TMI Blog2016 (4) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the provisions of section 22 and 23 of the Act and the principles laid down by the Hon’ble Bombay High Court in the case of Tip Top Typography (supra) after considering the additional evidences filed by the assessee in his defense. Addition on professional income - whether the assessee is liable to follow mercantile method of accounting in respect of income which has already been considered as income in the subsequent assessment year based on cash basis of accounting consistently followed by the assessee?- Held that:- The law has given freedom to the assessee to regularly employ either cash basis of accounting or mercantile basis of accounting to compute correct income chargeable to tax and the plain , simple and natural language and words used in the Section 145 of the Act does not , in our humble opinion, cast any bar on the assessee to follow regularly either cash basis or mercantile basis of accounting by the assessee having more than one source of income with in the head of income from ‘Profit and gains of business or profession’ or ‘income from other sources’ as in the instant case the assessee has two stream and sources of income under the head of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in accordance with law after duly verifying and authenticating the claim of the assessee with respect to acquisition and ownership of the above accommodations C-18 and C-20 out of undisclosed income of the assessee which has been brought to tax and due taxes paid to Revenue as asserted by the assessee and the assessee is directed to appear before the A.O. and file the necessary evidences before the AO to support its claim and assertions for verification and authentication by the AO Addition of cash deposit u/s 68 - Held that:- Due to lack of financial support, the assessee could not even complete his basic education and as such he is not well versed with the terms of accountancy, tax and other laws and regulations. The assessee has once again hit as he had incurred huge losses in the film business. The assessee’s accountant also left the job without even handing over the charge of the books of account. The assessee was not having the proper information about the books of account and assessee was traveling while assessment proceedings are going on which was the main reason the assessee could not produce the evidence before the A.O. and hence there was sufficient cause f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld CIT (A) erred in conforming the action of the LD AO in adding a sum of Rs. l,419,000/- as cash deposit u/s 68 of IT Act. 6. That the orders of Ld CIT(A) and Ld AO are bad in law and on facts. 3. The Brief facts of the case are that assessee is a Professional Dance Director for Cinematograph films. Besides this, he runs a dance academy by the name of Ganesh Acharya Dance Academy and film production house by the name of M/s Pushpa Krishna Creations. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Income Tax Act, 1961(Hereinafter called the the Act ), it was observed by the learned assessing Officer (Hereinafter called the A.O. ) from the individual Balance Sheet of the assessee that the assessee owned six immovable properties, which are as under:- Sl. No. Description of property Book value Remarks 1 Flat at Malad 5,42,902 2 Flat at Yashodeep CHS Ltd. 33,79,000 3 MHADA Premises 31,01,566 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Flat at Millat Nagar 1103 27,03,545 3 Flat at Millat Nagar 1203 23,63,490 4 Plot at MHADA Sheriq Hall 23,70,548 Total 79,80,485 Total book value : 79,80,485 10% of the book value of the property 7,98,048 Less: 30% Standard Deduction 2,39,414 5,58,634 . Thus, ₹ 5,58,634/- was added to the income of the assessee under the head Income from house property by the AO vide assessment orders dated 07-12- 2009 passed u/s 143(3) read with Section 143(2) of the Act. Further, it was observed by the A.O. that the assessee has debited in his P L account with interest on housing loan of ₹ 8,77,110/- and as the house properties were deemed to be let out properties, the said amount of interest cannot be allowed as business expenses and accordingly the A.O. restricted the claim of interest against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciation is claimed by the assessee but that does not mean that businesses are not carried by the assessee from the said premises. 4. The CIT(A) after considering the submission of the assessee observed that the assessee has not claimed any depreciation on the business premises. With respect to Mhada property, the CIT(A) held that the assessee himself has shown advance of ₹ 15 lacs and also NOC for sale of property by the Society was given on 02/10/2007 which means that property was not sold during the previous year and hence amount was shown as advance .The CIT(A) held that the AO has rightly treated the said property as deemed let out property. With regard to Flat at Malad, the CIT(A) held that the assessee has himself stated that the flat as vacant during assessment proceedings. The assessee has not brought any evidence to substantiate that the flat has been used for godown nor any depreciation is claimed and hence the claim of the assessee was rejected. With respect to claim of Flat No. 1103 and 1203 , the CIT(A) observed that these are newly acquired properties during the previous year. The claim of the assessee that these flats were used for businesses was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scheme or provisions in the Act to compute the annual letting value (ALV) to compute income from house property based upon the book value/market value of the property. Similarly , the assessee submitted that since the property at Millat nagar was used for business purposes, hence, the interest cannot be restricted to ₹ 1,50,000/- as the amount has been paid by the assessee on housing loan availed for the acquisition of Millat Nagar property and the said property is being used for business purposes. 