TaxTMI 
TaxTMI 
TaxTMI 
2012 (12) TMI 378
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....ch had been let out at meager rent of Rs.3,80,000/- per annum. It was further found that the flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs.26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs.12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The AO asked the assessee to explain as to why rental income should not be assessed a house property income and that annual letting value (ALV) should not be computed on the basis of fair rental value in the market. The assessee submitted that the property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties. It was accordingly urged that the rental income should be assessed as business income. As regards annual letting value, assessee submitted that the flats were occupied by tenants since last several years and it was not possible to revise the rent with respect to market value. It was further submitted that the rent ....
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....4(a). 2.3 The assessee disputed the decision of AO and submitted before CIT(A) that the property was covered under Maharashtra Rent Control Act, 1999 and, therefore, ALV had to be taken as standard rent and therefore, the AO was not justified in taking the market rent. The assessee also argued that the rental income should have been assessed as business income. The assessee further argued that the AO was not justified in not allowing deduction on account of Municipal tax. CIT(A) after necessary examination of records noted that the rental income in assessment year 2005-06 had assessed as income from house property and no appeal had been filed by the assessee. CIT(A) observed that though rental income was assessed as business income till 2003-04, the principle of resjudicata was not applicable in case of income tax proceedings. CIT(A) therefore confirmed the finding of AO regarding assessment of income as house property income. CIT(A) also rejected the claim of deduction on account of municipal tax after observing that the same was included in deduction allowed by AO @ 30% under section 24(a). CIT(A) also did not accept the claim of the assessee that rent actually received or stand....
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....nly an arrangement to reduce tax and therefore the property could not be taken as covered under Rent Control Act. It was thus argued that the fair rental value has to be adopted as ALV and that municipal ratable value was not binding on the assessing authorities. Reliance was placed on the Third Member decision of the Tribunal in the case of Baker Investor Services (125 ITD 1) and on the full Bench judgment of the Hon'ble High Court of Delhi in the case of DCIT vs. Moni Kumar Subba (333 ITR 38). In regard to municipal tax, the ld. DR placed reliance on the orders of authorities below. 2.6 We have perused the records and considered the rival contentions carefully. The dispute relates to various facets of assessments of rental income from letting out of property such as nature of income, determination of annual value and allowability of deduction on account of municipal tax. As regards the nature of income, the issue is settled by the judgment of Hon'ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. (42 ITR 49), in which it has been held that, in case, income falls under a specific head, it has to be assessed under same head. In the Income tax Act, ....
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....ch cases could not be let beyond the rent fixed in the Rent Control Act. The same view has been taken by the Hon'ble Supreme Court earlier in the case of Dewan Daulat Rai vs. NDMC (122 ITR 700). These cases relate to property covered under Rent Control Act. In cases where properties are not covered under Rent Control Act, there is no limit fixed on the values for which a property may be let from year to year and, therefore in such cases the fair rent for which property may be let has to be considered as annual value. This aspect has been examined in detail in the Third Member decision of the Tribunal in the case of Baker Technical Services (P) Ltd. (126 TTJ(Mum.)(TM)455). In the said case the Tribunal referred to the judgment of Hon'ble Supreme Court in the case of Motichand Hirachand & Ors vs. Bombay Municipal Corporation AIR 1968 SC AIR 441 in which in the context of phrase "rent at which property might reasonably be let from year to year" it was held that there are various methods applied in order to arrive at such hypothetical rent, for instance, the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of c....
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....of Reclamation Reality India Pvt. Ltd.(supra), had not followed the Larger Bench decision after observing that the same was contrary to the judgment of Hon'ble Jurisdictional High Court in the case of M.P. Sonavala (177 ITR 246). 2.9 We have carefully gone through the judgment of the High Court in case of M.O. Sonavala (supra), and we find that the same related to property covered under Rent Control Act. This is clear from the reference made to judgments of Supreme Court in case of Sheila Kaushish (supra) and Dewan Daulat Rai (supra), which related to properties covered under Rent Control Act. Even the judgment of Hon'ble High Court of Calcutta in the case of CIT vs. Prabhabati Bansali (141 ITR 419) followed by the Hon'ble Jurisdictional High Court related to property covered under Rent Control Act which is clear from the discussion in the last para at page 433 of the report in which it is clearly mentioned that there has to be overall limit on the rateable value which should not exceed the standard rent which applies only in case of property covered under the Rent Control Act. The Tribunal in case of Reclamation Reality India (P) Ltd. had followed the judgment of High Court in th....
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....nal companies and private/public limited companies having paid up share capital of Rs.1 crore or more. It has been submitted that since the property was covered under Rent Control Act, the standard Rent determined or determinable under Rent Control Act or actual rent received whichever is higher has to be taken as annual value. We are however unable to accept the arguments advanced. The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities. Therefore, in our view, the provisions of Rent Control Act cannot be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. In this case the AO ....
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....only 35% of the rent received from the share holder could be assessed as house property income. It was therefore, argued that 65% of administrative expenses should be allowed. The Ld. DR on this issue placed reliance on the orders of authorities below. 3.2 We have perused the records and considered the matter carefully. The dispute is regarding allowability of administrative expenses of Rs. 2,71,705/-. The ld. AR submitted that since 65% of rental income received from the director was assessable as business income, 65% of administrative expenses should be allowed. We find the argument convincing and reasonable. We have already held that rental income from Ms. Rekha Jalan has to be treated as business income and therefore we direct the AO to allow 65% of the expenses. 4. The third dispute is regarding nature of interest income received from ICDs and bills discounting. The AO treated interest income as income from other sources without any discussion in the assessment order. In appeal, CIT(A) remanded the matter to the AO who reported that the assessee vide letter dated 9.7.2009 admitted that the assessee was utilizing the funds lying with them for advancing loan and bill discounti....