(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
iv. The assessee is doing diamond brokerage and also partner in jewellery business and having luxurious
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
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
(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  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).;