M/S Care Institute Of Medical Sciences ... vs Assessee

M/s Care Institute of Medical Dy. Commissioner of Income- Sciences Ltd., Hyderabad. tax, Circle - 1(2), Hyderabad. PAN - AAACV7252L

(Appellant) (Respondent)

Revenue by Shri A.V. Raghuram Assessee by Shri D. Sudhakar Rao

Date of hearing 12-12-2014 Date of pronouncement 30-01-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal of assessee is directed against order dated 11/01/12 passed by ld. CIT-I, Hyderabad u/s 263 of the Act pertaining to AY 2007-08.

2. Briefly the facts are, assessee is a company. For the AY under consideration, it filed its return of income on 12/11/2007 declaring net loss of Rs. 33,62,849. During the scrutiny assessment proceeding, AO after examining the books of account and various other informations called for noticed that the total income returned by assessee comprised of business income arising out of licence fee of Rs. 32,40,000 in respect of hotel premises belonging to assessee and leased to Quality Care India Ltd. AO was of the view that lease rental income has to be assessed under the head 'income from house property' and not as business income as claimed by assessee. On 2 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

further examination, AO noticed that as per the lease agreement dated 26/09/2001 effective from 01/04/2001, assessee is to receive licence fee of Rs. 32,40,000 for utilization of leased premises and furniture & fittings, out of which, Rs. 16,20,000 was towards premises and balance amount towards furniture & fittings. He further noticed that total built up area of licensed premises was 1,35,000 sq.ft. He also noticed that as per the lease agreement, in addition to the licence fee, licensee/lessee shall provide a refundable deposit of Rs. 2 crores to assessee. AO was of the view that as assessee derives benefit out of interest free deposit , it should form part of the annual letting value of the property. He noted that otherwise, assessee would have paid interest at substantial rates had it not been an interest free deposit in pursuance to the lease agreement. Working out the interest deemed to be received by assessee at 12% per annum amounting to Rs. 24 lakhs, AO computed ALV of the leased premises at Rs. 40,20,000 as against Rs. 16,20,000 declared by assessee. Accordingly, AO computed the income from house property at Rs. 28,14,000 after allowing statutory and other deductions. AO also treated 50% of the licence fees received towards furniture and fittings as business income.

3. Learned CIT while examining assessment records of assessee for the impugned AY, prima-facie, was of the view that the assessment order passed for the impugned AY is erroneous and prejudicial to the interests of revenue as AO has failed to examine the following issues:

i) It is seen from the records that the assessee company has received interest free security deposit of Rs. 22 crores from M/s Quality Care India Ltd. tenant of the property Hotel Banjara Palace. Notional interest on this security deposit should have been considered while determining the annual letting value of the property. The AO has failed to consider this aspect while completing the assessment.

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ii) The income from letting out of furniture and fixtures has to be assessed under the head 'other sources'. However, this was wrongly assessed as business income."

Accordingly, learned CIT issued notice to assessee directing to show cause on the issues raised by him. In response to the said show cause notice, assessee submitted its reply vide letter dated 21/11/2011 stating therein that as AO has examined the issue relating to interest on security deposit, there is no need to reconsider it again. It was pointed out by assessee that AO has fixed notional interest on interest free security deposit of Rs. 2 crore while computing ALV of leased premises. Assessee submitted that when the entire lease agreement was considered by AO, assessment order cannot be said to be erroneous and prejudicial to the interests of revenue for non- consideration of the same facts and issues. Assessee also relied upon certain decisions to contend that ALV has to be computed as per section 23(1)(c) or (b) and not based on notional interest on interest free deposits. As far as the second issue relating to treating the amount received on furniture and fixtures as income from other sources is concerned, assessee submitted as the issue was examined by AO, the decision taken by AO should not be revised.

