Income Tax Appellate Tribunal - Mumbai
The Bombay Drug Distributors, Mumbai, ... vs Asstt. Commissioner Of Income Tax - ... on 19 February, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH, MUMBAI
BEFORE SHRI ABY T VARKEY, JM &
MS PADMAVATHY S, AM
I.T.A. No. 3619/Mum/2023
(Assessment Year: 2014-15)
The Bombay Drug Distributors ACIT, Circle-19(3),
Drug House, 54-B, Proctor Road, Tardeo, Matru Mandir
Vs.
Grant Road (East), Mumbai.
Mumbai- 400007
PAN : AACFT1362N
Appellant) : Respondent)
Appellant/Assessee by : Shri Vimal Punmiya, CA
Revenue/Respondent by : Shri Ashok Kumar Ambastha,
Sr. DR
Date of Hearing : 13.02.2024
Date of Pronouncement : 19.02.2024
ORDER
Per Padmavathy S, AM:
This appeal is against the order of the Commissioner of Income Tax (Appeals) / NFAC [for short 'the CIT(A)] dated 09.08.2023 for the AY 2014-15. The assessee raised the following grounds of appeal:
"1. The Learned CIT (Appeals), NFAC has erred in law and on facts and circumstances of the case in upholding the addition of Rs.41,00,000/- by applying provisions of Section 50-C of the Act, on sale of Tenancy Rights in Premises and assessing the difference between the agreement value and the market value as determined by the stamp duty authorities as income by way of long-term capital gains.2 ITA No. 3619/Mum/2023
The Bombay Drug Distributors
2. The Learned CIT(Appeals), NFAC came to conclusion that the Appellate prepared tenancy agreement which was a colourable device for lower incidence of stamp duty as well as to ger away with the violation of section 50C of the Act but enjoy all the benefits of ownership.
3. The Learned CIT (Appeals), NFAC has erred in law and on facts and circumstances of the case in misinterpreting the various clauses of the Tenancy Agreement that was entered into by the Appellant.
4. The Learned CIT(Appeals), NFAC has erred in law and on facts and circumstances of the case in upholding the service of order on 31-12-2016 being the last day of serve the order to the assessee, to security personnel of the building who was not authorised to receive the order."
2. The assessee is a registered partnership firm carrying on the business of medicines, drugs etc. The assessee filed a return of income for AY 2014-15 on 02.03.2015 declaring total income of Rs. 53,82,245/-. The case was selected for scrutiny and statutory notices were duly served on the assessee. During the year under consideration the assessee has declared Long Term Capital Gain (LTCG) of Rs. 54,00,000/-. The AO noticed that the market value of the property was Rs. 95,00,000/- and called on the assessee to explain why the difference of Rs. 41,00,000/- cannot be treated as income under section 50C of the Income Tax Act (the Act). The assessee submitted before the AO that the assessee has not sold the immovable property but has sold the tenancy rights in the property owned by the assessee. The assessee further submitted that the sale of tenancy rights is not subject to tax under section 50C of the Act. The AO did not accept the submissions of the assessee and made the addition of Rs. 41,00,000/- under section 50C of the Act for the reason that assessee has not furnished any corroborative explanation/evidences in support of the contention. Aggrieved the assessee filed appeal before the CIT(A). The assessee submitted the copy of tenancy agreement in support of its claim that the assessee has not sold the property but only transfer 3 ITA No. 3619/Mum/2023 The Bombay Drug Distributors the tenancy rights. The CIT(A) however confirmed the addition made by the AO by holding that "Now, coming to the fact emanated from the agreement of tenancy, it reveals is between Landlord and Tenant and not between two tenants for transfer of tenancy rights or for surrender of tenancy rights to owner or a leasehold rights by lessee. Tenancy rights means to become a tenant of the property for a specified period whereas the present agreement for tenancy doesn't specify any period of tenancy but it is perpetual in nature. Further, the tenancy rights created on certain period of being a tenant of any property and it can't be said that the owner of a property shall have a tenancy right in it's own property. Further, the agreement is irrevocable in nature because there is no clause of suo-motto revocation after a prior notice by the owner of the property for vacation. Also, the monthly rent is very nominal, which includes the property/municipal tax and doesn't have any increment clause. After going through the clauses of this agreement for tenancy, it is seen that this document is nothing but a colourable device for lower incidence of stamp duty as well as to get away with the violation of section 50C of the Act but enjoy all the benefits of ownership of the property. So far as the case laws cited by the appellant are concerned, no case law has the similar facts of the present case ie agreement for tenancy between an owner and tenant. The referred case laws relate either to transfer of leasehold property by lessee to new lessee or surrender of tenancy rights by tenant to owner or transfer of tenancy rights by one tenant to another tenant. For example, the decision in Fleurette Marine Novelle Hatam relates to surrender / assignment of tenancy rights, Kancast (P) Ltd relates to transfer of leasehold rights in MIDC land by the lessee not the owner, Tejender Singh relates to transfer of leasehold rights by lessee, Pradeep Steel Re-Rolling Mills Pvt. Ltd relates to transfer of leasehold rights by lessee, Atul G. Puranik relates to transfer of leasehold rights in land received on compensation from CIDCO for acquisition of agricultural land, etc. In short, the appellant being an owner of the property no. 105 in Drug House has transferred all the rights in the said property and the possession of the said property vide agreement for tenancy dated 27.12.2013. Also, contents not mere nomenclature of a document are relevant factors to decide the transfer of ownership or tenancy. Further, no owner of any property shall become a tenant and created tenancy rights in his/her own property. I am in the considered view that this agreement is nothing but a document of transferring the property, which is duly covered under the word "land or building or both used in section 50C of the Act. Keeping in view the above facts & circumstances, I hold that the property bearing no. 105 in Drug House was transferred through 4 ITA No. 3619/Mum/2023 The Bombay Drug Distributors the agreement of tenancy and the provision of section 50C of the Act is applicable in the present case. Thus, this ground of appeal is dismissed."
