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2016 (12) TMI 455 - ITAT BANGALORE

2016 (12) TMI 455 - ITAT BANGALORE - TMI - Computation of annual value of the property let out to the assessee’s sister concern - AO observed that in the interim period of one year no payment of rent appears to have actually made to the assessee by the lessee - Held that:- Undisputedly the property in question was let out to its sister concern vide lease deed dated 1.4.2006 for a monthly rent of ₹ 5 lakhs. At that time, no interest free security deposit was given or credited to the assesse .....

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lakhs to ₹ 25,000 per month. Therefore, the notional rent earned on this ₹ 25 crores cannot be ignored at the time of computing the ALV of the property. - Punjab & Haryana High Court in the case of CIT v. K. Streetlite Electric Corporation, (2010 (10) TMI 742 - Punjab and Haryana High Court ) categorically held that interest-free security deposit taken by the assessee hugely disproportionate to monthly rent charged is a device to circumvent liability to income-tax. Therefore, no .....

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MBER For The Appellants : Shri V. Srinivasan, CA For The Respondent : Shri Kamaladhar, Standing Counsel ORDER Per Sunil Kumar Yadav, Judicial Member All these three appeals preferred by the assesses for the assessment years 2007-08 & 2009-10 were heard together and are disposed of by this common order for the sake of convenience. ITA Nos.1607 & 1692/Bang/2012 These appeals are preferred by the assessee against the respective order of the CIT(Appeals) on the common grounds, which are as u .....

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e appellant denies itself liable to be charged to interest u/s. 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case and the levy deserves to be cancelled. [4] For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as .....

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per month. While reducing the monthly rent, interest free security deposit was also negotiated whereby the lessee would pay the assessee an interest-free deposit of ₹ 25 crores. The assessee accordingly reduced the annual letting value (ALV) of the rented property at ₹ 3 lakhs which was not accepted by the Assessing Officer and he assessed the ALV at ₹ 52,16,768 by estimating the market value of the same at ₹ 7/- per sq.ft. on the basis of local enquiries made by him. 3. .....

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of these security deposits, rent was reduced from ₹ 5 lakhs per month to ₹ 25,000 per month with effect from the date of execution of the supplementary lease deed i.e., 29.3.2007. It was also contended that the AO does not have the power to enhance the ALV on the basis of higher deposit in view of the decision of the Calcutta High Court in the case of Satya & Company, 75 Taxman 183. 4. While disallowing the claim of assessee, the AO observed that in the interim period of one yea .....

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ly issued show cause notice to the assessee detailing the figures of liabilities as per the sale deed which do not match the figures in the appellant s balance sheet. 5. The CIT(Appeals) has examined both the aspects i.e., with regard to bare position of law for determination of ALV under the Income-tax Act and, secondly, implication of business expediency and advantage which is sought to be harnessed from the arrangement with reference to an adverse effect upon the revenue. He also examined the .....

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reference:- 4.12. On a consideration of the submissions, I find therein several glaring discrepancies. Firstly, the Advances from Customers represent trade advances and hence they are grouped under "Current Liabilities" in Schedule-9 of the Balance sheet. The appellant's claim that these were used for building the factory is neither borne out by the nature of the entry in the accounts, and neither by evidence at the time of assessment or appellate hearings. Infact, it is clear tha .....

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ft of liabilities from Advances to Loans in the Notes on Account or the Director's report, inspite of the magnitude of the amount and its long-term implication on the appellant's rental incomes. Thirdly, the AO has noted that no property tax documents were produced in spite of being given several opportunities, which also speaks its own story. Lastly, the AO has mentioned at Para 5 of his assessment order that the appellant's arrangement was made in the context of the impending publi .....

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g entered into an agreement earlier to charge a much higher rate (in-fact, twenty times higher than the reduced rate adopted later). The circumstances of this claim do not carry credibility in view of the manipulative nature of the transaction which is claimed to have been entered into on grounds of commercial expediency. I have already mentioned above that there was an impending public issue in the case of M/s SDL at the time, and the so-called "commercial expediency" appears to have .....