4. After examining the reply of assessee, learned CIT brought to the notice of assessee that AO while fixing ALV has totally ignored the interest free deposit of Rs. 22 crores received by assessee. He further brought it to the notice of assessee that as per the GHMC order dated 25/05/07, ALV of the property was fixed at Rs. 97,34,832 with effect from 01/04/2005. Learned CIT observed, if the interest of Rs. 22 crore is considered, ALV will be much higher, AO having ignored the deposit of Rs. 22 crores and the GHMC order fixing the ALV at Rs. 97,34,832, order passed by AO is erroneous and prejudicial to the interests of revenue. In response to the fresh query raised by learned CIT, assessee submitted that as AO has examined the issue of interest free deposit while fixing ALV, learned CIT cannot 4 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

reconsider the issue again. It was submitted by assessee that as per the lease agreement, the area leased out is only 1,35,000 sq.ft. whereas in the GHMC order, ALV has been fixed on 2,34,423 sq.ft. Further elaborating, it was submitted by assessee that certain area was reclaimed by assessee and converted into hospital area. Assessee recomputed the proportionate ALV on 1,35,000 at Rs. 56,06,115 and submitted that ALV fixed by AO at Rs. 40,20,000 was short by only 16,06,115, which according to assessee, represents the rent received on furniture and fixtures. Subsequently in course of proceeding before learned CIT, assessee submitted loan agreement dated 25/06/2002 and contended that as the loan agreement is subsequent to the lease agreement executed on 06/09/2001, it should not be considered for fixing ALV. Learned CIT, after considering the submissions of assessee in the context of facts and materials on record, observed that AR of assessee after examining the records was satisfied that AO during the assessment proceeding neither considered the loan agreement for Rs. 22 crore or the order of GHMC fixing the ALV. Learned CIT observed that assessee declared rental income from M/s Quality Care India Ltd. as income under the head 'business income' He noted that as per the agreement dated 26/09/2001, the premises at Road No. 1, Banjara Hills consisting of 1,35,000 sq.ft was let out for a period of 10 years. As per clause 5.2 of the lease agreement, out of the total licence fee of Rs. 32,40,000, an amount of Rs. 16,20,000 is towards lease of the premises and Rs. 16,20,000 is towards furniture and fixtures. He further observed, as per clause 5.5, a refundable interest free deposit of rs. 2 crore was given to assessee by licensee/lessee. Ld. CIT noted that AO while completing the assessment has only considered the interest free deposit of Rs. 2 crores as mentioned in para 5.5 of the agreement while fixing ALV of the property at Rs. 40,20,000. However, AO totally ignored the interest free security deposit of Rs. 22 crores received from M/s Quality Care India Ltd., as loan agreement dated 25/06/2002 was neither referred to in the lease agreement dated 5 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

26/09/01 nor was part of the assessment record. Learned CIT observed that AO has failed to consider both the GHMC order fixing ALV at Rs. 97,34,832 as well as notional interest on Rs. 22 crores received by assessee as interest free deposit while computing ALV. Thus, learned CIT was of the view that for non-consideration of GHMC order fixing ALV at Rs. 97,34,832 and also failure to consider notional interest on the interest free security deposit of Rs. 22 crore, it has resulted in determination of ALV at much lower amount which not only made the assessment order erroneous but also prejudicial to the revenue. Learned CIT also rejected assessee's claim that notional interest cannot be considered for fixing ALV. As far as contention of assessee that ALV fixed by GHMC at Rs. 97,34,832 is for 2,34,423 sq.ft. whereas assessee has leased out 1,35,000 sq.ft., learned CIT also did not find any merit in such contention.

