The Hon’ble Sri Justice v. Ramasubramanian

THE HON’BLE SRI JUSTICE V. RAMASUBRAMANIAN AND THE HON’BLE SMT JUSTICE ANIS I.T.T.A.No. 276 of 2016 JUDGMENT:(Per VRS,J) The Revenue has come up with the above appealunder Section 260A of the Income Tax Act, 1961 (for brevity ‘the Act’), raising the following questions of law: 1)Whether, on the facts and in thecircumstances of the case, the order of theTribunal is not perverse? andcircumstances of the case, the order of theTribunal is not perverse? and 2)Whether, on the facts and in thecircumstances of the case, the Tribunal wasjustified in holding that notional interest oninterest free loan of Rs.22 crores cannot beconsidered for computation of ALV, withoutappreciating the fact that there is nobusiness transaction between the assesseeand M/s. Quality Care India Limited otherthan rental transaction and, thus, the loanpartakes the character of rental deposits?circumstances of the case, the Tribunal wasjustified in holding that notional interest oninterest free loan of Rs.22 crores cannot beconsidered for computation of ALV, withoutappreciating the fact that there is nobusiness transaction between the assesseeand M/s. Quality Care India Limited otherthan rental transaction and, thus, the loanpartakes the character of rental deposits? 2. Heard Mr. J. V. Prasad, learned senior standingcounsel for Income Tax Department, appearing for theappellant.counsel for Income Tax Department, appearing for theappellant. 3. The respondent-assessee filed a return of incomeon 12.11.2007 declaring a net loss of Rs.33,62,849/-. During scrutiny assessment proceedings, the AssessingOfficer noted various things, including a LeaseAgreement, dated 26.09.2001, effective from 01.04.2001,under which the assessee was to receive a licence fee ofRs.32,40,000/- for utilization of the leased premises andfurniture and fittings. Out of the said amount,Rs.16,20,000/- was to be towards premises and thebalance amount was to be towards furniture and fittings. 4. The Assessing Officer also noted, during thescrutiny assessment proceedings, that the total built uparea of the licensed premises was 1,35,000/- square feet. The Lease Agreement provided for payment of arefundable deposit of Rs.2 crores to the assessee. Therefore, the Assessing Officer was of the view that theassessee, who derived benefit out of an interest freedeposit, should also take a part of the same towardsannual letting value (ALV) of the property. Working outthe interest deemed to be received by the assessee at12% per annum, amounting to Rs.24 lakhs, the AssessingOfficer computed the ALV of the leased premises atRs.40,20,000/- as against Rs.16,20,000/- declared by the assessee. 5. After examining the assessment records, theCommissioner of Income Tax (CIT) initiated proceedingsunder Section 263 of the Act and passed an order, dated11.01.2012, holding that the assessee also had anothertransaction with the lessor, under which the assesseereceived interest free security deposit of Rs.22 crores. Therefore, the CIT was of the view that notional interest onthis security deposit should have been considered, whiledetermining the ALV. The CIT also dealt with certain otherissues, about which we are not concerned in this appeal. 6. As against the order of the CIT, dated 11.01.2012,the assessee filed an appeal in I.T.A.No.441/Hyd/2012before the Income Tax Appellate Tribunal. The Tribunalallowed the appeal partly, by an order, dated 30.01.2015,in so far as the calculation of notional interest on the loanamount of Rs.22 crores, as part of the ALV. Therefore,the Revenue is before us. 7. Relying upon a decision of the Full Bench of theDelhi High Court in Commissioner of Income Tax Vs.Moni Kumar Subba[[1]], it is contended by Mr. J.V.Prasad,learned senior standing counsel, that the statute uses the 6. As against the order of the CIT, dated 11.01.2012,the assessee filed an appeal in I.T.A.No.441/Hyd/2012before the Income Tax Appellate Tribunal. The Tribunalallowed the appeal partly, by an order, dated 30.01.2015,in so far as the calculation of notional interest on the loanamount of Rs.22 crores, as part of the ALV. Therefore,the Revenue is before us. 7. Relying upon a decision of the Full Bench of theDelhi High Court in Commissioner of Income Tax Vs.Moni Kumar Subba[[1]], it is contended by Mr. J.V.Prasad,learned senior standing counsel, that the statute uses the expression “might” in Section 23(1)(a) and that, therefore,the Assessing Officer was bound to take into account thebenefits that the assessee derived out of differenttransactions, if they were between the same lessor andthe same lessee. In the case on hand, the lesseehappened to be the same Company, which also lent aninterest free loan amount of Rs.22 crores to theassessee. Therefore, it is his contention that the interestthat is payable on the said amount, should also beincluded to the rent that was fixed under the RentalAgreement. 8. We have carefully considered the abovesubmissions. 