Income Tax Appellate Tribunal - Mumbai
Deepa S. Bachani, Mumbai vs Asst Cit Cir 22(1), Mumbai on 2 January, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI RAVISH SOOD, JM
ITA No. Assessmen Appellant Respondent
t Year
320/Mum/2017 2012-13 Ms. Deepa S. Bachani Asst. CIT-22(1),
205-A, Bachanis Estate, Mumbai
7th Road, Khar (West),
Mumbai-400 052
PAN No. AAFPB 1786 M
321/Mum/2017 2012-13 Mr. Vijay S. Bachani Asst. CIT-22(1),
Mumbai
PAN: AAIPB 1982 A
322/Mum/2017 2012-13 Ms. Neeta S. Bachani Asst. CIT-22(1),
Mumbai
PAN: ACQPB 2392 G
323/Mum/2017 2012-13 Ms. Mala S. Bachani Asst. CIT-22(1),
Mumbai
PAN: AFIPB 2771 Q
Appellant by : Shri V. Chandra Shekhar
Respondent by : Shri A. K. Srivastava
Date of Hearing : 25.10.2018
Date of Pronouncement : 02.01.2019
ORDER
Per Shamim Yahya, A. M.:
These are appeals by four assessees against the respective order of the learned Commissioner of Income Tax (Appeals), Mumbai ('ld.CIT(A) for short) dated 26.10.2016 and pertains to the assessment year (A.Y.) 2012-13.
2. Since the issues are common and connected and the appeals were heard together, these have been consolidated and disposed of by this common order.
3. The common grounds of appeal read as under:
2ITA Nos. 320 to 323/Mum/2017
1. The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the Appellant's 25% share of receipts of Rs.1,29,03,425/- (ie. 25% of Rs.5,16,13,701/-) is nothing but in the nature of Capital Receipt, in as much the said receipt was received by the appellant towards "Liquidated damages/ Mesne Profit" awarded by the Small Cause Court, which does not partake the character of income exigible to tax as per the scheme of the Act under the facts and circumstances of the case.
2. The Learned Commissioner of Income Tax (Appeals) is not justified in erroneously holding that the Appellant had herself treated the Mesne Profit as Arrears of Rent in the revised return of income, without appreciating the settled position of law that consent does not confer jurisdiction and taxes are to be paid or collected in accordance with the scheme of the act and no tax can be collected without the authority of law and what needs to be taxed is Real Income and not a Capital Receipt, which fact was totally misconstrued by the learned Commissioner of Income-tax [Appeals] under the facts and circumstances of the case.
4. The issues involved in these cases pertain to taxability of Mesne Profit. The Assessing Officer (A.O. for short) was of the opinion that the same was to be brought to tax. The detail order of the A.O. in this regard may be gainfully referred as under:
5.1 The assessee is a co-owner of the premise consisting of Ground and Basement in the building known as "Gopi Kunj" situated at 1st Road, Khar(W), Mumbai 400052. The share of the assessee being 25% in the said premise. During the relevant previous year, the property was on rent with United Bank of India with whom the assessee had on-going dispute regarding the rent for the said premise(T.R. & R Suit no 5/6 of 2004). The dispute was settled by signing of a consent agreement between the owners of the premise and the tenant on 31.10.2012.
5.2 Vide her submissions dated 09.12.2014, the AR had submitted the copy of original return along with computation of Income. As per the submissions, the assessee had computed income from house property being rental income from United bank of India as under:
Rent income from United Bank Of India Rs 8,04,600
Less: Standard deduction § 30% Rs 2,41, 380
Total: Rs 5,63,220
5.3 During the course of assessment proceedings, the assessee was asked to file
the details of arrears amount received from UBI. In response to that vide her submission dated 06.10.2014, assessee filed copy of consent terms with UBI along with c copy of her personal capital account which is placed on record. On perusal of the same, it is seen that the as per the consent terms signed on 31.10.2012 3 ITA Nos. 320 to 323/Mum/2017 between the assessee and other co-owners of the property at Khar and the tenant United Bank of India, the assessee received following rental income from UBI:
a) Towards Unrealized Rent from 01/02/1993 till Rs.1,29,034,25.25 31/10/2011 (Being 25% Rs 5,16,13,701.34)
b) Monthly Rent for Nov'201 1 -March'2012 of Rs.8,04,600 Rs.1,60,920/- (Being 25% of Rs 6,43,680) Add: Interest on rent for Nov'2011-Dec'2011 Rs.30,544.25 (Being 25% of Rs.1,22,177) The above income was accounted for by the assessee in her revised return of Income as under:
Rent income from United Bank Of India ALV Rs.8,38,538 As per computation filed by assessee on 27.10.2014:
Rent .or Nov'2011-Mar 2012: 1,60,920*5 = 8,04,600 Add: Extra rent for Nov'2011-
Dec'201 1 : Rs 30,544.25 Add: Rent shown as per 26AS : Rs 3,393.75 Add: Arrear of Rent Received Rs 1,29,03,427 1,37,41,965 Less: Taxes paid to local authority Rs. 3,30,000 1,34,11,965 Less: Deduction u/s 24 Rs.40,23,589 93,88,376 Total Income from HP 93,88,376
Hence, the assessee had already accepted the above payments in her revised return of income filed on 03.03.2014. So there is no dispute that the assessee received the above amount on account of settlement of rent dispute with United Bank of India.