5. As far as second issue whether the amount received towards furniture and fixtures is to be treated as business income, learned CIT observed that AO has totally gone wrong while treating it as business income, hence, the decision of AO is not in accordance with law, as such, assessment order is erroneous and prejudicial to the interests of revenue. Relying upon various decisions, learned CIT finally concluded that AO having not considered the issues referred to by him in the proceeding u/s 263, assessment order is erroneous and prejudicial to the interests of revenue. Accordingly, he set aside the assessment order by issuing the following directions to AO:

"8. The AO shall duly consider all the case laws referred to above and also take into consideration the deposit of Rs. 22 crores in fixing the ALV including the GHMC valuation and reframe the assessment. The fair rental value cannot be less than the municipal value fixed. He should tax the income relating to fittings and fixtures under the head other sources and not as business income. After giving necessary opportunity, he is to reframe the assessment keeping in view the above directions and case laws referred above."

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6. Being aggrieved of the order of learned CIT, assessee is before us with the following grounds:

7. Ground Nos. 1 & 5 being general in nature do not require any specific adjudication. Ground No. 2 to 4 are on the issue of assumption of jurisdiction u/s 263 as well as on merits of directions issued by ld. CIT.

9. Learned AR more or less reiterating the submissions made before ld. CIT in course of revision proceeding, submitted that the deposits of Rs. 22 crores received by assessee through the agreement dated 25/06/02 is a separate and independent agreement and has no relation to the lease and licence agreement entered between the parties earlier on 06/09/01. Ld. AR referring to the loan agreement dated 25/06/02, a copy of which is at page 13 of paper book, submitted that loan was taken for a totally different purpose of clearing the debts under One Time Settlement (OTS) Scheme, hence, cannot be connected to the lease agreement. Specifically referring to clause 4 of the loan agreement, ld. AR submitted that the purpose of availing the loan was clearly mentioned therein, which is for the purpose of payment of dues under OTS, therefore, interest free deposit of Rs. 22 crores received by assessee under the loan agreement cannot be linked with the leased property. Ld. AR submitted that at the time of assessment proceeding, AO has examined the issue of interest free deposit of Rs. 2 crores referred to in the lease agreement and has also taking into account the notional interest on such interest free deposit while computing ALV. Therefore, as the amount of Rs. 22 crores received under the loan agreement, which is independent and separate from the lease agreement, has no connection with leasing of the property, notional interest on such amount received as loan cannot be considered for the purpose of computing ALV of the property. As far as the valuation by GHMC is concerned, ld. AR referring to the order of GHMC, a copy of which is 7 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

at page 59 of the paper book, submitted that the valuation made by GHMC is with regard to total floor area of the building comprising of land 2,34,423 sq.ft. consisting of seven floors and parking area whereas as per the lease agreement, assessee has let out only 1,35,000 sq.ft. floor area to lessee. In these circumstances, valuation of the GHMC cannot be considered for the purpose of fixing ALV. Ld. AR submitted that even applying the rate fixed by GHMC in its order dated 25/05/07, ALV computed in respect of 1,35,000 sq.ft., will be Rs. 56,66,601 whereas the AO has fixed ALV even at much higher figure. In these circumstances, assessment order passed cannot be considered to be erroneous and prejudicial to the interests of revenue. In support of such contention, ld. AR relied upon a decision of Hon'ble Delhi High Court, Full Bench, in case of CIT Vs. Moni Kumar Subba, 333 ITR 38 (Del.).

10. Ld. DR on the other hand submitted that as assessee has received interest free deposit of Rs. 22 crores, which has been completely ignored by AO while completing assessment, assessment order is not only erroneous but also prejudicial to the interests of revenue. Ld. DR submitted that even AO has also failed to examine the valuation made by GHMC, which is much higher than the ALV fixed by AO. Therefore, as there is evidence to show that ALV fixed by AO is much less than the actual ALV as per the evidence brought on record, assessment order has been rendered erroneous and prejudicial to the interests of revenue and ld. CIT has correctly revised it u/s 263 of the Act.

