Non-interest bearing deposits received by assessee from letting out its premises could not be subject-matter of addition by recourse to s. 28(iv)

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Non-interest bearing deposits received by assessee from letting out its premises could not be subject-matter of addition by recourse to s. 28(iv)

 

Bombay HC in the case of CIT Vs. Diners Business Services (P) Ltd. Has made following noteworthy observation:

1.The AO did not use interest-free deposit as the point of reference. He has used the difference between the rent charged by the assessee on the premises let to DCIL and what the AO considered to be the market rent. The AO has come to the conclusion that the assessee had received lesser rent by Rs. 22,59,043 from DCIL in respect of the said two properties and, accordingly, the AO has estimated 60 per cent of Rs. 22,59,043 received by the assessee as the value of the benefit which accrued to the assessee under s. 28(iv) and, consequently, the AO made an addition of Rs. 13,55,425. The CIT(A) found that the premises in question were located in the basement and on the first floor (a small portion) and since the assessee had no use for the premises in question, the assessee had let out the premises to DCIL without the facility of air-conditioning; without numerous fixtures and amenities which existed in the “executive centre”. In the circumstances, the CIT(A) took the view that the AO erred in determining the market rent on the higher side. The CIT(A) found that the premises in question were not comparable with the premises under the “executive centre”. Consequently, the CIT(A) came to the conclusion that the rent charged from DCIL vis-a-vis the premises in question were comparable to the rent from the “executive centre” if fittings and amenities provided in the “executive centre” were discounted. This finding has been confirmed by the Tribunal. This finding is a finding of fact. There is no reason to interfere with this finding.

2. Non-interest bearing deposits received by assessee from letting out its premises could not be subject-matter of addition by recourse to s. 28(iv) in the facts ad circumstances of the case.

3. One time non-refundable entrance fees received by assessee for enrolment of its customers as members of executive centre did not constitute revenue receipt.

 

The complete order of the case is as under:

COMMISSIONER OF INCOME TAX vs. DINERS BUSINESS SERVICES (P) LTD.

HIGH COURT OF BOMBAY

S.H. Kapadia & J.P. Devadhar, JJ.

IT Appeal No. 264 of 2001

17th April, 2003

(2003) 71 CCH 0396 MumHC

(2003) 185 CTR 0623 : (2003) 263 ITR 0001 : (2003) 132 TAXMAN 0758

Legislation Referred to

S. 4, 28(iv)

Case pertains to

Asst. Year 1987-88

Decision in favour of:

Assessee

In favour of :

Assessee

Counsel appeared:

R.V. Desai with P.S. Jetley i/b L.S. Shetty, for the Appellant : S.S. Shetty, for the Respondent

S.H. KAPADIA, J.

Judgment

During the accounting year ending 31st March, 1987, relevant to the asst. yr. 1987-88, the assessee had let out a portion of its commercial premises in Bombay and Hyderabad to Diners Club India Ltd. (sister concern) for which the assessee received non-interest bearing security deposit of Rs. 48,51,000 for the Bombay property and Rs. 4,50,000 for the Hyderabad property. The assessee also received annual rent for both the properties from Diners Club India Ltd. The AO held that the arrangement was a collusive arrangement between two sister concerns and that the assessee had received lesser rent vis-a-vis the market rent from Diners Club Ltd. Consequently, the AO held that 60 per cent of the amount should be taxed as value of the benefit which accrued to the assessee. Accordingly, the AO made an addition of Rs. 20,19,921 to the income of the assessee on this ground under s. 28(iv) of the IT Act, 1961. During the year in question, the assessee also received non-refundable entrance fees from its members amounting to Rs. 4,08,950. This was also brought to tax as a business receipt. Being aggrieved, the matter was carried in appeal to the CIT(A). Following his order for the earlier years, the CIT(A) cancelled the addition made by the AO on account of non-interest bearing security deposit received from Diners Club India Ltd. of Rs. 20,19,921. The CIT(A) also cancelled the addition of Rs. 4,08,950 made by the AO on account of non-refundable entrance fees in view of his order for the earlier years. The order of the CIT(A) has been confirmed by the Tribunal. Hence, this appeal. Before coming to the findings, we may set out the questions referred to us for our opinion. They are as follows :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT(A) deleting the addition of Rs. 20,19,921 made by the AO under s. 28(iv) of the IT Act, 1961, in respect of non-interest bearing deposits received by the assessee from letting out its premises at Mumbai and Hyderabad to its sister concern ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT(A) deleting the addition of Rs. 4,08,950 made by the AO on account of non-refundable entrance fees received by the assessee ?”

