Tribunals
Summary and Review of Case Laws Decided by Income Tax Appellate Tribunals
Thursday, 28 January 2016 15:14

Proportionate disallowance of interest is uncalled for when loan is given on the grounds of commercial expediency - Mumbai Tribunal

Written by
Rate this item
(1 Vote)

Gist

1. Market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality

2. When loan was given on the grounds of commercial expediency, proportionate disallowance of interest is uncalled for and deserves to be deleted

Facts

Ground No. 1

1. Assessee firm filed its return of income on 26.07.2009 declaring a loss of Rs. 47,67,568/-

2. The assessee was owner of the ground and basement floor of Savani Millenium Tower Co-op Housing Society Ltd measuring 7,377/- Sq Fts. which was let out to M/S Shivani transport Pvt. Ltd at a monthly rent Rs. 25,000/- by taking interest free security of Rs. 3,30,62,710/- from the said company

3. Besides the assessee was also owner of 804 Sq Ft carpet area on ground floor of Shivani Millinium Tower which was let out to Toscano Infrastructure (P) Ltd with amenities and rent and other charge for services were Rs. 3,60,000/- p.a.

4. During the course of assessment proceedings the AO found from the profit and loss account that the assessee had charged expenses of Rs. 54,27,568/- against the rental income credited of Rs. 6,60,000/- thereby showing net profit of Rs. 47,67,567/-

5. The AO observed that the rent in respect of ground and basement floor let to M/S Shivani Transporter Pvt Ltd was quite low as compared to the market rent and a show cause was issued as to why the rent and compensation received from the property should not be assessed as income from house property and annual letting value of the property u/s 23(1) of the Act should not be calculated by taking interest on the security deposit on the lines of decision of Bombay Tribunal in the case of Trivili Investmentsts Ltd. The AO framed the assessment u/s 143(3) of the Act vide order dated 22/12/2011 by working out the ALV by adding interest @ 8.5% on Rs. 3,25,00,000/- i.e Rs. 27,62,500/- to the rent received for such property and calculated the income from house property at Rs. 23,95,730/- by rejecting the contention of the assessee that rent Rs. 25,000/- p.m was mutually decided by taking Rs. 3,25,00,000/- as interest free security

6. Aggrieved by the order of AO the matter was carried before the FAA but the FAA upheld the order of AO by following the order of his predecessor CIT(A) for the assessment year 2007-08

7. The ld counsel for the assessee submitted that the case of the assessee was covered in its favour by the order of tribunal in its own case in ITA No.286/Mum/2014 for the assessment year 2007-08 in which a similar issued had been decided in favour of the assessee to which the ld DR did not raise any objection

Ground No. 2

8. Assessee had taken a secured loan of Rs. 2,98,78,458/- from City Bank and unsecured loans of Rs.1,31,59,000/- from 52 loan creditors and paid interest on the secured and unsecured loan of Rs. 35,93,937/- and Rs. 17,60,084/- respectively

9. The assessee had advanced loan to M/S MSN Enterprises of Rs. 5,67,95,010/- on which no interest was received derived during the year

10. The AO upon finding that the assessee had advanced a sum of Rs.5,67,95,010/- to M/S MNS Enterprises on which no interest was credited in the P & L a/c whereas it had raised interest bearing funds both secured and unsecured and accordingly a show cause notice was given to the assessee for making the disallowance of Rs. 53,54,021/- (Rs. 35,93,937/-+Rs. 17,60,084/-)

11. The AO ultimately disallowed the interest claimed of Rs. 53,54,021/- by rejecting the reply of the assessee as filed vide letter dated 07.11.2011 that the said loan was given on interest to M/s MNS Enterprises but unfortunately became sticky and bad and therefore, no interest income was received . So much so that even the loan advanced could not recovered due to the precarious financial health of said party

12. The ld CIT(A) also dismissed the appeal of the assessee by following the order of predecessor CIT(A) in the assessement year 2007-08

Adjudication

Ground No. 1 : We are of the opinion that market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful that he can resort to enquire about the prevailing rate in the locality. We are of the view that municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. It is definitely a safe guide....The determination of the ALV by the Revenue authorities is erroneous and as mentioned elsewhere, the Municipal rateable value exhibited at page-31 of the Paper Book is much less than the annual let out value disclosed by the assessee. We, therefore, do not find any reason for making the impugned addition. Finding of the Ld. CIT(A) is set aside and the AO is directed to accept the annual let out value as offered by the assessee. Ground No. 1 is accordingly allowed

Ground No. 2 : Considering the factual matrix in the light of the observations of the Hon’ble Supreme Court (supra), we find that the loan was given on the grounds of commercial expediency and therefore the proportionate disallowance of interest is uncalled for and deserves to be deleted. In so far as the proportionate disallowance of interest on the debit balance of the partners is concerned, the same has to be considered in the light of the partnership deed and as the partnership deed is silent on charging of such interest, we do not find any reason for such disallowances. We, accordingly direct the AO to delete the addition of Rs. 17,14,747/-. Ground No. 2 is accordingly allowed.  

Cases referred to

1. S.A. Builders Ltd. Vs CIT 288 ITR 1 

Additional Info

Read 2352 times Last modified on Saturday, 13 February 2016 14:53
Anil B.

A practicing Chartered Accountant Anil B. acquired CA, CS and LL.B degrees with over 12 years of rich and diverse management experience across Banking & Financial Services, Insurance and the Logistics industry spanning various markets and geographies globally.

This email address is being protected from spambots. You need JavaScript enabled to view it.

Leave a comment

Thank you for reading! We welcome and appreciate your comments, but at the same time, make sure you are adding something valuable to this article. If you have any serious queries, suggestions or anything related to this article, feel free to share them, we really appreciate that.

If you want to give us any feedback or report any errors, you can email your concerns on taxpundit@taxpundit.org and we'll revert back soon.

Have you done Analysis of any Case? Tell Us About It.

SITE INFORMATION

All content herein is the copyright of Taxpundit. No images, text, or any other content may be, reproduced or redistributed without the express written consent of Taxpundit.

All Rights Reserved. All Content Copyright.

Newsletter

Subscribe to our newsletter and stay updated on the latest developments and special offers!

Company Master Data Since 1900. More than 1.75 Million Records. Register/Login to get FREE access. Read more
Toggle Bar