11. We have heard the parties and perused the orders of the departmental authorities as well as other materials on record. As can be seen, assessee has entered into lease agreement with M/s Quality Care India Ltd. on 26/09/2001 for a period of 10 years leasing out 1,35,000 sq.ft. of carpet area consisting basement, cellar, ground floor, six upper floors and revolving floor of its property located at 8 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

Road No. 1, Banjara Hills. As per the agreement, the lease and licence agreement was supposed to expire on completion of 10 years i.e. on 31/03/2011. As per clause 5.5 of the lease agreement, assessee apart from lease and licence fee to be received in respect of leased property shall also receive refundable interest free deposit of Rs. 2 crores from the lessee towards security deposit. It is a fact on record, assessee has entered into separate agreement with the tenant i.e. M/s Quality Care India Ltd. on 25/06/02 for loan of Rs. 22 crores. As per clause 3 of the loan agreement, the said loan is interest free loan and as per clause 4 of the loan agreement, the purpose of loan was to repay the dues of the financial institutions under OTS. Whereas clause 5 of the loan agreement also provides that assessee shall repay the loan to M/s Qualtiy Care India Ltd. on termination of the lease and licence agreement. Therefore, it appears from the terms of the loan agreement, the interest free loan of Rs. 22 crores is not in any way linked to lease of the property but for repayment of debts due to financial institutions. Therefore, loan received of Rs. 22 crores having no nexus with the leasing of the property, notional interest on such loan cannot be factored in for computing ALV of the property. Why and under what circumstances interest free loan of Rs. 22 crores was given to assessee has little relevance for determining ALV, unless a direct link is established between such loan and leasing of property. In our view, ld. CIT has failed to establish such link. Therefore, considered in the aforesaid perspective, we do not find the direction of ld. CIT to take into consideration notional interest on interest free loan of Rs. 22 crores for computation of ALV to be justified. Moreover, section 23 of the Act prescribes the mode and manner of determining ALV. Subsection 1 of section 23 reads as under:

"For the purposes of section 22, the annual value of any property shall be deemed to be -

a) the sum for which the property might reasonably be expected to let from year to year; or 9 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable;

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.

Explanation-For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realize."

As can be seen from the language used, it is a deeming provision and speaks of determination of ALV in three different situations. Sub- clause (c) is not relevant for our purpose. Let us assume for the time being that sub-clause (b) also is not applicable because actual rent received by assessee cannot be said to be in excess of fair market value of rent. Therefore, only course left open is to fix the rent under clause (a) for a sum at which the property might reasonably be expected to be let out from year to year. Ld. CIT has himself referred to the order of GHMC fixing market value of rent of the property at Rs. 97.34 lakhs. Therefore, as per section 23(1)(a), the rent fixed by GHMC has to be considered as the ALV of the property. When ld. CIT is relying upon the rent fixed by GHMC, he cannot again direct the AO to consider the notional interest on interest free loan of Rs. 22 crores for determining ALV. Section 23(1)(a) certainly does not permit him to do so. In this context, we refer to the following observations of the Full Bench of Hon'ble Delhi High Court in case of CIT Vs. Moni Kumar Subba (supra):

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"13. We approve the aforesaid view of the Division Bench of this Court and operative words in s. 23(1)(a) of the Act are "the sum for which the property might reasonably be expected to let from year to year". These words provide a specific direction to the Revenue for determining the 'fair rent'. The AO, having regard to the aforesaid provision is expected to make an inquiry as to what would be the possible rent that the property might fetch. Thus, if he finds that the actual rent received is less than the 'fair/market rent' because of the reason that the assessee has received abnormally high interest-free security deposit and because of that reason, the actual rent received is less than the rent which the property might fetch, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest-free security can be taken as determinative factor to arrive at a 'fair rent'. Provisions of s. 23(1)(a) do not mandate this. The Division Bench in Asian Hotels Ltd. (supra), thus, rightly observed that in a taxing statute it would be unsafe for the Court to go beyond the letter of the law and try to read into the provision more than what is already provided for. We may also record that even the Bombay High Court in the case of CIT vs. J.K. Investors (Bombay) Ltd. (2001) 168 CTR (Bom) 189 : (2001) 248 ITR 723 (Bom) categorically rejected the formula of addition of notional interest while determining the 'fair rent' in the following manner :

