TMI Blog2012 (12) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... from house property. Determination of annual value - income from house property - rental income from Ms. Snehal Jalan - Applicability of the provisions of Rent Control Act - held that:- The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities. Therefore, in our view, the provisions of Rent Control Act cannot be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. Deduction on account of municipal taxes @ 30% u/s 24(a) - held that:- municipal tax paid by the assessee will be allowable as deduction @ 30% while computing income from house property. As regards the portion let ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee during the year had credited the sum of Rs.4,52,000/- on account of rent which included rent of Rs.72,000/- on account of land. It was found that the assessee was owner of two flats at New Woodland Co-operative Housing Society admeasuring 5219.31 sq.ft. which had been let out at meager rent of Rs.3,80,000/- per annum. It was further found that the flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs.26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs.12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The AO asked the assessee to explain as to why rental income should not be assessed a house property income and that annual letting value (ALV) should not be computed on the basis of fair rental value in the market. The assessee submitted that the property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties. It was accordingly urged that the rental i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cording to the AO, annual value which is defined as sum for which property may be let out from year to year would be the fair rent available in the market. The AO therefore, assessed the fair rent at 125 per sq.ft. which gave annual value of Rs.78,28,965/- for the total area of 5219.31 sq.ft. Accordingly AO assessed the income from house property at Rs.54,80,275/- after reducing the statutory deduction @ 30% under section 34(a). 2.3 The assessee disputed the decision of AO and submitted before CIT(A) that the property was covered under Maharashtra Rent Control Act, 1999 and, therefore, ALV had to be taken as standard rent and therefore, the AO was not justified in taking the market rent. The assessee also argued that the rental income should have been assessed as business income. The assessee further argued that the AO was not justified in not allowing deduction on account of Municipal tax. CIT(A) after necessary examination of records noted that the rental income in assessment year 2005-06 had assessed as income from house property and no appeal had been filed by the assessee. CIT(A) observed that though rental income was assessed as business income till 2003-04, the principle o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of DCIT vs. Reclamation Reality India Pvt. Ltd. 2.5 The ld. DR on the other hand supported the orders of authorities below and argued that the rental income had been rightly assessed as house property income. As regards ALV, it was argued that since property had been let out to director/share holder who was controlling the company, it was only an arrangement to reduce tax and therefore the property could not be taken as covered under Rent Control Act. It was thus argued that the fair rental value has to be adopted as ALV and that municipal ratable value was not binding on the assessing authorities. Reliance was placed on the Third Member decision of the Tribunal in the case of Baker Investor Services (125 ITD 1) and on the full Bench judgment of the Hon'ble High Court of Delhi in the case of DCIT vs. Moni Kumar Subba (333 ITR 38). In regard to municipal tax, the ld. DR placed reliance on the orders of authorities below. 2.6 We have perused the records and considered the rival contentions carefully. The dispute relates to various facets of assessments of rental income from letting out of property such as nature of income, determination of annual value and allowability of deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in the period prior to 1.4.1976 when clause (b) was not in existence, the Hon'ble Supreme Court in the case of Mrs. Sheila Kaushish (131 ITR 475) had held that in case of properties covered under Rent Control Act standard rent determined or determinable under Rent Control Act would be the upper limit of the annual value as the properties in such cases could not be let beyond the rent fixed in the Rent Control Act. The same view has been taken by the Hon'ble Supreme Court earlier in the case of Dewan Daulat Rai vs. NDMC (122 ITR 700). These cases relate to property covered under Rent Control Act. In cases where properties are not covered under Rent Control Act, there is no limit fixed on the values for which a property may be let from year to year and, therefore in such cases the fair rent for which property may be let has to be considered as annual value. This aspect has been examined in detail in the Third Member decision of the Tribunal in the case of Baker Technical Services (P) Ltd. (126 TTJ(Mum.)(TM)455). In the said case the Tribunal referred to the judgment of Hon'ble Supreme Court in the case of Motichand Hirachand Ors vs. Bombay Municipal Corporation AIR 1968 SC AIR 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal in the case of Makrupa Chemicals (P) Ltd., it was an independent decision by the Third Member. The decision of the Third Member which has binding force of Special Bench was binding on the division Bench while dealing with case of Reclamation Reality India Pvt. Ltd.(supra) and was required to be followed. The division bench in case of Reclamation Reality India Pvt. Ltd.(supra), had not followed the Larger Bench decision after observing that the same was contrary to the judgment of Hon ble Jurisdictional High Court in the case of M.P. Sonavala (177 ITR 246). 2.9 We have carefully gone through the judgment of the High Court in case of M.O. Sonavala (supra), and we find that the same related to property covered under Rent Control Act. This is clear from the reference made to judgments of Supreme Court in case of Sheila Kaushish (supra) and Dewan Daulat Rai (supra), which related to properties covered under Rent Control Act. Even the judgment of Hon ble High Court of Calcutta in the case of CIT vs. Prabhabati Bansali (141 ITR 419) followed by the Hon'ble Jurisdictional High Court related to property covered under Rent Control Act which is clear from the discussion in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR for the assessee argued that since property had been let out to an individual, the same was not out of the purview of Rent Control Act as exclusion was available in case of property let out to banks or public sector undertakings or any corporation established by or under any state/central Act or foreign mission, international agencies, multinational companies and private/public limited companies having paid up share capital of Rs.1 crore or more. It has been submitted that since the property was covered under Rent Control Act, the standard Rent determined or determinable under Rent Control Act or actual rent received whichever is higher has to be taken as annual value. We are however unable to accept the arguments advanced. The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO also held that the assessee was not doing any business since long. He therefore, disallowed the claim of expenses which in appeal was confirmed by CIT(A) aggrieved by which the assessee is in appeal before the Tribunal. 3.1 Before us, Ld. A.R submitted that 65% of rental income being received from director was assessable as business income and only 35% of the rent received from the share holder could be assessed as house property income. It was therefore, argued that 65% of administrative expenses should be allowed. The Ld. DR on this issue placed reliance on the orders of authorities below. 3.2 We have perused the records and considered the matter carefully. The dispute is regarding allowability of administrative expenses of Rs. 2,71,705/-. The ld. AR submitted that since 65% of rental income received from the director was assessable as business income, 65% of administrative expenses should be allowed. We find the argument convincing and reasonable. We have already held that rental income from Ms. Rekha Jalan has to be treated as business income and therefore we direct the AO to allow 65% of the expenses. 4. The third dispute is regarding nature of interest income rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave perused the records and considered the matter carefully. The dispute is regarding nature of investment income received from ICDs and bill discounting. The authorities below have treated the interest income as income from other sources. The case of the assessee is that business of financing is one of the objects in the memorandum of association and the assessee had been undertaking these activities in an organized manner. Therefore income should be assessed as business income. We however find that in assessment year 2005-06 this aspect had been examined and the AO in the scrutiny assessment under section 143(3) had treated the income as income from other sources which was accepted by the assessee as no appeal was filed. Though in subsequent years the business income declared by the assessee has been accepted but those assessments were covered in summary scheme in which the AO was not empowered to take any view regarding computation of income and had to simply accept the returned income. Therefore, acceptance of business income under section 143(1) in subsequent years can not be taken as decision by authorities to accept the claim of the assessee. Though the ld. AR has referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
