2018 (10) TMI 1173 - AT - Income Tax

Tribunal Upholds ALV Notional Interest, Capital Gains Computation, Confirms Deemed Dividend Deletion

The Tribunal dismissed the Revenue's appeal challenging the addition of notional interest to the Annual Letting Value (ALV) but upheld the computation of ... Income from house property - Addition to the Annual Letting Value on account of notional interest on interest free security received by the assessee - how to determine a reasonable/fair rent for the purpose of income from house property? - Held that:- As decided in assessee's own case in [2011 (3) TMI 497 - DELHI HIGH COURT] after considering the decisions in the case of Mrs. Sheila Kaushish (1981 (8) TMI 1 - SUPREME COURT) and Satya Co. Ltd. (1993 (8) TMI 293 - CALCUTTA HIGH COURT) upheld the finding of the Tribunal in setting aside the Annual lettable Value determined by the Assessing Officer and laid guidelines for determining Annual Letting Value. Under Section (23)(1)(a), the Assessing Officer has to decide the fair rent of the property. While deciding the fair rent, various factors could be taken into account. In such cases various methods like the contractors method could be taken into account. If on comparison of the fair rent with the actual rent received, the Assessing Officer finds that the actual rent received is more than the fair rent determinable as above, then the actual rent shall constitute the annual value under Section (23)(1)(b) of the Act. Now, applying the above test to the facts of this case, we find a categorical finding of fact recorded by the Tribunal that the actual rent received by the assessee was more than the fair rent. Under the above circumstances, in view of the said finding of fact, we do not see any reason to interfere. - decided in favour of assessee. Addition of long-term capital gain and short-term capital gain arising from transfer of leasing rights of the land located at Silliguri and Darjeeling - CIT(A) held the leasing of the land as in the nature of ‘transfer’ in terms of provisions of section 2(47) of the Act and treated the prevailing market value of the property (deemed consideration under section 50C of the Act) as ‘consideration’ liable to capital gain tax - substantial interest - transfer of rights of enjoyment in property - Held that:- In the instant case, though the initial period of lease has been mentioned for 30 years but same is further extendable. The company to whom, the properties have been leased, has borrowed funds from financial institutions and has constructed hotel buildings. The financial institutions have been given right to sale the land in case of default in payment by the company. In such circumstances, it can safely be said that the assessee has transferred all his rights of enjoyment in property to the company. No infirmity in the finding of the CIT(A) of holding the transaction as transfer liable for capital gains under section 45 of the Act. Amount of sale consideration liable for capital gains - According to AO the amount of security deposit received of ₹ 35 crore is sale consideration received and he apportioned the sale consideration for computation of short-term capital gain and long-term capital gain - According to CIT(A), the apparent consideration for transferring the right over and above the normal lease was nil and, therefore, he invoked provisions of section 50C of the Act and held that value as per the stamp duty valuation should be the sale consideration for transfer of properties - Held that:- We find that during the relevant period, section 50C of the Act could be invoked only, if the property was registered before the Stamp Duty Authorities and in that case amount adopted by the Stamp Valuation Authority could be treated as full value consideration received. The amendment to include assessable value as full value consideration was inserted w.e.f. 01/10/2009 and, thus, the value assessable as per stamp value authority cannot be applied for taking full value consideration of the property. Once, we have held that provisions of section 50C are not applicable in the instant case, the question of referring the matter to the Valuation Officer in terms of section 50C(2) also does not arise. In the instant case, the assessee has received so-called security deposits as interest-free amount for the properties leased. This is the amount, which is actually received by the assessee for transfer of rights in the property. In our opinion, in the given circumstances of the case, for the purpose of computation of the capital gain as laid down in section 48 of the Act, the security deposit received has been rightly treated by the Assessing Officer as full value consideration received as a result of transfer of the capital asset. We, accordingly, set aside the capital gain worked out by the Ld. CIT(A) and restore that of the Assessing Officer. - decided in favour of Revenue. Addition u/s 2(22)(e) for deemed dividend - beneficial owner of the shares - Held that:- According to the provisions of the law the assessee must be the beneficial owner of the shares of 10% or more. In this case ld AO has not established whether the assessee is holding shares as the beneficial shareholder of 10% or more. No such finding in the assessment order. Merely because the shares are held by the minor son of the assessee and the loan is received by the assessee it cannot be established that assessee is the beneficial shareholder of 10% or more and therefore such loan amount is not chargeable to tax in the hands of the assessee. AO has also not categorically stated that this amount is not advance rent and not adjusted subsequently against the rent payable by the company to the assessee. According to us if it is an advance rent then it becomes a business transaction and the provisions of deemed dividend cannot apply to such transactions. The deposits received by the assessee has already been held by us as sale consideration received on transfer of rights in the property and, thus, in our opinion, it is not in the nature of advance or deposits, which could be held as liable for deemed dividend in terms of section 2(22)(e) of the Act. - Decided against revenue Issues Involved:1. Deletion of addition made to the Annual Letting Value (ALV) on account of notional interest on interest-free security deposit.2. Addition of long-term capital gain and short-term capital gain arising from the transfer of leasing rights of land.3. Addition under section 2(22)(e) of the Income Tax Act, 1961, regarding deemed dividend.Issue-wise Detailed Analysis:1. Deletion of Addition to ALV on Account of Notional Interest:The Revenue challenged the deletion of an addition of Rs. 97,02,000/- under the head 'income from house property' due to notional interest on interest-free security deposits received by the assessee. The Assessing Officer (AO) added this interest based on municipal by-laws that require adding 12.5% of the amount of interest-free security deposit exceeding six-month rent to determine the lettable value. The CIT(A) deleted this addition, noting that similar additions had been consistently deleted in previous years, a stance upheld by the ITAT and the Delhi High Court. The Tribunal reaffirmed this position, citing the Delhi High Court's ruling that notional interest on interest-free security deposits could not be added to the actual rent received for computing ALV under section 23(1)(a) of the Income Tax Act.2. Addition of Long-term and Short-term Capital Gains:The assessee leased lands at Siliguri and Darjeeling to a related company, receiving substantial interest-free refundable security deposits. The AO treated these transactions as transfers of capital assets, invoking section 2(47) of the Income Tax Act, and computed capital gains based on the entire security deposit amount. The CIT(A) upheld the characterization of the transactions as transfers but determined the consideration based on the stamp duty valuation of the properties, not the entire security deposit. The Tribunal agreed with the CIT(A) on the nature of the transactions as transfers but reinstated the AO's computation, treating the security deposits as the full value of consideration received for the transfer of rights in the property.3. Addition under Section 2(22)(e) - Deemed Dividend:The AO proposed an alternative addition under section 2(22)(e), treating part of the security deposit as deemed dividend due to the assessee's substantial shareholding in the lessee company. The CIT(A) deleted this addition, ruling that the deposit was advanced during the course of business and not liable as deemed dividend. The Tribunal upheld this deletion, noting that the deposits were already considered as sale consideration for the transfer of property rights, thus not qualifying as advances liable for deemed dividend under section 2(22)(e).Conclusion:The Tribunal dismissed the Revenue's appeal regarding the addition of notional interest to ALV, upheld the AO's computation of capital gains based on the security deposits, and confirmed the deletion of the deemed dividend addition. The assessee's appeal was dismissed in totality.