"..........Before concluding we may point out that under s. 23(1)(b), the word 'receivable' denotes payment of actual annual rent to the assessee. However, if in a given year a portion of the actual annual rent is in arrears, it would still come within s. 23(1)(b) and it is for this reason that the word "receivable" must be read in the context of the word 'received' in s. 23(1)(b). In the light of the above interpretation, notional interest cannot form part of the actual rent as contemplated by s. 23(1)(b) of the Act. We once again repeat that whether such notional interest could form part of the fair rent under s. 23(1)(a) is expressly left open."

14. It is, thus, manifest that various Courts have held a consistent view that notional interest cannot form part of actual rent. Hence, there is no justification to take a different view than what has been stated in Asian Hotels Ltd [2010] 323 ITR 490 (Del.)."

12. As far as the valuation of GHMC is concerned, on a perusal of the order dated 25/05/07 of GHMC, a copy of which is at page 59 of the paper book, it is very much clear that valuation arrived at by the GHMC at Rs. 97,34,832 is for an area of 2,34,423 sq.ft. whereas as per lease agreement area leased out by assessee to lessee is 1,35,000 sq.ft.. Therefore, unless, it is established on record that area leased out to lessee is 2,34,423, the value of Rs. 97,34,832 has fixed by GHMC cannot be applied for computing ALV. As the exact area leased out by assessee has not been verified either by AO or by ld. CIT, we are inclined to remit the issue back to the file of AO with a direction to verify the exact area leased out to lessee and thereafter 11 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

compute ALV by proportionately applying rate fixed by GHMC in order dated 25/05/07 for different floors. Accordingly, this issue is remitted to file of AO.

13. One more issue requiring adjudication is in respect of treating the amount received towards rental of furnitures and fixtures as business income.

14. Facts in brief are, assessee while declaring its income for the impugned AY treated 50% of the lease rental as business income on the pretext that it was towards rent of furnitures and fixtures. AO while completing assessment also accepted the claim of assessee. Ld. CIT however while setting aside the assessment order, held that the rent received towards furnitures and fixtures cannot be treated as business income, but, at best can be treated as 'income from other sources'. Accordingly, he directed AO to treat the income from funitures and fixtures as 'income from other sources' and not as business income.

15. Having heard the parties and perused the materials on record, we are of the view that AO was not correct in treating the income received towards rent on furnitures and fixtures as business income. There is no dispute that assessee as the owner of property was exploiting it by letting it out and in the process realizing income by way of rent and such rental income is assessable as income from house property. In the process of letting out the property certain assets are also let out to the tenant. However, letting out of such assets are incidental to the letting out of the property. Therefore, the rent received from letting out of furniture and fixtures assume the same colour as the rent received from the building. In these circumstances, income received towards furnitures and fixtures has to be treated as income from house property only as is the case with the rental income from letting out of the premises and cannot be treated 12 ITA No. 441/ Hyd/201 2 M/s Care Institute of Medical Sciences Ltd.

as business income. Similar view has been expressed by coordinate bench in case of Smt. G. Prameela Devi Vs. ITO, ITA No. 646/hyd/2014 dt. 28/11/2014. Therefore, we direct AO to treat the amount received towards furnitures and fixtures as income from house property and not as business income. The directions of the CIT u/s 263 modified to that extent.

16. In the result, assessee's appeal is treated as partly allowed for statistical purposes.

Pronounced in the open court on 30/01/2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 30 th January, 2015 kv Copy to:-

1) M/s Care Institute of Medical Sciences Ltd., C/o AV Raghuram, Advocate, 610, 6 th Floor, Babhukhan Estate, Basheerbagh, Aayakar Bhavan,Hyderabad

2) DCIT, Circle 1(2), Aayakar Bhavan, Hyderabad.

3) CIT-I, Hyderabad

4) Addl. CIT, Range - 1, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.