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he appellant does not receive any rental income to the extent of the differential value of ₹ 57 lakhs from M/s SOL with the rent being reduced from ₹ 60 lakhs per annum to ₹ 3,00,000/-. If the arrangement had included payment of interest @ 12% (the notional rate adopted by the appellant in his notes on arguments) by the appellant to the principal and also full payment of the agreed rent, M/s SDL would still have had to account for a net income of ₹ 2,40,00,000/- [Rs. 3,00 .....

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the buildings, which were already very much in existence at the time of the lease deed coming into force, and never having been shown as such in the appellant's accounts earlier to 31.3.2007. 4.15. It is obvious to me therefore, that the cause of revenue has been completely subverted within this arrangement entered into by the appellant, and the so-called "commercial expediency" claimed by it is actually just a case of aggressive tax avoidance. It is significant to note that though .....

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pediency" on account of the so-called loan was now advanced. I have already mentioned above that the appellant has failed to adequately clarify the entries with regard to the existence of this loan in the balance sheet as on 31.3.2006 in course of the appellate hearings. The explanations offered only reflect a rather desperate attempt to juggle figures in the balance sheet from one head to another, making light of established accountancy principles whereby current trade liabilities have bee .....

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Though the appellant has challenged the decision of the AO in bringing the FMV of the property to tax on the ground that the law does not empower him to do so, it is patently clear that the appellant has entered into a sham transaction and been unable to defend it at the appellate stage inspite of being given sufficient opportunity on several occasions. In the circumstances, I am not convinced with the arguments of the appellant, and his claims remain unsubstantiated even at the appellate stage. .....

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The comparable cases of MTR Food Products and MTR Foods Ltd. were taken by the AO since the type and constitution of the leased properties were similar to the appellant's case. On the other hand, the appellant in the course of the appeal could not adduce any specific reason why the comparison is invalid. Apart from stating that the two cases may not be comparable, no specific items of difference are pointed out. As such, I do not find the argument raised by the appellant in this matter to b .....

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ned a lease deed fixing the rent at ₹ 5 lakhs per month, which was suddenly and inexplicably reduced to ₹ 25000 per month citing reasons which have already been found to be completely unsubstantiated and even sham ones. Hence, the appellant does not in the case command the credibility or bona-fides required to interpret the Supreme Court's judgment referred to above to its advantage. The ground raised is accordingly dismissed. 6. Aggrieved, the assessee is in appeal before the Tr .....

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om its sister concern, SDPL in order to ;purchase the land and construction thereon in the form of interest free trade advances. When the assessee was not in a position to return the advances taken from its sister concern, it had let out the constructed building for a period of 25 years at a monthly rent of ₹ 25,000 per month. The outstanding amount was converted into interest free security deposit with the assessee. The AO has estimated the ALV of the property u/s. 23(1)(a) of the Act at .....

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e let out property. It was further contended that ALV has to be computed in the light of rates prescribed by the municipal authorities and the municipal authorities have prescribed the rates for the impugned property at ₹ 1.60 per sq.ft., therefore for computing the ALV the rate at ₹ 1.60 per sq.ft. should be adopted. In support of the contentions, he has placed reliance upon the order of the Tribunal of this Bench in the case of DCIT v. Rajiv Chandrashekar in ITA No.1440/Bang/2013 a .....

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of any property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. Whereas as per section 23(1)(b), where the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable shall be the annual letting value. Therefore, while computing the ALV as per section 23(1)(b), actual rent received or receivable is to be taken into acc .....

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ferred to by the assessee are not applicable. The facts in those cases are that the property was not let out and ALV was computed as per provisions of section 23(1)(a) of the Act. When the property is let out, the ALV is to be computed as per section 23(1)(b) of the Act. The ld. DR placed heavy reliance upon the judgment of Hon ble Punjab & Haryana High Court in the case of CIT v. K. Streetlite Electric Corporation, 336 ITR 348 (P&H) in which it has been categorically held that interest .....

