2015 (2) TMI 1155 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decisions on ALV, Interest Disallowance, Deemed Dividend

The Deputy Commissioner of Income Tax Versus. Sri Rajeev Chandrashekar,

The Deputy Commissioner of Income Tax Versus. Sri Rajeev Chandrashekar, - TMI Issues Involved:1. Justification of CIT(A) in estimating the Annual Letting Value (ALV) of the property.2. Justification of CIT(A) in deleting the disallowance of interest on borrowings.3. Justification of CIT(A) in deleting the addition made as deemed dividend under Section 2(22)(e) of the Act.Issue-wise Detailed Analysis:1. Justification of CIT(A) in estimating the Annual Letting Value (ALV) of the property:The first issue concerns whether the CIT(A) was justified in estimating the ALV of the property at 8.5% on the total investments for determining income from house property under Section 22 of the Act, and whether following the decision of the Hon'ble Gujarat High Court in Bipin Bhai Vadilal Family Trust v. CIT, 208 ITR 1005, was appropriate. The assessee owned a property in Koramangala, Bangalore, which was let out for Rs. 9 lakhs. The AO believed the declared rent was low and recalculated the rental income based on prevailing rates, arriving at Rs. 43,20,000. The CIT(A) determined the 'fair rent' based on the total investment in the property, applying an 8.5% rate as per the Gujarat High Court decision, resulting in an annual value of Rs. 46,10,080. The Tribunal upheld CIT(A)'s order, noting that the ALV determined by the CIT(A) was higher than what the Karnataka High Court's yardstick would suggest, and since the assessee did not challenge this determination, the order was confirmed.2. Justification of CIT(A) in deleting the disallowance of interest on borrowings:The second issue is whether the CIT(A) was justified in deleting the disallowance of interest on borrowings amounting to Rs. 10,45,850. The assessee claimed a deduction under Section 24(1) of the Act against rental income, which the AO disallowed for lack of documentary evidence linking the loan to property acquisition. The CIT(A) found that loans were indeed taken for acquiring the property, initially from ING Vysya Bank, later repaid by loans from other entities. The CIT(A) directed the AO to consider interest on the relevant portion of the loan, resulting in a partial allowance of Rs. 10,45,872. The Tribunal found no merit in the Revenue's challenge, as the CIT(A)'s findings were based on clear evidence of the loan's purpose.3. Justification of CIT(A) in deleting the addition made as deemed dividend under Section 2(22)(e) of the Act:The third issue pertains to the deletion of an addition of Rs. 3,10,28,384 as deemed dividend under Section 2(22)(e) of the Act. The assessee received an advance from Jupiter Capital Pvt. Ltd., which the AO treated as deemed dividend, arguing that the assessee was indirectly a shareholder through Vectra Holdings Pvt. Ltd. The CIT(A) deleted the addition, stating that since the assessee was not a direct shareholder in Jupiter Capital Pvt. Ltd., the amount could not be treated as deemed dividend. The Tribunal upheld this view, referencing the Special Bench decision in Bhaumik Color Labs, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company, not a non-shareholder. Thus, the CIT(A)'s order was confirmed, and the Revenue's appeal was dismissed.Conclusion:The appeal by the Revenue was dismissed, with the Tribunal confirming the CIT(A)'s decisions on all three issues: the estimation of ALV, the deletion of interest disallowance, and the deletion of the deemed dividend addition. The Tribunal's judgment was pronounced on February 27, 2015.