6. The ld. D.R., on the other hand, relied upon the orders of authorities below. 7. We have considered the rival contentions and perused the material available on record. We observed that the Hon ble Bombay High Court in the case of CIT v. Tip Top Typography, (2014) 48 Taxmann.com 191 (Bom) has laid down the principles for computation of income from house property u/s 22 and 23 of the Act. The relevant extracts of judgment of Hon ble Bombay High Court are reproduced as under : 43. It also appears that both, the judgment in the case of Satya Co. Ltd. (supra) rendered by a Division Bench of the Calcutta High Court and the judgment of this Court in the case of J.K. Investor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not address this issue and straightway proceeded to add notional interest on the interest free security deposit. The aforesaid conclusion is correct. We may record that permissibility of adding notional interest into actual market rent received was not approved by the Calcutta High Court in the case ofCIT v. Satya Co. Ltd. [1997] 140 CTR (Cal) 569] and categorically rejected in the following words: There is no mandate of law whereby the AO could convert the depression in the rate of rent into money value by assuming the market rate of interest on the deposit as the further rent received by way of benefit of interest-free deposit. But section 23, as already noted, does not permit such calculation of the value of the benefit of interest-free deposit as part of the rent. This situation is, however, foreseen by Schedule III to the WT Act and it authorises computation of presumptive interest at the rate of 15 per cent as an integral part of rent to be added to the ostensible rent. No such provision, however, exists in the Act. That being so, the act of the AO in presuming such notional interest as integral part of the rent is ultra vires the provision of section 23(1) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is already provided for. The attempt by learned counsel for the Revenue to draw an analogy from the Wealth-tax Act, 1957 is also to no avail. It is an admitted position that there is a specific provision in the Wealth-tax Act which provides for considering of a notional interest whereas Section 23(1)(a) contains no such specific provision. We approve the aforesaid view of the Division Bench of this Court and Operative words in Section 23 (1)(a) of the Act are the sum for which the property might reasonably be expected to let from year to year . These words provide a specific direction to the Revenue for determining the fair rent . The Assessing Officer, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the fair/market rent because of the reason that the assessee has received abnormally high interest free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notional interest on the deposit is not any actual rent received or receivable. Under sub-clause (b) of section 23(1) only the actual rent received or receivable can be taken into consideration and not any notional advantage. The rent is an actual sum of money which is payable by the tenant for use of the premises to the landlord. Any advantage and/or perquisite cannot be treated as rent. Wherever any such perquisite or benefit is sought to be treated as income, specific provisions in that behalf have been made in the Act by including such benefit, etc., in the definition of the income under section 2(24) of the Act. Specific provisions have also been made under different heads for adding such benefits or perquisites as income while computing income under those heads, e.g., salary, business. The computation of the income under the head 'House property' is on a deemed basis. The tax has to be paid by reason of the ownership of the property. Even if one does not incur any sum on account of repairs, a statutory deduction therefore is allowed and where on repairs expenses are incurred in excess of such statutory limit, no deduction for such excess is allowed. The deductions for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e a safe yardstick if in the Assessment Year in question when assessment is to be made under Income-tax Act. The property is let-out at a much higher rent. Thus, the Assessing Officer in a given case can ignore the municipal valuation for determining annual letting value if he finds that the same is not based on relevant material for determining the fair rent in the market and there is sufficient material on record for taking a different valuation. We may profitably reproduce the following observations of the Supreme Court in the case of Corporation of Calcutta v. Smt. Padma Debi, AIR 1962 SC 151, 153. A bargain between a willing lessor and a willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness. Thus the rateable value, if correctly determined, under the municipal laws can be taken as ALV under Section 23(1)(a) of the Act. To that extent we agree with the contention of the learned Counsel of the assessee. However, we make it clear that rateable value is not bin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re applied in order to arrive at such hypothetical rent, for instance, by reference to the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties or to the profits carried from the property or to the cost of construction.' 