Decided on May 16,2014

Jayshri Gautambhai Desai Appellant


- (1.) THIS is an appeal at the behest of assessee which has emanated from the order of CIT(A), Valsad, dated 31.10.2012 for assessment year 2007 -08. The effective grounds of appeal are as under: "(1) On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) erred in confirming the order of the ITO for the addition to the extent of Rs. 5,59,000/ - applying the notional annual value of the residential property instead of considering the Municipal Retable Value available for the residential property deemed to be let out u/s. 23(4) r.w.s. 23(1) of the Act. (2) On the facts and in the circumstances of the case and in law, both the lower authorities erred in adopting the notional and imaginary annual value for the residential property "deemed to be let out" purely on assumptions, presumptions and pure guess work, ignoring the explanations duly substantiated by the evidences furnished to establish the existence of Municipal Retable Value for the residential property and hence, the action of bot the lower authorities for substituting the annual value by the notional annual value is baseless, arbitrary and perverse and therefore, liable to be struck down. (4) The learned CIT (Appeals) has erred in confirming the adhoc disallowance to the extent of Rs. 29,204/ - on account of alleged Motor Car expenses and depreciation thereon." All the four grounds of appeal of the assessee are revolving around annual value of two flats in Mumbai.
(2.) THE A.O. observed that assessee owned three flats in Mumbai detailsas under: i. Flat no.3, Rekha Apartment, : Area - 965 Sq.Ft. 46, Ridges Road, Malabar Hill, Mumbai ii. Flat No.4, Rekha Apartment : Area - 306 Sq.Ft. 46, Ridges Road, Malabar Hill, Mumbai iii. Flat No.18, Paras Apartment : Area - 697 Sq.Ft. L.D. Ruparel Cross Marg "B", Mumbai Out of above three flats, the assessee has chosen to show notional income of flat nos. 3 & 4 of Rekha Apartment. Since the assessee had chosen residential property in Paras Apartment as self -occupied, a question for determining annual value arises before the A.O. for those other than self -occupied properties as per the provisions of Section 23(4) of the IT Act. As per Section 23(4) where the property of any assessee consist more than one house (a) the provisions of that sub -section shall apply only in respect of one of such houses, which the assessee may, at her option, specified this (b) the annual value of the house or houses, other than house in respect of which the assessee has exercised an option under Clause (a), shall be determined under sub -section (1) as if such house or houses had been let out. The A.O. gave reasonable opportunity of being heard on this issue, which was responded by the assessee vide letter dated 12.11.2009 & 02.12.2009. After considering the assessee's reply, the ld. A.O. assessed the notional income from both the properties, by considering following factors: i. Property no.1 & 2 are located in most posh area of Mumbai i.e. Malabar Hills and prevailing rate of rent on 2 bed room and a kitchen is ranging between Rs.50,000/ - to Rs. 1,50,000/ - per month. ii. Mumbai is considered to be a mega city and the business capital of the country and whose rental value is second highest in India after Gurgaon and fetching value of rent is between Rs.50,000/ - & 1,50,000/ -. iii. The flat situated at 18, Paras Apartment, L. D. Ruparel Cross Marg "B", Malabar Hills, Mumbai purchased at Rs.1.03 crore. Thus, value of the property at Serial Nos. 1 & 2 are also not less than Rs. 1 crore. iv. The assessee is doing diamond brokerage and also partner in jewellery business and having luxurious life. v. The assessee had paid interest of Rs.1,51,800/ - on borrowings, which had been set off against the business income. The borrowings were made for self -occupied property. vi. The assessee claimed that she was doing business of diamond brokerage in flat no.4 of Rekha Apartment, Mumbai. vii. The assessee had movable and immovable property, value in crores and also volume of business was in crore. The notional rent on the basis of total purchase price of property nos. 1 & 2 has been worked out at Rs.95,000/ - @10% on total price of Rs.9.5 lacs. 2(i). The A.O. had worked out the annual rental value of property no.1 at Rs.12,00,000/ - and property no.2 at Rs. 4,00,000/ - and same was added in the income of the assessee. He allowed 30% deduction on it.
(3.) BEING aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A) who had allowed the appeal partly by observing that since the annual rental value had not been taxed in the cases of other co -owners as assessee has 50% share in both the properties. The entire rental value is assessed to this case on the protective basis. The assessee's submission before the ld. CIT(A) was that the premises are subject to Maharashtra Rent Control Act and they had not been let out, the notional rent cannot exceed the standard rent, which has to be worked out at 10% of the cost of these two flats. As per Section 22 of the IT Act, provides that annual value of the property shall be chargeable to income Tax Act under the head "Income from House Property". Section 23(1)(a) provides that for the purpose of Section 22, the annual value of the property shall be deemed to be the sum for which the property might reasonably be expected to let from year to year. Further, Section 23(2) provides that where a property is self -occupied, the annual value of the said property shall be taken as 'Nil'. However, Section 23(4) provides that where the assessee is the owner of more than one house, the annual value of the house or houses, other than the self -occupied house, shall be determined as provided in Section 23(1) of the Act by assuming that the said property has been let out. The appellant has used