2016 (4) TMI 310 - HC - Income Tax

Appeal Dismissed, Tribunal Decisions Upheld on Rental Income, Loan Interest, Deemed Dividend

The High Court dismissed the appeal, upholding the Tribunal's decisions on all three issues. The Tribunal's determinations regarding the rental income ... Annual value as yardstick for determination of annual letable value - reliance on municipal annual value for computation of income from house property - nexus between borrowed funds and acquisition for interest allowance - finality of Tribunal's findings of fact - deemed dividend under section 2(22)(e) of the Income Tax Act - taxability of loans/advances to a concern in which shareholder has substantial interest - chargeability of deemed dividend in the hands of shareholder and not the non shareholder concernAnnual value as yardstick for determination of annual letable value - reliance on municipal annual value for computation of income from house property - Tribunal's deletion of addition relating to rental income of Koramangala property was not a substantial question of law warranting interference. - HELD THAT: - The Tribunal applied the municipal (BBMP) annual value as a yardstick and noted that the CIT(A) had determined the annual letable value (ALV) at a figure higher than the municipal estimate and in a manner favourable to the Revenue; the assessee did not challenge the CIT(A)'s determination. The Tribunal followed precedent permitting the use of a reasonable rate of return or municipal valuation as the basis for ALV and affirmed the CIT(A)'s order. In these circumstances the High Court found no substantial question of law arising from the Tribunal's factual and legal conclusion and declined to interfere. [Paras 5, 6, 7]Question No.1 does not raise a substantial question of law; no interference with the Tribunal's deletion of the addition.Nexus between borrowed funds and acquisition for interest allowance - finality of Tribunal's findings of fact - Tribunal's confirmation of the CIT(A)'s finding that the loans were taken for acquisition and the consequent allowance/quantification of interest was not a question of law for the High Court to re examine. - HELD THAT: - The CIT(A) found on the materials that loans were utilised for acquisition of specified sites and made a factual determination as to the quantum of interest to be allowed (including apportionment where one site was not leased). The Tribunal affirmed these factual findings (paras reproduced in the order and the CIT(A)'s reasoning at para 4.4). The High Court held that the Tribunal is the final fact finding authority and that scrutiny of these findings of fact in the present appeal is outside its scope; accordingly no substantial question of law arises from Question No.2. [Paras 8, 9, 10, 11]Question No.2 does not raise a substantial question of law; the factual findings as to utilisation of funds and interest were confirmed and not open to re examination.Deemed dividend under section 2(22)(e) of the Income Tax Act - taxability of loans/advances to a concern in which shareholder has substantial interest - chargeability of deemed dividend in the hands of shareholder and not the non shareholder concern - Tribunal correctly held that the advance received from the lender company could not be treated as deemed dividend in the hands of the assessee (a non shareholder), and no substantial question of law arises. - HELD THAT: - The Tribunal analysed the limbs of section 2(22)(e) and accepted the view that the deeming fiction is intended to tax dividend in the hands of the shareholder on whose behalf or individual benefit the payment is made. It relied on the Special Bench and the Rajasthan High Court decision in Commissioner of Income Tax v. Hotel Hilltop to conclude that deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a non shareholder concern. As the assessee was not a shareholder of the lender company, the Tribunal negatived the Revenue's contention and the High Court found the decision squarely applicable on the facts; consequently no substantial question of law is made out. [Paras 12, 13, 14]Question No.3 does not raise a substantial question of law; the Tribunal's conclusion that the advance was not taxable as deemed dividend in the hands of the non shareholder assessee is affirmed.Final Conclusion: The appeal is devoid of merit and is dismissed; no substantial question of law arises from the Tribunal's findings on (i) determination of annual value, (ii) factual nexus for allowance of interest on borrowed funds, and (iii) non applicability of deemed dividend under section 2(22)(e) in the hands of a non shareholder. Issues Involved:1. Justification of the Tribunal in deleting the addition made by the assessing authority regarding rental income.2. Justification of the Tribunal in allowing interest on the loan borrowed.3. Consideration of advance received as deemed dividend under section 2(22)(e) of the Income Tax Act.Issue-wise Detailed Analysis:1. Rental Income Addition:The Tribunal addressed whether the addition made by the assessing authority concerning the rental income of a property in Koramangala was justified. The assessing officer had estimated the fair rent based on prevailing rates in the locality. However, the Tribunal observed that the annual value for the property was determined by the BBMP at Rs. 29,722 for the relevant financial year. The Karnataka High Court, in a previous case, had established that in the absence of other details, the ALV fixed by the Corporation should be the yardstick for determining the ALV under section 23 of the Act. The Tribunal noted that the actual rent received by the assessee was greater than the ALV determined by the BBMP. Consequently, the Tribunal upheld the CIT(A)'s determination of the ALV, which was more favorable to the Revenue, and dismissed the grounds raised by the Revenue.2. Interest on Loan Borrowed:The Tribunal examined whether the interest on the loan borrowed was justifiably allowed. The CIT(A) had found that the assessee borrowed loans to acquire the property, and there was no material evidence from the Revenue to disprove this finding. The CIT(A) noted that the property was initially acquired with a loan from ING Vysya Bank, which was later repaid using a loan from M/s Innovision Properties Pvt. Ltd. The outstanding loan was subsequently repaid by obtaining another loan from M/s Tayana Consult Pvt. Ltd. The CIT(A) directed the Assessing Officer to consider interest only on the amount relevant to the properties subjected to the lease agreement. The Tribunal confirmed these findings, and the High Court held that since the Tribunal is the ultimate fact-finding authority, no substantial question of law arose for consideration.3. Deemed Dividend under Section 2(22)(e):The Tribunal deliberated on whether the advance received from M/s Jupiter Capital Pvt. Ltd. could be considered a deemed dividend under section 2(22)(e) of the Act. The Tribunal referenced the legal provisions of section 2(22)(e) and concluded that the conditions for considering the advance as deemed dividend were not met because the assessee was not a shareholder in the lender company. The Tribunal relied on the decision of the Rajasthan High Court in Commissioner of Income Tax Vs. Hotel Hilltop, which held that deemed dividend can only be assessed in the hands of a shareholder of the lender company, not in the hands of a non-shareholder. Given that the assessee was not a shareholder, the Tribunal ruled that the advance could not be taxed as deemed dividend.Conclusion:The High Court dismissed the appeal, finding no merit in the Revenue's contentions. The Tribunal's decisions on all three issues were upheld, confirming that no substantial questions of law arose for consideration. The appeal was thus dismissed.