46. We have and after careful reading of the provision in question and the conclusion of the Full Bench of the Delhi High Court councluded that a different view cannot be taken. We respectfully concur with the view taken in this Full Bench decision of the Delhi High Court. 47. We are of the view that where Rent Control Legislation is applicable and as is now urged the trend in the real estate market so also in the commercial field is that considering the difficulties faced in either retrieving back immovable properties in metro cities and towns, so also the time spent in litigation, it is expedient to execute a leave and license agreements. These are usually for fixed periods and renewable. In such cases as well, the conceded position is that the Annual Letting Value will have to be determined on the same basis as noted above. In the event and as urged b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve ascertainment is done by the Officer he must, then, comply with the principles of fairness and justice and make the disclosure to the Assessee so as to obtain his view. 48. We are not in agreement with Shri Chhotaray that the municipal rateable value cannot be accepted as a bona fide rental value of the property and it must be discarded straightway in all cases. There cannot be a blanket rejection of the same. If that is taken to be a safe guide, then, to discard it there must be cogent and reliable material. 49. We are of the opinion that market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. We are of the view that municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. It is definitely a safe guide. 50. We have broadly agreed with the view taken by the Full Bench of the Delhi High Court. Hence, the issue of determination of the fair rental value in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; in the premises is adopted. This may not be the trend tomorrow, therefore, we do not wish to conclude the matter by evolving any rigid test. 52. We have also noted the submissions of Shri Ahuja. We are of the opinion that even in the cases and matters brought by him to our notice, it is evident that the Assessing Officer cannot brush aside the rent control legislation, in the event, it is applicable to the premises in question. Then, the Assessing Officer has to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. The attempt by the Assessing Officer to override the rent control legislation and when it balances the rights between the parties has rightly been interfered with in the given case by the Appellate authority. The Assessing Officer either must undertake the exercise to fix the standard rent himself and in terms of the Maharashtra Rent Control Act, 1999 if the same is applicable or leave the parties to have it determined by the Court or Tribunal under that Act. Until, then, he may not be justified in applying any other formula or method and determine the fair rent by abiding with the same. If he desires to undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vitiated. In view of the above, we are of the considered view that the matter with respect to ground no 1 and 2 raised by the assessee in memo of appeal needs to be set aside to the file of the A.O. for re-determination of the income from house properties in accordance with the provisions of section 22 and 23 of the Act and the principles laid down by the Hon ble Bombay High Court in the case of Tip Top Typography (supra) after considering the additional evidences filed by the assessee in his defense. Accordingly we set aside the order of CIT(A) and restore back the issue to the file of A.O. with the above directions and to decide the issue de-novo as per law. The A.O. shall also afford sufficient opportunity of being heard to the assessee in accordance with principles of natural justice. Ground No. 1 2 are accordingly treated as allowed for statistical purposes. 8. Ground No. 3 relates to the addition of ₹ 22,57,000/- made by the A.O. on the ground that in case of professional income, the assessee is liable to follow mercantile method of accounting in respect of income which has already been considered as income in the subsequent assessment year based on cash basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee in the financial year 2006-07 itself which in the opinion of A.O. was done to arrive at the correct total income of the assessee without rejecting the books of account of the assessee. 