flat no.18 at Paras Co -op. Hsg. Soc. Ltd., Mumbai as self -occupied house. Thus, the annual value of the flat had been taken at Nil. As per Maharashtra Rent Control Act, Section 2(1), which applies to premises let for the purpose of residence in areas specified in Schedule I and II. Thus, said Schedule is applicable on property situated in Greater Bombay. As per this Act, the rent is to be decided on the basis of cost of the premises and reasonable return on such cost. He relied upon the decision Hon'ble Supreme Court in case of Dewan Daulatrai Kapoor vs. New Delhi Municipal Committee & another 122 ITR 700 (SC), in which, it is held that the AO would have to arrive at the standard rent by applying the principles laid down in the rent Control Act for determination of the standard rent. In view of the above background, the value of deemed let out properties is considered as per the ALV determined on the basis of standard rent. Therefore, he considered the market value of both the properties as assigned by the A.O. in assessment order. He further observed that in case of flat no.3, Rekha Apartment, the appellant got50% of share as gift from the mother -in -law in the year 1997. The ld. A.R. contended that in such cases Section 49(1 )(ii) & Section 55(2)(b)(ii) are applicable. Ld. A.R. submitted a Valuation Report from the Registered Valuer showing market value at Rs.10,25,795/ -. The market value of the flat on the date of gift (1997) cannot be considered for determining the ALV because the donor or the appellant had not purchased that flat on that date. With regards to the flat no.4 at Rekha Apartment, the ld. A.R. stated before the CIT(A) that the flat was purchased in the year 1992 for a consideration of Rs.9,00,000/ - and therefore, 10% of that value should be considered for determining the ALV. The Housing Society also charges, which had not been added in the cost of the flat. The properties are transferred through the shares but actually money received by the transferor is never reflected in the transferred documents. It is true that actual money received on transfer of immovable property, is much more but disclosed less. The A.O. took the base value of the Flat No.18, Paras Apt. which was purchased in the year 2006. The purchase rate for flat no.18, Paras Apt., was approximately Rs.14,500/ - per sq. ft. It is not fair to apply this rate for the year 1992 and 1997. Thus, he took reasonable rate per sq. ft. for the year 1992 at Rs.5,000/ - and for the year 1997 at Rs.10,000/ -.Accordingly, he calculated ALV on Rs.9,65,000/ - and Rs.15,30,000/ - @ 10% at Rs.9,65,000/ - and Rs.1,53,000/ - respectively. The appellant has ownership of only 50% and therefore, 50% on rent is taken as income in the hands of appellant. Now, the assessee is before us. Ld. A.R. argued that appellant had opted flat no.18, Paras Co -operative Housing Society Ltd. as self -occupied property for residential purposes for which he filed necessary evidence at page no.66 of paper book. The other two flats being flat no.3 and adjacent small unit no.4 at Rekha Co -op. Housing Soc. Ltd. had been treated by the appellant as the property deemed to be let out and accordingly, based upon the Municipal Ratable Value of Rs.6,000/ - has been shown in the return of income. It is further argued that this ALV of Rs.6,000/ - of flat nos. 3 & 4 has been consistently shown year to year in the return of income by all the co -owners, which has rightly been accepted by the Department in the past while framing the assessment u/s.143(3) of the IT Act. In support of this, a copy of regular assessment order u/s. 143(3) of the Act for the assessment year 06 -07 passed by the same ITO, Ward 2, Navsari on 12.11.2008 along with the statement of computation of income in the case of one of the co - owners, namely, Shri Gautambhai K. Desai (the appellant's husband) have been attached at page nos. 67 to 76 of paper book. In spite of that the ld. Lower Authorities had applied the multiplication formula based upon the property being Flat No.18 purchased in the year 2006, which is patently in contravention of the provisions of law. The ld. Counsel submitted that flat no.3 was received through Gift Deed dtd. 29.11.1997, which was purchased by the owner, Smt. Indiraben K. Desai on 05.12.1960 for Rs.28,000/ -. The market value of the said flat as on November 1974 and 01.04.1981 was Rs.1,09,200/ - and Rs.10,25,795/ - respectively for which a Valuation Report was placed at page no.15 to 29 of the paper book. It is well settled law position that to determine ALV as provided u/s.23(1) of the Act, the Municipal Ratable Value has to be adopted more particularly when the Municipality or Local Authority has determined the ratable value of the property. In this regard, he relied upon the judgment of the Hon'ble ITAT, Mumbai SMC Bench, Mumbai in the case of Shri Shailesh I Shah vs. ITO (in ITA No. 8687/Mum/2010). Alternatively, it was submitted by the ld. Counsel that the standard rent be applied considering Maharashtra Rent Control Act, which provided for the standard @ 10% of the cost of residential property. The ld. Counsel submitted the Valuation Report before the lower authorities to decide the standard rate on the basis of standard rent as per Maharashtra Rent Control Act. He further relied in case of ITAT, Mumbai Bench decision in case of Deputy Commissioner, Special Range -22 vs. Shripal S. Morakhia [2006] 7 SOT 609 (MUM.), wherein ALV was taken as actual rent Rs.7,000/ - per month more than Municipal Ratable Value against the ALV decided by the A.O. at Rs.13,65,475/ -. Thus, he requested to apply Municipal Ratable Value for self -occupied property to determine the income from house property. At the outset, ld. S. D.R. supported the order of the CIT(A).;

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