5.4 In her revised return of income filed on 03.03.2014, the assessee had claimed Rs 3,30,0007- against the payment of municipal taxes. Vide 142(1) notice dated 03.12.2014, the assessee was asked to file response to following "3. As per the leave & license agreement with Union Bank of India, the licensee is liable to pay property taxes and other charges(Para-S). In light of the above justify why your deduction of Rs. 3,30,000/- being taxes paid to local authority claimed in your return should not be disallowed and added back to your income. Please provide receipt for municipal taxes paid by you along with other relevant documents to support your claim."
Vide her submissions dated 09.12.2014, the assessee submitted that:
" With regard to your point no 3, the taxes paid Rs.3,30,000/- to B.M.C on 21/03/2012 are arrears of property taxes...The copy of the property taxes paid receipt is enclosed herewith in which my share is 1/4th".4
ITA Nos. 320 to 323/Mum/2017 Based on the assessee's submissions, the claim of Rs.3,30,000/- against the payment of municipal taxes is hereby allowed.
5.5 UNREALIZED VS ARREAR RENT 5.5.1 During the course of assessment proceedings, it was observed thai the assessee had treated Rs 1,29,03,4277- as arrear rent for 0170271993 till 3171072011 u7s 25B of the Income Tax Act'1961 and accordingly claimed 30% standard deduction on it.
5.5.2 In case of income from house property, it is the annual value of the property which is to be taxed. Section 23 prescribes the mode of determination of annual value. For the sake of reference, the relevant portion of section 23 is reproduced as under:
"23. (1) For the purposes of section 22, the annual value of any property shall be deemed to
(a) the sum for which the prope -ty might reasonably be expected to let from yoar to year; or
(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 per section 23(1 )(a), the annual value of any property is deemed to be the sum for which the property might reasonably be expected to be from year-to- year. However, as per clause (b), if 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), then the amount received or receivable is deemed to be the annual letting value of the property. The Explanation to section 23(1) when read with clause (b), says that in case the assessee has not realized the rent then the unrealized rent is not included in actual rent received or receivable by the owner. Any unrealized rent received subsequently is instead 5 ITA Nos. 320 to 323/Mum/2017 charged to income-tax as per the provisions of Section 25AA which is reproduced under for the sake of reference.
"25AA. Where the assessee cannot realise rent from a property let to a tenant and subsequently the assessee has realised any amount in respect of such rent, the amount so realised shall be deemed to be income chargeable under the head "Income from house property" and accordingly charged to income-tax as the income of that previous year in which such rent is realised whether or not the assessee is the owner of that property in that previous year."
