2015 (2) TMI 168 - AT - Income Tax

Tribunal rules in favor of assessee, directing recalculations under Section 145A

The Tribunal ruled in favor of the assessee on various grounds, including excluding notional interest from ALV computation, allowing deduction of ... Income from house property - inclusion of notional interest on the interest free security deposit received from the licencee of the house property, for the purpose of computing the ALV of the said property - Held that:- It is a settled proposition of law by virtue of the judgment in the case of J.K. Investors [2000 (6) TMI 9 - BOMBAY High Court] and Tip Top Typography [2014 (8) TMI 356 - BOMBAY HIGH COURT] that the notional interest should not be included while computing the income from house property under section 23(1)(a) and (b) of the Act. It is also a settled proposition that actual rent received or receivable by the land lord constitutes a reliable evidence to ascertain the properties’ capacity to earn the rent in open market. The forms should be accepted unless the Assessing Officer has contrary evidence to suggest the deflation of rental income by extraneous consideration. Also when the interest income earned by the assessee on the said security deposits deposited with the banks the same is offered to tax, the inclusion of such interest on the said deposits for the purpose of ALV amounts to double taxation. - Decided in favour of the assessee. Deduction representing the maintenance expenses paid to the societies - Held that:- On perusal of the decision of the Tribunal in the case of Aloo Bejan Daver (2011 (4) TMI 1277 - ITAT MUMBAI) we find it is categorically mentioned that the 'maintenance charges' are to be deducted from the gross rent to arrive at the ALV of the property. For this proposition, the Tribunal relied on the decision of the Coordinate Bench in the case of Varma Family Trust ( 1983 (10) TMI 79 - ITAT BOMBAY-A) as well as the decision of the ITAT in the case of Sharmilla Tagore vs. JCIT (2004 (6) TMI 591 - ITAT MUMBAI). This order of the Tribunal has referred to the jurisdictional High Court judgment in the case of J.K. Investors (Bombay) Ltd [ 2000 (6) TMI 9 - BOMBAY High Court]. The said judgment of Hon’ble High Court is relevant for exclusion of outgoings, being liabilities of the assessee in view of section 23(1)(b) of the Act. -Decided in faaour of assessee. Applicability of the provisions of section 145A to the unutilized MODVAT - Held that:- The word 'inventory' shall include opening stock as well as closing stock. ssue was decided in favour of the assessee and the Assessing Officer was directed by the ITATto recomputed the profits after making adjustments with reference to opening stock, purchases as well as the sales. - Decided in favour of assessee for statistical purposes. Disallowance of lease rentals - Held that:- despite few adjustments to the leased agreement relevant for the AY under consideration, the essential facts relating to the ownership of the vehicle i.e., the ownership remains the lessor and therefore, the lease in question constitutes operating lease. Therefore, the lease rentals paid by the assessee constitutes an allowable expenditure.- Decided in favour of assessee. Disallowance with regard to the employees contribution to PF and ESIC - claim allowed by CIT(A) - Held that:- It is a settled position of the issue that the payments made by the assessee towards PF and ESIC are eligible for deduction if the same have been made on or before the due date of filing of return of income. As well the due date includes the grace period. Undisputed fact is that the assessee made the payments within the said grace period prior to the due date filing of the return of income. Therefore, we find no infirmity in the decision of the CIT (A) in allowing the assessee’s appeal. - Decided against revenue. Issues Involved:1. Inclusion of notional interest on interest-free security deposit for computing Annual Letting Value (ALV) of property.2. Deduction of maintenance expenses paid to housing society in computing income from house property.3. Applicability of Section 145A of the Income Tax Act to unutilized MODVAT credit.4. Disallowance of lease rent on the grounds that the lease agreements were financial arrangements.5. Levy of penalty under Section 271(1)(c) of the Income Tax Act.6. Disallowance of employees' contribution to PF and ESIC.Issue-wise Detailed Analysis:1. Inclusion of Notional Interest on Interest-Free Security Deposit for Computing ALV of Property:The first issue pertains to the inclusion of notional interest on the interest-free security deposit received from the licensee of the house property for computing the ALV. The assessee received a monthly rent of Rs. 45,000 and a security deposit of Rs. 1.8 Crores. The Assessing Officer (AO) included notional interest at 12% on the deposit, revising the ALV upwards. The CIT (A) upheld this decision. However, the Tribunal noted that the actual rent received is a reliable indicator of the property's earning capacity, and there was no evidence of rent deflation. The Tribunal also highlighted that including notional interest leads to double taxation since the interest earned on the deposit was already taxed. Consequently, the Tribunal decided in favor of the assessee, excluding the notional interest from the ALV computation.2. Deduction of Maintenance Expenses Paid to Housing Society in Computing Income from House Property:The second issue involves the deduction of maintenance expenses paid to the housing society. The assessee argued these expenses should be deductible under Section 23 of the Act. The Tribunal referred to various decisions, including Aloo Bejan Daver vs. ITO, which supported the deduction of such expenses from the gross rent to arrive at the ALV. The Tribunal followed these precedents and allowed the deduction of maintenance expenses, ruling in favor of the assessee.3. Applicability of Section 145A of the Income Tax Act to Unutilized MODVAT Credit:The third issue concerns the addition to the closing stock on account of unutilized MODVAT credit under Section 145A. The AO added Rs. 31,04,093 to the closing stock. The Tribunal referred to several decisions, including the assessee's own case for AY 2001-02, which established that adjustments under Section 145A should be made to all inventories, including opening stock, purchases, and sales. The Tribunal directed the AO to recompute the profits after making the necessary adjustments, allowing the assessee's ground for statistical purposes.4. Disallowance of Lease Rent on the Grounds that the Lease Agreements were Financial Arrangements:The fourth issue relates to the disallowance of lease rent claimed by the assessee. The AO treated the lease agreements as financial arrangements and disallowed the lease rentals. The Tribunal referred to a Third Member decision in the assessee's own case for AY 1996-97 to 1998-99, which classified the lease as an operating lease, allowing the lease rentals as revenue expenditure. The Tribunal followed this precedent and ruled in favor of the assessee, allowing the lease rentals as deductible expenditure.5. Levy of Penalty under Section 271(1)(c) of the Income Tax Act:The fifth issue involves the levy of penalty under Section 271(1)(c) connected to the quantum appeal for AY 2005-06. Since the Tribunal granted relief to the assessee by deleting the addition in the quantum appeal, the penalty under Section 271(1)(c) was deemed unsustainable. The Tribunal allowed the assessee's appeal on this ground.6. Disallowance of Employees' Contribution to PF and ESIC:The sixth issue pertains to the disallowance of employees' contribution to PF and ESIC. The AO disallowed Rs. 3,13,235, which was later allowed by the CIT (A) on the grounds that the payments were made before the due date of filing the return. The Tribunal upheld the CIT (A)'s decision, referencing judgments that supported the allowance of such contributions if paid before the due date of filing the return.Conclusion:The Tribunal allowed the assessee's appeals on several grounds, including the exclusion of notional interest from ALV computation, deduction of maintenance expenses, and allowance of lease rentals. The Tribunal also directed the AO to recompute profits after making necessary adjustments under Section 145A. The penalty under Section 271(1)(c) was deemed unsustainable following the relief granted in the quantum appeal. The Revenue's appeal was dismissed, and the assessee's appeals were partly allowed for statistical purposes.