9. At the outset, it should be pointed out that thedecision of the Full Bench of the Delhi High Court aroseout of a case where there was a single arrangement oragreement between the assessee and another party. Under the lease agreement, the monthly rent was fixed atRs.90,000/-. But, a security deposit, which was interestfree, to the tune of Rs.8.58 crores, which representedalmost about 100 times the monthly rent, was fixed. Therefore, taking note of thehuge variance between the monthly rent and the interestfree security deposit, the Full Bench of the Delhi High Court came to the conclusion that a proper interpretationto Section 23(1)(a) would be to calculate the ALV on thebasis of what the property may reasonably fetch, if let outby a willing lessor to a willing lessee uninfluenced by anyextraneous circumstances. As a matter of fact, the FullBench of the Delhi High Court formulated certainprinciples to be followed in such cases, which can beusefully extracted as follows: “(i) ALV would be the sum at which the propertymay be reasonably let out by a willing lessor to awilling lessee uninfluenced by any extraneouscircumstances. (ii) An inflated or deflated rent based onextraneous consideration may take it out of thebounds of reasonableness. (iii) Actual rent received, in normalcircumstances, would be a reliable evidenceunless the rent is inflated/deflated by reason ofextraneous consideration. (iv) Such ALV, however, cannot exceed thestandard rent as per the rent control legislationapplicable to the property. (v) If standard rent has not been fixed by theRent Controller, then it is the duty of theassessing officer to determine the standard rentas per the provisions of rent control enactment. (vi) The standard rent is the upper limit, if the fair rent is less than the standard rent, then it is thefair rent which shall be taken as ALV and not thestandard rent.” But, in the case on hand, there are actually twotransactions, both of which were not found by theAssessing Officer or by the CIT to have a direct nexuswith each other. One transaction was not even found tobe an integral part of another transaction. 10. As a matter of fact, the Lease Agreement, dated26.09.2001, fixed the licence fee at Rs.32,40,000/- forutilization of the leased premises as well as furniture andfittings. The Lease Agreement also provided for paymentof an interest free refundable deposit of Rs.2 crores. Therefore, in the scrutiny assessmentproceedings, the Assessing Officer calculated interest at12% per annum on the interest free refundable deposit ofRs.2 crores and added a sum of Rs.24 lakhs to the leaseamount fixed under the Lease Agreement, But, in the case on hand, there are actually twotransactions, both of which were not found by theAssessing Officer or by the CIT to have a direct nexuswith each other. One transaction was not even found tobe an integral part of another transaction. 10. As a matter of fact, the Lease Agreement, dated26.09.2001, fixed the licence fee at Rs.32,40,000/- forutilization of the leased premises as well as furniture andfittings. The Lease Agreement also provided for paymentof an interest free refundable deposit of Rs.2 crores. Therefore, in the scrutiny assessmentproceedings, the Assessing Officer calculated interest at12% per annum on the interest free refundable deposit ofRs.2 crores and added a sum of Rs.24 lakhs to the leaseamount fixed under the Lease Agreement, dated 26.09.2001. If this had not been done in thescrutiny assessment proceedings, the decision of the FullBench of the Delhi High Court would have squarelyapplied to the case on hand. Once this has been done,the question as to whether the notional interest payable on the interest free loan granted, would also be taken intoaccount for calculating the ALV, stands on a completelydifferent footing. 11. As rightly observed by the Tribunal, no direct orindirect link has been established between the loanarrangement and the lease transactions. The LeaseAgreement, as we have pointed out earlier, was dated26.09.2001, effective from 01.04.2001. But, the loanarrangement was under an Agreement, dated 25.06.2002,which was almost a year after the Lease Agreement wasentered into. The Tribunal noted in paragraph 9 of itsorder that this loan arrangement was actually for thepurpose of clearing the debts of the assessee, under aOne Time Settlement Scheme with the Bank. Therefore,there was not even a scope for the Assessing Officer tocome to the conclusion that the loan arrangement had adirect nexus with the letting-out of the property. The loanarrangement was for the purpose of discharging the duesof the assessee to the Bank under a One Time SettlementScheme. Even if there had been no Lease Agreement,the assessee would have been under an obligation todischarge the same. 12. Therefore, in the above circumstances, we do not think that any substantial question of law arises for ourconsideration in the appeal. Hence, the Appeal isdismissed. Consequently, miscellaneous petitions if anypending in the appeal shall stand dismissed. There shallbe no order as to costs. __________________________ V. RAMASUBRAMANIAN, J ____________________ ANIS, J. 26[th] July, 2016cbs THE HON’BLE SRI JUSTICE V. RAMASUBRAMANIANÖ AND THE HON’BLE SMT JUSTICE ANIS I.T.T.A.No. 276 of 2016(Per VRS,J) cbs 26[th] July, 2016 [1](2011) 333 ITR 39 (Delhi) (FB)