9. Aggrieved by the orders of the AO, the assessee carried the matter before the CIT(A) in appeal and submitted that income from production of films have been accounted for on accrual basis since according to the nature of business , in the opinion, it was the most appropriate method of accounting. The assessee submitted that the assessee computed the income separately for both the business based on different methods of accounting and no mistake has been pointed by the A.O. and there was no intention of the assessee of showing incorrect income. The assessee submitted that the choice of following method of accounting lies with the assessee and not with the Revenue in accordance with the provisions of section 145 of the Act. The assessee submitted that as per rule 9A of the Act which govern the amortization of cost of production of the film business, the assessee can only follow mercantile system of accounting. The assessee submitted that if the AO wanted to follow mercantile system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee submitted that the assessee is a choreographer which falls under the definition of film artist as professional defined in Rule 6F of Income Tax Rules, 1962 , whereby the assessee is allowed to follow cash system of accounting which has been consistently and regularly followed by the assessee and allowed by the Revenue in the earlier years. The ld. Counsel submitted that it produced films under the banner of his proprietary concern Pushpa Krishna Creation and for the film production business the assessee followed prescribed Rule 9A 9B of the income Tax Rules, 1962 and for this business of film production the mercantile method of accounting is adopted . Thus, in nut-shell, the income from profession of choreography was accounted for on cash basis consistently and regularly for several years which was accepted by the Revenue and for the film production business, Rule 9A 9B was mandatory and was followed by assessee whereby mercantile method of accounting was followed . The ld. Counel submitted that the A.O. has directed the assessee to follow accrual basis of accounting for choreography business also because as per the AO, the assessee by following both cash and me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above facts are admitted by the AO in his assessment orders u/s 143(3) of the Act dated 07-12-2009 . The CIT(A) has observed that the choreographer, film producer has to follow rule 9A and 9B of Income Tax Rules, 1962 which in our humble opinion is not correct as the Rule 6F of the Income Tax Rules, 1962 provides that film artist include dance director and are professionals vide explanation (c) to sub-rule 2 to Rule 6F of Income Tax Rules,1962 while Rule 9A and 9B of the Income Tax Rules , 1962 deals with film production and distribution rights of feature film, thus the finding of the CIT(A) that choreographer i.e. dance directors have to compulsorily follow Rule 9A and 9B of Income Tax Rules, 1962 is humbly rejected. The whole controversy revolves around the action of the AO whereby the AO held that the assessee cannot follow cash basis of accounting for income arising from his profession and at the same time follow mercantile system of accounting for film production business, which in the opinion of AO is not permissible in view of the amendment in Section 145 of the Act by Finance Act , 1995 as it leads to following hybrid system of accounting because the assessee with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the AO is that the assessee in the instant case by following cash system of accounting for income from profession and by following mercantile system of accounting for film production business , has in-fact followed hybrid system of accounting which is not permitted by Section 145 of the Act after amendment by Finance Act, 1995 which in our considered view is again devoid of merits . It is important to refer to amended Section 145 of the Act which was amended by Finance Act,1995 as applicable to relevant assessment year which reads as under: [Method of accounting. 145. (1) Income chargeable under the head Profits and gains of business or profession or Income from other sources shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the first question is concerned, of course, it has come that the assessee was maintaining books of accounts by both manners viz., by receipt basis, and on mercantile basis as well, inasmuch as, with respect to accrual of lease income, mercantile system was adopted. However, for lease and hire income, the receipt basis was adopted. True it also is that by virtue of section 145, as amended, the income chargeable under the head Profits and gains of business or profession or Income from other sources is, subject to provisions of sub-section (2), to be computed in accordance with either cash or mercantile system of accounting, regularly employed by the assessee. Earlier the provision was that such income was to be computed in accordance with the method of accounting regularly employed by the assessee. In the present case, the learned Tribunal has found that this is undisputed and settled principle of fiscal law, that only the real income is to be taxed, and that the same income cannot be taxed twice. It was also taken to be settled principle of law, that realities of life have to be considered while arriving at the taxable income. It was noticed that amendment in section 145 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re considered to be earned only when they are actually received in cash. Similarly, expenses are deemed to be incurred only when they are actually paid in cash. 2. Accrual Basis of Accounting (Mercantile Basis of Accounting): Under this method, all Incomes are recorded or credited to the period in which they are earned irrespective of the fact that whether the same has actually been received or not. Similarly, expenses are charged to the period in which they relate irrespective of the fact that they have actually been paid or not. Thus, as could be seen the major difference between the cash method of accounting and accrual basis of accounting is the timing difference in the recognition of expenses and income. 