TaxTMI 
TaxTMI 
2008 (2) TMI 654
X X X X Extracts X X X X
X X X X Extracts X X X X
....out the objects of the partnership firm as that of dealing in commodities and the business of dealing in shares and securities or holding them by way of business investment, or business of providing finance whether by way of making loans or advances or otherwise for any activity or any other business or businesses as may be mutually agreed upon between the parties from time to time. The profits and losses of this partnership were to be shared, equally between the partners. Clauses 7 and 8 of the partnership deed are also relevant and are extracted for ready reference: "7. Capital - The capital of the Partnership shall be contributed by the Partners from time to time as and when considered necessary or expedient for the purpose of carrying on the partnership business in such proportion as the parties hereto may from time to time agree upon. The present capital of the partnership firm is Nil. 8. Interest - The partners may introduce capital and/or give loan to the firm, which shall carry interest at the rate of 12 per cent per annum or such other rates as may be mutually agreed upon between the partners from time to time. Provided however, the interest on capital and/or loans s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent in the partnership, by borrowing monies from M/s. Reliance Capital Ltd. He took this Bench through the paper book, specifically to the statement of accounts of the assessee and as well as that of M/s Shreenath Enterprises to demonstrate that the amount in question was in fact an investment made by the assessee company. He took this Bench to section 14A and submitted that the CIT(A) has not correctly appreciated this section. His case is that the return of investment made in the partnership firm is exempt under section 10(2A) of the Act and thus does not form part of total income and hence he submits that any expenditure incurred in relation to earning of non-taxable income is not allowable in terms of section 14A. His case is that the CIT(A) has wrongly interpreted clause 8 of the partnership deed. For the assessment year 2001-02 he submits that the assessee has not earned any income whatsoever during the year from the partnership concern and thus no expenditure is allowable. On the reliance being placed by the CIT(A) on the judgment of the Hon'ble Supreme Court in the case of Rajendra Prasad Moody (supra), the learned departmental representative submits that in that case the H....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at during the year there is no exempt income earned by the assessee. The entire expenditure in question was relatable to the earning of Rs. 99,01,000 and thus the same should be allowed 7. After hearing rival contentions and considering the papers on record the orders of the authorities below we are of the considered opinion that the order of the first appellate authority calls for no interference for the following reasons: 7.1 The assessee in this case, in pursuance of the objects of carrying on of business of dealing in commodities and business of dealing in shares and securities, etc. has investment in the partnership firm. Clause 8 of the partnership firm clearly states that the assessee shall be entitled to interest at the rate of 12 per cent on the capital introduced. The earning of interest is capped at the maximum amount of profit earned In other words, the interest on capital/loans, should not exceed the aggregate amount of profit earned by the firm in the year. Section 28(v) of the Act merely states that the interest earned on a partnership firm is taxable. For the assessment year 2001-02 the assessee had in fact earned interest of Rs. 99,01,000 and the Assessing Of....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Facts in brief : The assessee owns a property at plot No. 25, D-16, Vasant Vihar, New Delhi. The assessee had let out the said property to M/s. Reliance Industries Ltd. vide agreement dated 8-10-1998. for an annual rent of Rs. 60,000 and a security deposit of Rs. 3,70,60,000. The assessee had computed the annual letting value of the said property under section 23(1)(b) of the Act by taking the rent received at Rs. 60,000 and offered the same to tax in its returns of income. During the course of assessment proceedings the assessee submitted that the municipal rateable value (MRV) as per Delhi Municipal Authority is Rs. 22,230 only. Thus he submits that this MRV being less than the rent received, the higher of the two has to be taken into consideration while computing the annual letting value under section 23(1)(b) of the Act. The Assessing Officer disagreed with the assessee and computed the annual letting value by considering the annual rent at Rs. 14,40,000, i.e. municipal rent of Rs. 1,20,000. On appeal, the first appellate authority upheld the order of the Assessing Officer. Further aggrieved, the assessee is before us. 12. Mr. Mistry, the learned counsel for the assessee s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....70,60,000 in this case and the interest has to be considered while arriving at the fair market value of the property. He specifically submitted that section 23(1)(b) is not applicable to the facts of the case and only section 23(1)(a) has to be considered. He placed reliance on the judgment on the order of I-Bench of the Tribunal in the case of ITO v. Makrupa Chemicals (P.) Ltd. [2007] 108 ITD 95 (Mum.) and submitted that in this case the judgments of the Hon'ble Supreme Court in the cases of Mrs. Sheila Kaushish v. CIT [1981] 131 ITR 435, Dewan Daulat Rai Kapoor v. New Delhi Municipal Committee [1980] 122 ITR 700 and the judgment in the case of Dr. Balbir Singh v. Municipal Corpn. of Delhi [1985] 152 ITR 388^1 have been considered and it was held that the fair rental value should be decided by taking into account various factors and what rent the property would fetch on a bargain between a willing lessor and lessee uninfluenced by any extraneous circumstances may afford guiding test of reasonableness. The supported the order of the first appellate authority as well as the Assessing Officer and submitted that the Assessing Officer has relied on report in Times Property - Really New....
