2017 (5) TMI 409 - AT - Income Tax

Tribunal overturns additions on house property income, directs corrections for refundable deposit treatment.

Rashmi Dhariwal, New Delhi Versus ACIT, Circle-23 (1), New Delhi

The Tribunal partially allowed the appeal, overturning the additions under 'Income from House Property' based on notional interest and interest income. ... Income from house property - annual letable value of the house property - Held that:- In view of the decision of the Hon’ble Delhi High Court in CIT versus Moni Kumar Suba (2011 (3) TMI 497 - DELHI HIGH COURT ) we hold that the Ld. assessing officer as well as the Ld. CIT (A) were not correct in enhancing the annual value of the property by notional amount of interest on account of interest free refundable deposit given by the landlord to the assessee. In the result ground No. 4 to 10 of the appeal of the assessee are allowed. Method of accounting - interest income from Kisan Vikas Patra - Held that:- As considered the rival contentions and also per used the provisions of section 145 of the income tax act which provides that Income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. In view of this, we do not find any infirmity in the stand of the assessee of offering interest income from Kisan Vikas Patra on cash basis. In view of this we direct the assessing officer to delete the addition of ₹ 2 38007/– as well as interest from core molding of ₹ 9 0377/– amounting in all to ₹ 366618/- on account of interest income chargeable to tax under income from other sources. Issues Involved:1. Adequacy of opportunity and principles of natural justice.2. Admissibility and merit of additional evidence.3. Addition under 'Income from House Property'.4. Estimation of Annual Letting Value (ALV) based on notional interest.5. Adverse inference regarding payments made.6. Determination of ALV under Section 23(1)(c) of the Act.7. Consideration of Municipal Corporation of Delhi's ALV.8. Treatment of the entire principal amount of non-interest bearing refundable security deposit.9. Addition of interest income.10. Credit of TDS amount.Detailed Analysis:1. Adequacy of Opportunity and Principles of Natural Justice:The assessee argued that the CIT(A) erred in passing the order without giving a proper and adequate opportunity of being heard, violating the principles of natural justice. However, this ground was dismissed as it was deemed general in nature.2. Admissibility and Merit of Additional Evidence:The assessee contended that the CIT(A) failed to pass a reasoned order on the admissibility and merit of additional evidence submitted, despite calling for a remand report from the AO. This issue was not specifically addressed in the detailed analysis.3. Addition under 'Income from House Property':The CIT(A) confirmed the AO's addition of Rs. 36,33,966 under 'Income from House Property'. The AO viewed the transaction of leasing the property to M/s Bennett, Coleman & Co. Ltd. as a colourable device to evade tax. The Tribunal found that the AO and CIT(A) were incorrect in enhancing the annual value of the property by notional interest on the interest-free refundable deposit, referencing the Delhi High Court's decision in CIT vs. Moni Kumar Suba.4. Estimation of Annual Letting Value (ALV) Based on Notional Interest:The AO estimated the ALV of the flat at Rs. 51,91,380 based on notional interest at 10.75% on the security deposit. The Tribunal, citing the Delhi High Court's decision, held that notional interest on interest-free security deposits should not be considered for determining the ALV of the property.5. Adverse Inference Regarding Payments Made:The CIT(A) drew adverse inferences against the assessee regarding payments made to M/s Royal Timbers and M/s Price Enterprises based on statements recorded by the AO without giving the assessee an opportunity to cross-examine. This issue was not specifically addressed in the detailed analysis.6. Determination of ALV under Section 23(1)(c) of the Act:The assessee argued that the ALV should be determined under Section 23(1)(c) of the Act, considering the property was under renovation until March 2008. The Tribunal did not specifically address this argument but allowed the related grounds based on the Moni Kumar Suba decision.7. Consideration of Municipal Corporation of Delhi's ALV:The assessee contended that the ALV as per the Municipal Corporation of Delhi (Rs. 1,13,400) should be considered. The Tribunal agreed, referencing the Delhi High Court's decision that the municipal rateable value should be considered unless the AO can show it does not represent the correct fair rent.8. Treatment of the Entire Principal Amount of Non-Interest Bearing Refundable Security Deposit:The CIT(A) directed the entire principal amount of the non-interest bearing refundable security deposit received by the assessee to be added to the income of the assessee's husband. The Tribunal found this direction incorrect and allowed the related grounds of appeal.9. Addition of Interest Income:The AO added Rs. 3,28,385 on account of interest income, adopting the accrual method of accounting instead of the cash method followed by the assessee. The Tribunal held that the assessee is entitled to offer interest income on a cash basis and directed the AO to delete the addition.10. Credit of TDS Amount:The CIT(A) did not give credit for TDS amounting to Rs. 11,549 deducted by Core Moulding Pvt Ltd, despite taxing the income declared by the assessee in her revised return. This issue was not specifically addressed in the detailed analysis.Conclusion:The Tribunal allowed the appeal in part, specifically overturning the AO's and CIT(A)'s decisions regarding the addition under 'Income from House Property' based on notional interest and the addition of interest income. The Tribunal directed the AO to delete the additions and consider the municipal rateable value for determining the ALV. The appeal was partly allowed.