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light of rival submissions and we find that undisputedly the property in question was let out to its sister concern vide lease deed dated 1.4.2006 for a monthly rent of ₹ 5 lakhs. At that time, no interest free security deposit was given or credited to the assessee s account. By supplementary lease deed dated 29.3.2007, the terms of the lease were modified and monthly rent was reduced to ₹ 25,000 per month from ₹ 5 lakhs per month. At that time, interest-free security deposit w .....

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the assessee and we find that in those judgments, ALV was computed as per the provisions of section 23(1)(a) of the Act. Section 23(1)(a) of the Act would apply where the property was not let out and the AO has worked out the ALV of the property which shall be deemed to be the sum for which the property shall be reasonably be expected to let from year to year. But, where the property has been let out, the ALV shall be deemed to be the actual rent received or receivable by the owner in respect th .....

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erest-free security deposit can be taken into account while computing the ALV or the ALV is to be computed on the basis of actual rent received, ignoring the other surrounding facts and circumstances. According to us, while computing the ALV all surrounding factors should be looked into and more particularly the interest-free security deposit received by the assessee while letting out the property should be taken into account. In most of the cases, substantial amount of interest-free security de .....

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osit is to be treated as income from house property. The relevant observations of the Hon ble High Court along with the facts of the case are extracted hereunder for the sake of reference:- The assessee earned rental income from letting facilities of factory, land, building and offices. The assessee had taken interest-free security of ₹ 35 lakhs from two parties to whom the assets were leased out, but the assessee showed a very low rental income of ₹ 1.50 lakhs as annual letting valu .....

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he Commissioner (Appeals). On further appeal: Held, allowing the appeal, that under the lease deeds and on a conjoint reading of all the documents and an analysis of the factual aspects, the security deposit of ₹ 35 lakhs which amounted to 140 times the monthly rent was disproportionate to the actual contractual rent of ₹ 25,000 per month, i.e., total ₹ 12,500 per month for land and building, etc. and ₹ 12,500 per month for furniture, fixtures, plant and machinery, etc. I .....

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e to avoid tax and had no real basis with the actual rent that was received by the assessee. According to section 23(1)(b) of the Income-tax Act, 1961where the property was actually let out, the actual amount of rent received or receivable would form part of the income from house property. Ordinarily, the notional interest that may accrue on the security deposit would not form part of income from house property. However, where payment of the security deposit was to circumvent liability to tax on .....

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ent of the Hon ble Punjab & Haryana High Court, we are of the considered view that receipt of ₹ 25 crores as interest-free security deposit cannot be ignored while computing the ALV. Therefore the AO has rightly adopted the ALV which was even lesser to the monthly rent of ₹ 5 lakhs per month initially agreed upon by the parties. Thus, we find no infirmity in the order of CIT(Appeals) and we confirm the same. 12. So far as ground No.3 relating to interest u/s. 234B and 234C is con .....

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by the learned AO at ₹ 21,81,669/- rejecting the income reported by the appellant under the facts and in the circumstances of the appellant's case. [3] Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s 234-B and 234-C of the Act, which under the facts and in the circumstances of the appellant's case and the levy deserves to be cancelled. [4] For the above and other grounds that may be urged .....

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ts and liabilities, except land and buildings to M/s. Sobha Developers Pvt. Ltd. [SDPL] for an amount of ₹ 13,20,82,084. Two days before the date of sale i.e., on 1.4.2006 lease deed was entered into whereby the assessee leased out its land and buildings to SDPL for a monthly rent of ₹ 5 lakhs. Supplementary lease deed was entered into on 30.3.2007 whereby the terms of lease were renegotiated and monthly rent reduced to ₹ 25,000 per month from ₹ 5 lakhs per month. In this .....

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