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2007 (1) TMI 211 - AT - Income TaxDetermination of ALV - let out a commercial space on an annual rent - interest-free security deposit - Income From House Property or Not - HELD THAT - In the instant case admittedly neither the assessee has given the annual letting value as determined under the provisions of Municipal Corporation Act or NDMC Act or under the Rent Control Act nor the Assessing Officer has determined the same u/s 23(1)(a) of the Act as observed in our order herein above hence we set aside the orders of tax authorities below and direct the Assessing Officer to recompute the ALV of the property-in term of section 23(1)(a) of the Act by considering the Municipal Valuation as per the MCD Act/By-Laws or NDMC Act/By-Laws or under Delhi Rent Control Act whichever is applicable in the instant case of the assessee and thereafter in case he finds the ALV of the property so determined to be higher than the actual rent declared by the assessee the rental income should be enhanced accordingly and in case he finds the rent declared by the assessee to be higher than the ALV so determined by the Assessing Officer then he should accept the same and should not make any addition in this regard. In the result the Ground No. 1 of the appeal filed by the assessee stands allowed partly for statistical purpose. Disallowance to personnel and administrative expenses - In the instant case since the assessee has furnished the complete details of expenses incurred by the assessee for the business of the assessee in our opinion the tax authorities below were not justified in making the ad hoc proportionate disallowance of these expenses without identifying any such expenditure having been incurred by the assessee for administrative and personnel purposes and more so when according to the assessee he was simply receiving rent from the tenant which was deposited in the bank account of the assessee for which it has not incurred any separate expenditure. Thus the ad hoc proportionate disallowance sustained by the CIT(A) in this regard cannot be upheld and therefore the order of CIT(A) in this regard is set aside and Ground No. 2 of the assessee s appeal is allowed. Disallowance of telephone expenses car expenses/depreciation - HELD THAT - We hold that the CIT(A) was not justified in upholding the order of Assessing Officer wherein a case of a company he disallowed the expenses claimed by the assessee-company with regard to telephone and car/depreciation treating the same to be of personal nature. Accordingly the order of CIT(A) in this regard is set aside and the disallowances sustained by the CIT(A) in this regard are deleted. Ground No. 3 of the assessee s appeal is allowed. In the result the appeal filed by the assessee is partly allowed.
Issues Involved:
1. Determination of Annual Letting Value (ALV) of the rented property. 2. Allocation of administrative and personnel expenses to property income. 3. Disallowance of telephone expenses and car expenses/depreciation. Issue-wise Detailed Analysis: 1. Determination of Annual Letting Value (ALV) of the Rented Property: The primary issue was whether the notional interest on the security deposit should be added to the actual rent received to determine the ALV of the property under section 23 of the Income-tax Act. The assessee had let out a commercial space with an annual rent of Rs. 25,30,800 and received an equivalent amount as interest-free security. The Assessing Officer added notional interest at 15% on the security deposit to the ALV, relying on the ITAT Bombay Bench decision in CIT v. Rati Agnihotri. The CIT(A) enhanced the ALV further by adopting notional rent at 15% on Rs. 25,30,800. The assessee contended that the security deposit was for covering risks and not for reducing rent. The assessee cited Supreme Court decisions in Godhra Electricity Co. Ltd. v. CIT and CIT v. Satya Co. Ltd., which did not recognize taxing notional income. The CIT(A), however, upheld the addition, citing cases like ITO v. Chem Mech (P.) Ltd. and Rakesh Aggarwal v. Asstt. CIT. The Tribunal noted that the Assessing Officer did not determine the ALV as per section 23(1)(a) by comparing it with the actual rent. The Tribunal emphasized that the ALV should be based on municipal valuation or standard rent under the Rent Control Act, not on notional interest. The Tribunal concluded that notional income from interest-free security deposits is not contemplated under section 23. Consequently, the Tribunal set aside the orders of the tax authorities and directed the Assessing Officer to recompute the ALV based on municipal valuation or rent control laws, without considering notional interest. The appeal on this ground was partly allowed for statistical purposes. 2. Allocation of Administrative and Personnel Expenses to Property Income: The Assessing Officer had allocated indirect expenses, including personnel and administrative expenses, to the property income, arguing that such expenses were related to earning rental income. The CIT(A) upheld this allocation, excluding financial expenses. The assessee argued that no such expenses were incurred specifically for managing the property and provided details of personnel and administrative expenses for the business. The Tribunal found that the tax authorities did not identify any specific expenses related to the property management and had made an ad hoc disallowance. The Tribunal held that without specific identification of expenses, such ad hoc disallowance was unjustified. Therefore, the Tribunal set aside the CIT(A)'s order and allowed the appeal on this ground. 3. Disallowance of Telephone Expenses and Car Expenses/Depreciation: The Assessing Officer disallowed 1/10th of the telephone and car expenses/depreciation, assuming personal use. The CIT(A) upheld this disallowance, relying on the Madras High Court decision in New Ambadi Estates (P.) Ltd. v. State of Tamil Nadu. The assessee cited the Gujarat High Court decision in Sayaji Iron & Engg. Co. Ltd. v. CIT and various Tribunal decisions, which held that no such disallowance could be made in the case of companies. The Tribunal agreed with the assessee, noting that in cases where there are conflicting High Court decisions, the one favorable to the assessee should be followed. The Tribunal set aside the CIT(A)'s order and deleted the disallowance of telephone and car expenses/depreciation. The appeal on this ground was allowed. Conclusion: The Tribunal's judgment addressed three primary issues: the determination of ALV without considering notional interest, the unjustified allocation of administrative and personnel expenses to property income, and the disallowance of telephone and car expenses/depreciation in the case of a company. The appeal was partly allowed, providing relief to the assessee on all three grounds.
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