Appeal partially allowed: ALV enhancement & Service Tax deleted, interest disallowance removed, but IDFC charges upheld.

The Tribunal partly allowed the appeal, deleting the enhancement of Annual Letting Value (ALV) and the inclusion of Service Tax in rental income. The disallowance of interest on borrowed funds was also deleted. However, the disallowance of professional charges paid to IDFC was upheld.

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Issues Involved:
1. Enhancement of Annual Letting Value (ALV) and inclusion of Service Tax in rental income.
2. Disallowance of interest on borrowed funds.
3. Disallowance of professional charges paid to IDFC.

Detailed Analysis:

Issue 1: Enhancement of Annual Letting Value (ALV) and Inclusion of Service Tax in Rental Income
- Enhancement of ALV:
- The CIT(A) enhanced the ALV of the let-out property by Rs. 1,67,74,073/- and omitted to give relief in respect of Service Tax.
- The assessee derived rental income from a school building and claimed that a portion of the rental income included Service Tax, which was not mentioned in the lease agreement.
- The CIT(A) applied 8% on the total investment to compute the ALV, which was contested by the assessee.
- The Tribunal found that the CIT(A) did not undertake the necessary exercise to compute the ALV as per guidelines, and no comparable cases were brought on record.
- The Tribunal referenced the Full Bench of the Delhi High Court in CIT vs. Moni Kumar Subba, which provided that the annual letting value should be the sum at which the property might reasonably be expected to let from year to year.
- The Tribunal concluded that the rent paid by the lessee was fair and reasonable, and there was no basis for the CIT(A) to enhance the ALV. The enhancement made by the CIT(A) was deleted.

- Inclusion of Service Tax:
- The CIT(A) admitted additional evidence showing that the assessee paid Service Tax for the assessment year under appeal.
- The Tribunal noted that the Service Tax is a liability upon the assessee-company and should be an allowable deduction.
- The addition of Rs. 16,80,870/- on account of Service Tax was deleted.

Issue 2: Disallowance of Interest on Borrowed Funds
- The assessee claimed interest on borrowed funds of Rs. 2,20,46,017/- and the A.O. disallowed 50% of the interest due to the absence of specific bifurcation of funds used for land and building and other assets.
- The assessee provided details showing that the borrowings were used for the construction of the school building.
- The Tribunal found that the entire borrowed funds were utilized for the construction of the school building, and similar deductions in earlier years were not disputed.
- The disallowance of interest was deleted, and the ground of appeal of the assessee was allowed.

Issue 3: Disallowance of Professional Charges Paid to IDFC
- The assessee claimed professional charges paid to IDFC for processing a loan application, which was disallowed by the A.O. and confirmed by the CIT(A).
- The assessee argued that the service fees fall under the definition of interest under section 2(28A) of the I.T. Act and should be allowable under section 24(b).
- However, the Tribunal noted that the assessee did not provide evidence to show that the professional charges were towards a loan utilized for assets yielding rental income.
- The disallowance of professional charges was upheld, and this ground of appeal was dismissed.

Conclusion:
The appeal of the assessee was partly allowed. The enhancement of ALV and the inclusion of Service Tax in rental income were deleted, and the disallowance of interest on borrowed funds was also deleted. However, the disallowance of professional charges paid to IDFC was upheld.

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