Hence, as per the legal provisions, any unrealized rent recovered subsequently by the assessee is charged to income tax in the year of receipt. Further, Rule 4 of the Income Tax rules'1962 covers the definition of the unrealized rent and is reproduced here for the sake of reference :
"Rule 4. For the purposes of the Explanation below sub-section (1) of section 23, the amount of rent which the owner cannot realise shall be equal to the amount of rent payable but not paid by a tenant of the assessee and so proved to be lost and ^recoverable where,--
(a) the tenancy is bona fide;
(b) the defaulting tenant has vacated, or steps have been taken to compel
him to vacate the property;
(c) the defaulting tenant is not in occupation of any other property of the
assessee;
(d) the assessee has taken all reasonable steps to institute legal
proceedings for the recovery of the unpaid rent or satisfies the Assessing Officer that legal proceedings would be useless.] 5.5.3 In the instant case, the assessee is a co-owner of premise being Ground and Basement in the building "Gopi Kunj" situated at 1st Road, Khar(W), Mumbai 400052. The share of the assessee being 25% in the said premise. The assessee along with other co-owners had filed an eviction case against the united bank of India vide suit no T. R & R Suit No 5/6 of 2004 in "The court of small Causes" at Mumbai court in 2004. Hence steps were taken by the assessee to compel the tenant to vacate the premise after a dispute arose on the same matter. The matter was finally resolved by signing of a consent agreement between the assessee along with other co-owners and the tenant being United Bank Of India on 31.10.2012. 5.5.4 To understand the applicability of section 25AA to assessee's case, it is equally important how the assessee was treating the tenancy for years prior to AY 12-13 (being the to FY in which dispute was settled). The return of Income as filed by the assessee for AY 2011-12 and AY 2010-12, were analyzed (placed on record) and it was that the assessee was showing a NIL income under the head 'Income from Property'. That is, the assessee was not showing any deemed or otherwise rental from the property being Ground and Basement in the building "Gopi Kunj" situated 1st Road, Khar(W), Mumbai 400052 prior to signing of consent terms with the tenant.6
ITA Nos. 320 to 323/Mum/2017 5.5.4 Based on the above, it is clear that the the rent for said premise was not realized due to an on-going dispute between the assessee & other co-owners and the tenant. Subsequently, the amount was realized during FY 2011-12 after the signing of the consent terms between the owners and the tenants. Hence the assessee's case is squarely covered under the provisions of section 25AA read with Rules 4 and accordingly unrealized rent received on settlement of dispute should get taxed under section 25AA.
5.6 Subject to the above, the assessee's income under the head income from house property is computed as under:
(a) Rent income from United Rs 3,04,600
Bank of India u/s 22
ALV:
Rs.1,60,920 * 12 - Rs.1,60,920
* 7 (being unrealized rent for
April'201 1-Oct'2011)
Add: Extra rent for Nov& Rs 30,544.25 Rs.8,35,144.25
Dec'2011
Less: Municipal Taxes paid Rs.3,30,000 Rs.5,05,144.25
to local authority
Less: Standard deduction @ 30% Rs 1,51,543.275 Rs.3,53,600.975
TOTAL
ADD:
(b)Unrealized rent received u/s Rs.1,29,034,25.25 Rs 1,29,034,25.25
25AA
TOTAL Rs 1,29,034,25.25
INCOME FROM Rs.1,32,57,026.225
HOUSE PROPERTY((a) + (b))
Hence, Rs.1,26,93,806.225/- (Rs .13257026.225-Rs.5,63,220) is hereby added to the income of the assessee as Income from House property.
5. Upon the assessee's appeal, the ld. CIT(A) noted that the assessee has contended that receipt of Rs.1,29,03,425/- being the "Liquidated Damages/Mesne Profit" awarded by the Small Court Order and Consent Terms with Court by the appellant and the United 7 ITA Nos. 320 to 323/Mum/2017 Bank of India, partakes the character of a capital receipts and the same is not exigible to tax.
6. The ld. CIT(A) noted the assessee's submission as under:
The Appellant submits that the compensation received from the bank is nothing but Mesne Profit and hence not liable to tax. The Appellant relies upon the following judicial decisions, which are binding in nature in support of its claim that the amount of compensation received is Mesne Profit and therefore exempt from tax.
CIT vs. Goodwill Theatres Pvt. Ltd (Bombay High Court) Mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as "book profits" u/s 115JB.
As the department has implicitly accepted the decision rendered by a Special Bench of the Income Tax Appellate Tribunal in the case of Narang Overseas vs. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assessees. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd held that compensation received in lieu of unauthorised occupation of premises is Mesne Profits and the receipt is capital in nature. There is no doubt that the issue arising herein is also with regard to the character of mesne profits received by the Assessee. In this case also, the amounts are received by the Assessee from a person in wrongful possession of its property i.e. after the relationship of landlord and tenant has come to an end. Once the Special Bench order of the Tribunal in Narang Overseas Pvt. Ltd has taken a view on the character of mesne profits, then unless the Revenue challenges the order of the Special Bench of the Tribunal it would be unfair of the Revenue to pick and choose assessees where it would follow the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. The least that is expected of the State, which prides itself on Rule of Law is that it would equally apply the law to all assessees's We further also rely of following cases, which are identical on facts.