Findings

2. In this case, a factual finding is recorded by the CIT(A) which finding of fact has been confirmed by the Tribunal. In this case, the assessee had let out a part of commercial premises admeasuring 5,390 sq. ft. in Bombay and 735 sq. ft. in Hyderabad to Diners Club India Ltd. (a sister concern of the assessee) for which the assessee received non- interest bearing deposit of Rs. 48,51,000 for the Bombay property and a sum of Rs. 4,50,000 for the Hyderabad property. The CIT(A) found that the assessee had fixed the rent at Rs. 647 per sq. ft. per annum for the Bombay property and the rent was fixed at Rs. 299 per sq. ft. per annum for the Hyderabad property. For the purpose of the working out the benefit, the AO did not use interest-free deposit as the point of reference. He has used the difference between the rent charged by the assessee on the premises let to Diners Club India Limited and what the AO considered to be the market rent. The AO has come to the conclusion that the assessee had received lesser rent by Rs. 22,59,043 from Diners Club India Ltd. in respect of the said two properties and, accordingly, the AO has estimated 60 per cent of Rs. 22,59,043 received by the assessee as the value of the benefit which accrued to the assessee under s. 28(iv) of the Act and, consequently, the AO made an addition of Rs. 13,55,425.

3. In this case, the basic issue is whether the AO was justified in estimating 60 per cent of the amount of the lesser rent/charges received by the assessee as the value of the benefit accruing to the assessee under s. 28(iv) of the Act and, consequently, whether the AO was justified in adding back Rs. 13,55,425 to the income of the assessee. In our view, there is no substantial ground of appeal raised by the Department. The CIT(A) found that the AO has proceeded on the basis of the difference between the rent charged by the assessee to Diners Club India Ltd. and what the AO considered to be the market rent. The CIT(A) found that the market rent determined by the AO was arbitrary. The CIT(A) found that the AO has determined the market rent without discounting the amenities and facilities which existed in so-called comparable premises. The CIT(A) found that the assessee had bought three floors in Raheja Chambers, Nariman Point, Mumbai. That, the first and the second floors were used as “executive centre” in which secretarial assistants, telex, fax and other amenities were provided. The CIT(A) found that the premises in question were located in the basement and on the first floor (a small portion) and since the assessee had no use for the premises in question, the assessee had let out the premises to Diners Club India Ltd. without the facility of air-conditioning; without numerous fixtures and amenities which existed in the “executive centre”. In the circumstances, the CIT(A) took the view that the AO erred in determining the market rent on the higher side. The CIT(A) found that the premises in question were not comparable with the premises under the “executive centre”. Consequently, the CIT(A) came to the conclusion that the rent charged from Diners Club India Ltd. vis-a-vis the premises in question were comparable to the rent from the “executive centre” if fittings and amenities provided in the “executive centre” were discounted. This finding has been confirmed by the Tribunal. This finding is a finding of fact. We do not see any reason to interfere with this finding.

Accordingly, we answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Department.

4. As stated above, the AO made an addition of Rs. 4,08,950 to the income of the assessee on account of non-refundable entrance fees received by the assessee. The CIT(A) found that the entrance fees were charged by the assessee for enrolment of its customers as members of the “executive centre”. The entrance fees were a one-time fee and only members were eligible to avail of the facilities available in the “executive centre”. The CIT(A) found that the entrance fees were non-refundable. In the case of CIT vs. W. I. A. A. Club Ltd. (1982) 136 ITR 569 (Bom), it has been held that the entrance fees were paid to the club in order to acquire the right to avail of services and facilities extended by the club. It was held that the entrance fees constituted receipt in the capital field. Hence, the CIT(A) ordered deletion of Rs. 4,08,950 made by the AO on account of non-refundable entrance fees received by the assessee. In view of the judgment of the Bombay High Court in the case of CIT vs. W. I. A. A. Club Ltd. (supra), the Tribunal was right in ordering deletion of Rs. 4,08,950 made by the AO on account of non-refundable entrance fees.

Accordingly, we answer question No. 2 in the affirmative, i.e., in favour of the assessee and against the Department.

Accordingly, the appeal is dismissed. No order as to costs.

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