY HIGH COURT . Disallowance of interest expenditure - from the material on record as found that the entire borrowings were from related parties and the assessee was used as a conduit for availing the loan from Mercator Ltd and lending to AHM Investments Pvt Ltd thus alleging that the assessee was unable to establish that the interest expenditure was incurred for the purpose of business - HELD THAT - The factual matrix clearly reveal that before the departmental authorities the assessee failed to furnish any evidence to demonstrate that the interest expenditure claimed as deduction was incurred for the purpose of business. This the factual position remains unaltered even before us. The onus is entirely on the assessee to establish on record that the interest expenditure claimed as deduction was incurred for the purpose of business. The assessee having failed to do so the claim cannot be allowed. Accordingly we do not find any reason to differ with the view expressed by the learned first appellate authority. This ground is dismissed.

Summary

Issues Involved:
1. Addition of Rs. 55 lakhs as 'Income from House Property'.
2. Disallowance of expenditure under section 14A read with rule 8D.
3. Disallowance of interest expenditure amounting to Rs. 3,15,03,366/-.

Issue-wise Detailed Analysis:

1. Addition of Rs. 55 lakhs as 'Income from House Property':

The assessee challenged the addition of Rs. 55 lakhs as 'Income from House Property'. The facts revealed that the assessee, a logistics service provider, declared a loss and computed book profit at Nil under section 115JB. The assessing officer noticed a discrepancy in the rental income from a property let out at Rs. 50,000 per month with a refundable deposit of Rs. 5 crores. The officer, after verifying the market rent, issued a show-cause notice to the assessee to explain why 10% of the refundable deposit should not be added back to the rent. Despite objections, the officer computed the rental income at Rs. 5 lakhs per month for 11 months and determined the net income from house property at Rs. 38,50,000/-. The Commissioner (Appeals) confirmed this addition.

The Tribunal considered the rival submissions and reviewed the decisions cited by the assessee, including J.K. Investors (Bom) Ltd vs Dy.CIT, CIT vs Tip Top Typography, and CIT vs Moni Kumar Subba. The Tribunal emphasized that notional interest cannot form part of actual rent and that the municipal ratable value should be considered unless there is cogent evidence to suggest otherwise. The Tribunal noted that the assessing officer did not provide concrete evidence of concealed real position by the parties and thus deleted the addition made by the assessing officer.

2. Disallowance of expenditure under section 14A read with rule 8D:

The assessee challenged the disallowance of expenditure under section 14A read with rule 8D. The Tribunal observed that the assessee did not earn any exempt income during the year under consideration. Citing the legal principle established in the case of Principal Commissioner of Income-tax vs M/s Ballarpur Industries Ltd, the Tribunal held that in the absence of any exempt income, no disallowance under section 14A r.w.r.8D can be made. Consequently, the Tribunal deleted the addition made by the assessing officer.

3. Disallowance of interest expenditure amounting to Rs. 3,15,03,366/-:

The assessee also challenged the disallowance of interest expenditure amounting to Rs. 3,15,03,366/-. The assessing officer found that the borrowings were from related parties and alleged that the assessee acted as a conduit for availing and lending loans. The officer disallowed the interest expenditure on the grounds that the assessee could not establish that the expenditure was incurred for business purposes. The Commissioner (Appeals) confirmed the disallowance but granted partial relief by reducing an amount already disallowed under section 14A r.w.r.8D.

The Tribunal upheld the disallowance, noting that the assessee failed to furnish evidence to demonstrate that the interest expenditure was incurred for business purposes. The Tribunal emphasized that the onus was on the assessee to establish the business purpose of the interest expenditure, which the assessee failed to do. Thus, the Tribunal found no reason to differ with the view of the first appellate authority and dismissed this ground.

Conclusion:

The appeal was partly allowed, with the Tribunal deleting the additions related to 'Income from House Property' and disallowance under section 14A r.w.r.8D, but upholding the disallowance of interest expenditure. The order was pronounced on 18/11/2021.