TMI Blog2003 (12) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 92,92,510 be allowed as legitimate business expense under section 36(1)(iii). 2. Grounds 1 to 3 deal with the issue whether ₹ 14,04,00,000 being the notional interest worked out on the interest-free deposit of ₹ 78 crores would form part of rent received by the assessee. 3. The assessee is a company engaged in the business of trading in equity shares and investment and financing. During the assessment year under consideration, the Assessing Officer found that the assessee company is the owner of a commercial premises known 'Jindal Mansion' situated at Peddar Road, Mumbai. Since 1987 the assessee company had two tenants. The assessee company purchased this property when it was already under tenancy of Jindal Strips Ltd. and Jindal Iron Steel Co. Ltd. on a monthly rent of ₹ 5,000 and ₹ 6,500 respectively on the basis of ₹ 1 per sq. ft. in respect of the area occupied by them. These tenants continued as tenants of the assessee on the same terms and conditions. In the financial year 1995-96 relevant to assessment year 1996-97, the assessee reconstructed the property which now consists of ground plus 5 upper floors. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and correct annual value under section 23(1)(a) of the Act. After analyzing the lease agreement, he was of the view that the payment of security deposit is a consideration for providing service facilities of lease property. Clause 4 of the agreement speaks that such security deposit would be refunded to the licensee after deducting therefrom such amount that may be found due and payable by licensee under this renewal agreement. Therefore, he concluded that the deposit is being utilised to recover the arrear dues, etc. if any. Thus, this interest-free deposit has an essential element of annual value. Accordingly, the interest-free deposit is nothing but good basis to determine the annual letting value of the property. He further mentioned that security deposits were received from lessees, all Jindal group of companies and the said deposits were reinvested in the shares of the said companies. Therefore, it was a modus operandi to recycle the funds to the lessee companies. 6. As regards the lease rent fixed @ ₹ 1 per sq. ft. in a posh locality of Peddar Road, the Assessing Officer was of the view that no prudent businessman would ever let out such a property in a posh localit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer also mentioned that the assessee has paid interest @ 18% on its borrowings as well as lending and, therefore, it would be reasonable to adopt notional interest at the same rate on such interest-free deposits so as to arrive at the annual letting value of the property under section 23(1)(a) of the Act. The computation of notional interest is given by him at paras 2.11 and 2.12 of his order. 9. He further mentioned that the profit and loss account produced before him showed that the assessee had received dividend during the year as per details given below : Name of the company Dividend i.Jindal Strips (8,18,048 shares) Rs.24,54,144 ii.Jindal Iron Steel Co. Ltd. (19,51,467 shares) Rs.39,02,934 iii.Saw Pipes (62,400 shares) Rs.62,400 iv.Others (370) Rs.964 Total Rs.64,20,442 The above amount was claimed as exempt under section 10(33) of the Act. He observed that in assessment year 1998-99 the assessee claimed exemption und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case, it had received dividend income of ₹ 64,20,442 which is clearly identifiable and divisible venture. The assessee has only one business venture of trading in shares of Jindal Group of companies, which is clearly identifiable and the income is separately determinable as reflected in the P L Account and balance-sheet. Thus, he concluded that the interest attributable to such acquisition of shares of Jindal Group of companies on which exempted dividend income has been received during the year needs to be reduced out of the gross dividend under section 10(33) of the I.T. Act. In support of his findings he also referred to the Circular No. 780 dated 4-10-1999 on section 10(33)(i) of the I.T. Act, 1961. He further mentioned that section 10(33) contained the words income by way of dividend referred to in section 115-O for which clarification was given in the above circular. Therefore, it will follow that such exemption is available only on net dividend. 12. In view of the above he held that the interest expenses on fund utilised for investment in shares for the purposes of earning dividend income, which is exempt under section 10(33), the corresponding interest expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight reasonably be expected to let appearing in section 23(1)(a) of the Act envisages a figure which cannot exceed the maximum or ceiling of rent laid down in the appropriate rent control legislation. In the present case, the Bombay Rents, Hotel and Lodging House Rates (Control) Act, 1947 (hereinafter referred to as the 'BRCA') applies. Section 7(1) of the BRCA provides inter alia that it shall not be lawful to claim or receive on account of rent for any premises any increase above the standard rent . It is also pointed out that section 7(2)(a) of the BRCA provides that no person shall claim or receive on account of any licence-fee or charge for any premises anything in excess of the standard rent . It is emphasised that the term standard rent is defined under section 5(10) of the BRCA. Section 5(10(b)(iii ) applies in the present case and the said sub-section provides that the standard rent, in the instant case, will be the rent at which the premises were first let, where such first letting is after 1-4-1940. 