3. Hybrid or Mixed Method of Accounting: Under this method, both cash basis and accrual basis are followed. Incomes are recorded on cash basis whereas expenses are taken on accrual basis. The net income is ascertained by matching expenses on accrual basis with income on cash basis. This is the most conservative basis of ascertaining income because all possible expenses relating to the period whether actually paid or not are considered whereas income onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g more than one source of income with in the head of income from Profit and gains of business or profession or income from other sources as in the instant case the assessee has two stream and sources of income under the head of income from Profit and gains of business or profession viz. his professional income and also income from production of films because by following either of the two method of accounting regularly , there is not likely to be distortion in computation of correct income as per the provisions of the Act and it will be only timing difference which we have seen above due to following the above methods of accounting and no prejudice will be caused to the Revenue . The said income of ₹ 22,57,000/- from the profession is also stated to have been offered for tax by the assessee in the year of receipt i.e. immediately succeeding financial year 2007-08 by following consistently and regularly cash basis of accounting for his source of income from profession . Thus, we hold that the assessee is not following hybrid or mixed method of accounting and the assessee is following cash system of accounting for his income from profession and mercantile system of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see only in whose income the capital gain/loss arising from transfer of the aforesaid properties should be included. The assesssee submitted that these accomodations were purchased in September 1994 in above three names and the purchase of the same has been duly dealt with in the order of the A.O. passing the block assessment order in the case of assessee. Accordingly the assessee submitted that the A.O. be directed to assess capital gains in the hands of the assessee and delete the addition made u/s 68 of the Act. The CIT(A) after considering the facts, gave relief to the assessee with respect to the accommodation no. C-19 as the same was owned by the assessee while the addition with respect to accommodation C-18 and C-20 of ₹ 10 lacs being advance receipt in respect of mother and sister of the assessee is confirmed in the hands of the assessee as the Mhada properties stood in the name of mother and sister of the assessee.The CIT(A) also held that the NOC from sale of the above properties were given by society on 2/10/2007 which means that the property was not sold during the year under consideration and hence the amount was shown as advance. 17. Aggrieved by the orders o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18 and C-20 owned by the assessee and held by the assessee in the name of close family members being sister and mother shall be chargeable to tax in the hands of the assessee although the accommodations are technically held in the name of close family members i.e. mother and sister of the assessee and hence we order deletion of addition of ₹ 10 lacs being advance on sale of these accommodations as made by the AO and as confirmed by the CIT(A) with the direction to the AO to compute capital gains arising out of these two accommodations as per Act which shall be brought to tax in the hands of the assessee in accordance with law after duly verifying and authenticating the claim of the assessee with respect to acquisition and ownership of the above accommodations C-18 and C-20 out of undisclosed income of the assessee which has been brought to tax and due taxes paid to Revenue as asserted by the assessee and the assessee is directed to appear before the A.O. and file the necessary evidences before the AO to support its claim and assertions for verification and authentication by the AO . Needless to say that proper and adequate opportunity as per law shall be given by the AO to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidences before the CIT(A) which are not admitted by the CIT(A) . The assessee has also submitted in his written submissions filed before the authorities below that the assessee originally hailed from very lower strata of society. With lot of hard work, difficulty and moral support from the family , the assessee has come so far in his profession of choreography. Due to lack of financial support, the assessee could not even complete his basic education and as such he is not well versed with the terms of accountancy, tax and other laws and regulations. The assessee has once again hit as he had incurred huge losses in the film business. The assessee s accountant also left the job without even handing over the charge of the books of account. The assessee was not having the proper information about the books of account and assessee was traveling while assessment proceedings are going on which was the main reason the assessee could not produce the evidence before the A.O. and hence there was sufficient cause for not producing the evidence during the assessment proceedings and accordingly prayed before the CIT(A) for admitting the additional evidence which the CIT(A) declined to admit t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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