1. Narang Overseas vs. ACIT 100 ITD (Mum) (SB)
2. ITO, Ward 31 (2), vs. Late snn sanaeep Goya/, ITA No.2603/Dei./2012
3. M/s Brandon & Co. Pvt. Ltd VS Asst CIT2(1), ITA No. 6371/Mum/2009."
7. Despite noting that there are conflicting decision of High Courts on this issue, the ld. CIT(A) distinguished the Hon'ble jurisdictional High Court decision and upheld the A.O's action. The ld. CIT(A) held as under:
8ITA Nos. 320 to 323/Mum/2017 4.2. I have considered the facts of the case and the appellant's submissions.
There are conflicting decisions of the High Courts on the issue of whether mesne profits are taxable. The Hon'ble Madras High Court in the case of CIT vs. P. Mariappa Goundar 147 ITR 676 (Mad.) has held that mesne profits are revenue in nature. In the case of CIT vs. Goodwill Theaties Pvt. Ltd. relied upon by the appellant, the Hon'ble Bombay High Court did not decide the legal issue of taxability of mesne profits. It had dismissed the revenue's appeal on the technical ground that as the Department had not filed further appeal against the decision of the Tribunal in the case of Narang Overseas Pvt. Ltd. vs. ACIT 100 ITD (Mum) (SB) where similar issue was involved, it cannot file an appeal on the issue in the cse of other assessees. The facts obtaining in the case of Narang Overseas Pvt. Ltd. (supra) are also distinguishable from that of the appellant's. In that case, the mesne profits awarded by the Court had no co-relation with the leave and licence agreement prescribing maximum commission of 17.5% of sales. In the instant case, the mesne profits determined as per consent terms is clearly the difference of the rent being paid as per the old agreement and the prevailing market rates. It is in essence an enhancement of the rent being paid and partakes of the character of rental income which is revenue in nature. It is pertinent to note that the appellant herself had also filed a revised return of income treating the mesne profits as arrears of rent. In view of all these, the appellant's ground of appeal is dismissed.
8. Against the above order, the assessees are in appeal before us.
9. We have heard both the counsel and perused the records. We find that the ld.
CIT(A) has noted that there are conflicting decisions on the issue as to whether these mesne profit are revenue in nature or not. He has distinguished the Hon'ble Bombay High Court decision in the case of Goodwill Theatres Pvt. Ltd. (supra) on the ground that the Hon'ble Bombay High Court has dismissed the revenues appeal on technical grounds that revenue has not preferred an appeal against the case of ITAT Special Bench decision in the case of Narang Overseas (supra) which was in favour of the assessee. It is settled law that when the two views are possible, one in favour of the assessee has to be adopted.
In the present case, since there are conflicting Hon'ble High Court's decisions and the Hon'ble jurisdictional High Court decision has been distinguished, we find that on the touchstone of the Hon'ble Apex Court decision in the case of CIT v. Vegetable 9 ITA Nos. 320 to 323/Mum/2017 Products Ltd. [1973] 88 ITR 192 (SC) the issue should have been decided in favour of the assessee. Be as it may, we note that the Hon'ble Apex Court vide order dated 29.11.2017 in Civil Appeal No. 19944/2017 (supra) has remanded the issue in the case of Goodwill Theatres Pvt. Ltd(supra) to the Hon'ble jurisdictional High Court to decide the issue on merits. In these facts, in our considered opinion, interest of justice will be served, if we remit the issue raised in these appeals to the file of the A.O. The A.O. is directed to follow the decision of Hon'ble High Court in the case of Goodwill Theatres Pvt. Ltd (supra) as and when it comes and decide the issue. Both the counsel fairly agreed to this proposition.
10. In the result these appeals by the assessee are allowed for statistical purposes Order pronounced in the open court on 02.01.2019 Sd/- Sd/-
(Ravish Sood) (Shamim Yahya)
Judicial Member Accountant Member
Mumbai; Dated : 02.01.2019
Roshani, Sr. PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT - concerned
5. DR, ITAT, Mumbai
6. Guard File
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai