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TMI Blog2003 (12) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... enses of Rs. 92,92,510 be allowed as legitimate business expense under section 36(1)(iii)." 2. Grounds 1 to 3 deal with the issue whether Rs. 14,04,00,000 being the notional interest worked out on the interest-free deposit of Rs. 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 Rs. 5,000 and Rs. 6,500 respectively on the basis of Rs. 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 let out the property t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 @ Rs. 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 locality on throw-away price. Therefore, in order to compensate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 under section 10(33) on gross receipt of dividend without deducting interest expenses incidental to such income. He further observed that the assessee debited interest expense of 92,92,510 in its P&L Account which is payable to various Jindal Group of companies. The interest bearing funds so received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heet. 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 expenses on such borrowings cannot be allowed as business expenses and have to be deducted out of the gross dividend income. Besides, he also held that the allocation of interest expenses computed on pro rata basis by allocation of interest-bearing funds on its utilization towards cost of equity shares appearing in the closing stock o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 accordance with the phrase "the sum for which the property might reasonably be expected to let" can never exceed Rs. 2,54,400. Therefore, if section 23(1)(a) of the Act is to be applied, the annual of these rented properties can never exceed this amount. 16. The learned counsel for the assessee then submitted that the proposition that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mansion' amounted to Rs. 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 receivable is Rs. 2,54,400 being @ Re 1 per sq. ft. pm. and the assessment order of the property tax for a period of 6 months w.e.f. 1-10-1998 to 31-3-1999 show a rateable value of Rs. 10,61,190 (please refer page 166 of the paper book). It was submitted that though the case of assessee falls under section 23(1)(b), however, even if the department applies p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 buying and selling securities. From the financial statement it can be observed that the assessee had earned dividend income from scrips held as stock-in-trade and from investments. The amount borrowed is a legitimate business necessity and the interest payable on it is allowable under section 36(1)(iii) of the Income-tax Act, 1961. Even though dividend income is exempt u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en." 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 Rs. 18 to Rs. 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 per the assessee's own valuation report, rateable value comes to Rs. 34.54 per sq.ft. 22. With regard to grounds 4 & 5, the learned departmental representative submitted that the same arguments as has been mentioned in the assessment order. 23. In reply, the learned counsel for the assessee invited our attention to the fact that in the present case, the tenants are paying all sorts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 Rs. 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 letting value of the building under section 23 of the Income-tax Act. 26. Section 22 of the Income-tax Act, 1961 reads as under:- "22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'." The method of computation of annual letting value is provided in section 23 of the Income-tax Act, 1961. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wherein it was observed that after the rent control legislation came into force the standard rent would be the rent which will be determinative of the factor of annual letting value of the building and not the actual rent received by the landlord from the tenants. This principle was further followed in Amolak Ram Khosla's case (supra). In Dr. Balbir Singh's case (supra), the Hon'ble Supreme Court considered its earlier decision in the case of Dewan Daulat Rai Kapoor (supra); Mrs. Sheila Kaushish (supra) and Amolak Ram Khosla's case (supra) and it was held that the rent control does not enjoy unfettered discretion to do what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. J.K. Investors (Bom.) Ltd. [2001] 248 ITR 723 1 and Calcutta High Court in the case of CIT v. Satya Co. Ltd. [1994] 75 Taxman 193. We find that this issue was also considered at length by the Tribunal, in favour of the assessee, in which one of us was a party to the order, in the case of M/s. Ruchi Properties Ltd. v. Jt. CIT [IT Appeal No. 3407 (Mum.) of 1999] for assessment year 1994-95 to which our attention was invited by the learned counsel at the time of argument. Therefore, we are of the opinion that notional interest on the interest-free deposit cannot be taken into consideration while determining the annual letting value of the building under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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