2015 (10) TMI 2026 - AT - Income Tax

Appeal partly allowed; deletion of addition under 'Income from House Property' and relief on bank interest disallowance.

The appeal was partly allowed, with the deletion of the addition under 'Income from House Property' and partial relief on the disallowance of bank ... Addition of income from House Property u/s. 23(1 )(a) - CIT(A) confirming the addition by rejecting the submissions of the assessee that no interest on interest free advance was assessable as income from House Property - Held that:- In the present case it is seen that the AO has not made any enquiry, nor any material has been brought on record to show that rent received by the assessee was lesser then the fair market rent nor any inquiry or investigation has been done to find out the effect of interest free deposits and to determine the fair market rent expected to be fetched by the property in question, as per clause (a) of section 23(1). Under these circumstances, AO cannot be allowed to make addition on account of notional interest. Since this issue stands squarely covered with the case of Mrs. Bharati Anirudh Kilachand [2015 (1) TMI 1104 - ITAT MUMBA] it is held that the addition made by the AO is contrary to law and facts and the same is directed to be deleted. - Decided in favour of assessee. Addition on account of disallowance of Bank Interest and Bank Charges on the ground that the Bank Loan is utilized for other than business purpose - Held that:- As it has been argued that part of the loan raised during the year has been utilized for repayment of the old loan. This fact has not been controverted by the Ld. DR. Also stated before us that no disallowance has been made out to the amount of interest paid on the old loans in earlier years. In view of all these facts and circumstances, we direct the AO to allow the proportionate amount of interest paid on amount of loan of Bajaj Finance which has been utilized in making repayment of the old loans. The balance disallowance out of the amount of interest is confirmed. With regard to disallowance of loan processing charges and bank charges it is noted by us that these have been incurred for the purpose of the business of the assessee and therefore these are directed to be allowed. - Decided in favour of assessee in part. Issues Involved:1. Confirmation of assessment under Section 143(3) of the Income Tax Act, 1961.2. Addition under the head 'Income from House Property' by including notional interest on an interest-free advance.3. Incorrect amount of security deposit considered.4. Notional interest on interest-free deposit as income from House Property.5. Disallowance of bank interest and bank charges on the ground that the bank loan was utilized for non-business purposes.Detailed Analysis:Issue 1: Confirmation of Assessment under Section 143(3)- Ground No. 1 and 6 are general and do not need specific adjudication.Issue 2: Addition under the Head 'Income from House Property'- The assessee challenged the addition of Rs. 2,20,316 under the head 'Income from House Property' by rejecting the submission that no interest on the interest-free advance of Rs. 25,15,000 was assessable as income under Section 23(1)(a) of the Income Tax Act, 1961.- During assessment, the AO observed that the assessee had rented out a property at a lower rental income by not considering the interest element on an interest-free security deposit of Rs. 25,15,000. The AO computed 12% interest per annum on the security deposit to determine the fair market rent, increasing the rental income from Rs. 60,000 to Rs. 85,150 per month.- The CIT(A) upheld the AO's decision, emphasizing that the interest income element could not be ignored in determining the fair rent of the property.Issue 3: Incorrect Amount of Security Deposit Considered- The assessee contended that the security deposit amount should be Rs. 25,00,000 instead of Rs. 25,15,000. However, since the addition was deleted under Issue 2, this ground became infructuous and was dismissed.Issue 4: Notional Interest on Interest-Free Deposit- The assessee argued that the AO did not ascertain the fair market rent as per Section 23(1)(a) and made the addition based on notional interest without any investigation or comparable case. The assessee cited judgments from the Delhi High Court and Mumbai ITAT supporting that notional interest should not be added to the actual rent received.- The Tribunal found that the AO had not conducted any enquiry or investigation to determine the fair market rent and had made the addition based on conjectures. Citing relevant judgments, the Tribunal held that the addition of Rs. 2,20,316 was contrary to law and facts and directed its deletion.Issue 5: Disallowance of Bank Interest and Bank Charges- The AO disallowed Rs. 10,68,568 on account of bank interest and charges, claiming the bank loan was used for non-business purposes. The disallowances included:- Interest on loan: Rs. 8,26,301- Loan processing charges: Rs. 1,88,815- Bank charges: Rs. 53,452- The CIT(A) confirmed the disallowance. However, the Tribunal noted that part of the loan was used to repay old loans, and no disallowance had been made for interest on old loans in previous years.- The Tribunal directed the AO to allow the proportionate amount of interest on the loan used to repay old loans and confirmed the balance disallowance. The loan processing charges and bank charges were directed to be allowed as they were incurred for business purposes.Conclusion:- The appeal was partly allowed, with the deletion of the addition under 'Income from House Property' and partial relief on the disallowance of bank interest and charges.