X X X X Extracts X X X X
X X X X Extracts X X X X
....serving that the Hon'ble court had not expressed any opinion as to whether the notional interest could be considered as part of ALV under section 23(1)(a) of the Act. Having held so, he did not proceed to determine the ALV under section 23(1)(a). On the contrary, he proceeded to determine the ALV under section 23(1)(b) by taking into consideration the actual rent received and the notional interest on interest free deposit by observing at page 2 of his order "the interest on deposit received by the assessee also partakes the character of the rent tough not expressly called rent". Such approach is not supported by any case law. On the contrary, the Hon'ble Calcutta High Court judgment in the case of Satya & Co. (supra) clearly holds that notional interest cannot be added to the amount received. This judgment has been usefully referred and impliedly approved by the Hon'ble Bombay High Court in the case of J.K. Investors (Bombay) Ltd. (supra). Therefore, the decision of the Assessing Officer in determining the ALV after taking into consideration the notional interest was contrary to the binding judgment of the High Court. He also failed to consider the effect of various judgments of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n "the gross annual rent at which such house or building... May reasonably be expected to let from year to year" as contained in section 127(a) of the Calcutta Municipal Act, 1923 which is analogous to the expression in section 23 of the Act was considered by the Hon'ble Supreme Court in the case of Corporation of Calcutta v. Smt. Padma Devi AIR 1962 SC 151. Their Lordships at Page - 153 observed as under: "A bargain between a willing lessor and willing lessee uninfluenced by any extraneous circumstances may afford a guiding test of reasonableness. An inflated or deflated rate of rent based upon fraud, emergency, relationship and such other considerations may take it out of the bounds of reasonableness." On the same page, it was further observed as under: "A combined reading of the said provisions leaves no room for doubt that a contract for a rent at a rate higher than the standard rent is not only not enforceable but also that the landlord would be committing an offence if he collected a rent above the rate of the standard rent. One may legitimately say under those circumstances that a landlord cannot reasonably be expected to let a building for a rent higher than the st....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be exceeded in any case. 14. All the decisions mentioned above were rendered in connection with the determination of ratable value under municipal laws. The ratio laid down in the above decisions has been applied by the Apex Court for determining the annual letting value under section 23 of the Act in the case of Mrs. Sheila Kaushish v. CIT 131 ITR 435 on account of similarity in the provisions under the municipal enactments and section 23 of Income-tax Act, 1961. Thus the ratable value, if correctly determined, under the municipal laws can be taken as ALV under section 23(1)(a) of the Act. To that extent we agree with the contention of the Ld. counsel of the assessee. However, we make it clear that ratable value is not binding on the Assessing Officer. If the Assessing Officer can show that ratable value under municipal laws does not represent the correct fair rent, then he may determine the same on "the basis of material/evidence placed on record. This view is fortified by the decision of Patna High Court in the case of Kashi Prasad Kataruka v. CIT 101 ITR 816. 15. The above discussion leads to the conclusions that - (i) ALV would be the sum at which the property may be re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 method like contractors' method could be taken into account." 17. The circumstances mentioned above are only illustrative and not exhaustive. Therefore, in our opinion, the Assessing Officer can take into consideration any circumstance which may inflate/deflate the fair rent under section 23(1)(a) of the Act. If such rent is less than the standard rent, then the same shall be taken as fair rent otherwise the standard rent shall be considered as fair and under section 23(1)(a) of the Act. Once the fair rent is so determined, then the applicability of section 23(1)(b) would have to be considered. If the actual rent received/receivable is higher than the fair rent, then the actual rent would be treated as ALV, otherwise the fair rent so determined shall be taken as ALV." [Emphasis ours] 16. A reading of the above shows that the standard rent is the upper limit. The property is situated in Delhi and is undisputably covered under the Rent Control Act. Hence the Standard rent had to be arrived at....