15. It was submitted, therefore, that on a plain reading of section 23(1)(a) of the Act, if the same is to be applied, the annual value is to be ascertained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 actual rent is the actual sum of money which is payable by the tenant for the use of the premises to the landlord. It was then pointed out that the municipal rateable value for the entire 'Jindal Mansion' amounted to ₹ 10,61,190 for 1-10-1998 to 31-3-1999 and, therefore, if this value was to be accepted as a guide to standard rent, then an appropriate proportion of this amount would have to be taken for computing the standard rent in respect of these three tenanted premises. It was submitted that this is not necessary in the present case, since the standard rent is actually fixed in terms of section 5(10)(b)(iii ) of the BRCA. 17. The learned counsel for the assessee further submitted that section 23(1)(b) of the Act provides that annual value of any property computed under this sub-clause shall be annual rent received or receivable in respect of the property where the sum exceeds the sum computed under section 23(1)(a) of the Act. It was pointed out that in the present case, the amount of annual rent received or receivabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the revenue authority was only certificate from Builders Pvt. Ltd., who said that the rateable value of the property was ₹ 10,2000. Thus, in the circumstances, the Tribunal held that the amount received by way of deposit shall be taken into consideration for computing annual letting value under section 23(1)(a) of the Act. 19. As regards the case of Dy. CIT v. Apar Ltd. [IT Appeal No. 9326 (Bom.) of 1995] it is submitted that from the paragraph 17 of the order it is clear that in that case also no actual rent was received by the assessee. Therefore, provisions of section 23(1)(a) was considered by the Tribunal. Under these circumstances, the learned counsel submitted that firstly, this case is directly covered by the decision of the Bombay High Court and even if the department considers it that the case is covered under section 23(1)(a), even then, the standard rent already fixed prior to 1940 cannot be altered by taking notional interest on security deposit. 20. It is submitted that the assessee-company is an investment company. Its business is of trading in equity shares and investment financing. Accordingly some of the shares are held as stock-in-trade for buyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Therefore, thedecision of the Bombay High Court in the case of JK Investors (Bom.) (P.) Ltd. (supra) is not applicable in the present case. In this connection, our attention was invited to the following discussion of the Bombay High Court: We once again repeat that whether such notional interest could form part of the fair rent under section 23(1)(a) is expressly left open. Our attention was also invited that this is a transaction between the family concerns in which both the lessees are of some group of companies. As per the observations of the Hon'ble Supreme Court in Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 annual value cannot exceed measure of standard rent. It is pointed out that the CIT(A) has adopted a rateable value at 8.5 per cent of the cost of construction for rateable value and it will reach ₹ 18 to ₹ 20 lakhs which should be taken as ALV under section 23(1)(a). In this connection our attention was drawn to the decision CIT v. R. Dalmia [1987] 163 ITR 525 (Delhi) wherein it has been mentioned that if the assessee has understated the value, the Assessing Officer could fix the value. It is reiterated that as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lised towards interest-free loan to the family members cannot said to be incidental to the business purposes, he disallowed the interest attributable to the amount of interest-free advances from that of the interest paid by the assessee, by ₹ 4,30,015. For this he relied on the decision in the case of Phalton Sugar Works Ltd. v. CWT [1994] 208 ITR 989 1 (Bom.), Saraya Sugar Mills (P.) Ltd. v. CIT [1993] 201 ITR 711 2 (All.), CIT v. Sujani Textiles (P.) Ltd. [1985] 151 ITR 6533 (Mad.), CIT v. Doctor Co. [1989] 180 ITR 627 (Bom.) and K. Somasundaram Bros. v. CIT [1999] 238 ITR 939 (Mad.). 25. We have considered the rival submissions and gone through the material available on record. It is an admitted position that the company purchased 'Jindal Mansion' which was previously owned by Kamla Metals and the said property was under the tenancy of two companies, viz., Jindal Strips Ltd. and Jindal Iron Steel Co. Ltd. right from 1983 onwards at the same rent of ₹ 1 per sq. ft., at the time when the assessee has purchased this property. Now, the question arise, whether notional interest on the interest-free deposit can be considered while determining the annual le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section (1) of section 23 of the Income-tax Act, 1961 implies that the sum for which the property might reasonably be expected to let cannot exceed in any case, the standard rent in respect of areas where the Rent Control Legislation is applicable. 27. In the case of Dewan Daulat Rai Kapoor (supra), the Hon'ble Supreme Court has observed as under: When the rent control legislation provides for fixation of standard rent, which alone and nothing more than which the tenant shall be liable to pay to the landlord, it does so because it considers the measure of the standard rent prescribed by it to be reasonable. It lays down the norm of reasonableness in regard to the rent payable by the tenant to the landlord. Any rent which exceeds this norm of reasonableness is regarded by the Legislature as unreasonable or excessive. The Legislature obviously regards recovery of rent in excess of the standard rent as exploitative of the tenant and would it be proper for the court to say that it would be reasonable on the part of the landlord to expect to recover such exploitative rent from the tenant. In the case of Mrs. Sheila Kaushish (supra), the same principle was followed where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , viz., M/s. Jindal Strips Ltd. and M/s. Jindal Iron Steel Co. Ltd. Therefore, the provisions of section 23(1)(b) of the I.T. Act would be applicable to the case before us. 30. Provisions of section 23(1)(b) of the Act provides that where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred in clause (a), the amount so received or receivable. In the instant case, the amount of annual rent received or receivable being less than that of that (sic) computed under section 23(1)(a) of the Act, it cannot exceed the municipal rateable value already fixed by BRCA. 31. Now the question arises, whether the revenue authorities can take into consideration the notional interest on the interest-free deposits received by the assessee from its tenants while determining the annual letting value of the building under section 23 of the Income-tax Act. Since we are of the opinion that the provisions of sub-clause (b) to sub-section (1) of section 23 is applicable to the present case, this issue stands directly covered by the decision of the Hon'ble Bombay High Court in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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