3. Aggrieved the assessee is in appeal before the Tribunal.
4. The ld. AR submitted that the assessee has entered into an agreement dated 27.12.2013 with Mr. Kamlesh Javerchand Jain and Mrs. Vipika Kamlesh Jain whereby the tenancy rights in respect of office premises no. 105 on the 1st floor of building (Drug House) is transferred. The ld. AR further drew our attention to the fact that the assessee received a one-time consideration of Rs. 54,00,000/- towards a transfer of tenancy rights besides the monthly rentals and that the assessee has offered to tax the entire consideration received as Capital Gains taking cost of acquisition as Nil. The ld AR submitted that the tenancy agreement was registered under the Maharashtra Stamp Duty Act as per which the stamp duty was payable either on agreement value or on market value whichever is higher and therefore the assessee paid the registration cost based on the market value of the property i.e.Rs.95,00,000. The ld. AR further submitted that the AO has misunderstood that the assessee has transferred the immovable property and according invoked section 50C of the Act to make an addition towards the difference between the stamp duty value and the agreement value. In order to substantiate that the assessee has not transferred the immovable property but the tenancy rights therein, the ld. AR drew our attention to the various clauses in the tenancy agreement and submitted that the assessee has the rights to terminate the tenancy rights and to evict the tenant if the tenant fails to comply with the terms as agreed in the agreement. Therefore the ld AR argued that the assessee has transferred only the right to use the property subject to the tenant adhering to the terms of the tenancy agreement. The ld. AR also submitted that the provisions of section 50C of the Act is applicable only to 5 ITA No. 3619/Mum/2023 The Bombay Drug Distributors cases where there is a transfer of capital asset being land and building or both and in assessee's case it is not the capital asset i.e. transfer but only the tenancy rights in the property is transferred. Therefore, the ld. AR submitted that the AO is not correct in invoking the provisions of section 50C of the Act. The ld. AR in this regard relied on the decision of the co-ordinate bench of the Tribunal in the case of Ashwin Vardhichand Shah v/s. NFAC (ITA No. 2434/Mum/2023 dated 12.12.2023).
5. The ld. DR on the other hand submitted that the tenancy agreement does not have any end date and is a perpetual agreement. The ld. DR accordingly relied on the order of the CIT(A) where the CIT(A) has observed that the entire transaction is a colorable device entered into by the assessee in order to avoid the Capital Gain at the stamp duty value of the property.
6. We have heard the parties and perused the material on record. The assessee, being the owner of property situated at premises no. 105 on the 1st floor of building (Drug House), vide tenancy agreement dated 27.12.2013 has transferred the tenancy right therein for an one time consideration of Rs. 54,00,000/- and a monthly rental was agreed at Rs. 3,960/- per month as per the terms of the agreement. The said agreement was registered as per the Maharashtra Stamp Duty Act whereby the assessee paid the stamp duty on the market value of the property which was at Rs. 95,00,000/-. The AO during the course of assessment treated the entire transaction as sale of property and therefore, invoked the provisions of section 50C of the Act to make an addition of Rs. 41,00,000/- being the difference between the stamp duty value and the agreement value. The CIT(A) confirmed the addition made by the AO stating that the assessee being the owner cannot transfer the tenancy rights and that the agreement is nothing but a document of transferring 6 ITA No. 3619/Mum/2023 The Bombay Drug Distributors the property. The contention of the assessee is that the assessee has not transferred the capital asset but only the tenancy rights therein and therefore provisions of section 50C of the Act is not applicable. In this regard our attention was drawn the certain clauses in the agreement which is extracted below:
"4. The New Tenants shall occupy the said Premises as tenant of the Landlords monthly tenancy basis and pay to on the Landlords a sum of Rs.3.960/- (Rupees Three Thousand Nine Hundred Sixty Only) as and by way of monthly rent (being the standard rent inclusive of municipal taxes, rates, ceases and permitted increases, etc.) on or before the 10th day of each month in advance.
5. The tenancy of the New Tenants shall be monthly tenancy according to the British calendar month and shall be governed by the provisions of the Maharashtra Rent Control Act 1999, and any statutory notification/ modification thereof made from time to time. The New tenants shall not commit any breach of the said Act.
6. The Landlords or representatives shall their have authorized free and unobstructed access to the said Premises and every part thereof, as and when required at
8. In the event of the New Tenants committing breach of any of the terms and conditions herein contained and failing to remedy or make good such breach within 60 days of receipt of a Notice in respect of the same from the Landlords, the Landlord shall have the right to terminate this agreement and take possession of the said premises from the New Tenants on expiry of said 60 (sixty) days period and such right of the Landlords shall be in addition to their other rights and remedies under the law. Notice under this clause shall be given by the Landlords in writing and shall be deemed to be served to sent by e-mail or registered post with acknowledgement due."
7. From the perusal of the above clauses of the agreement it is clear that the assessee has transferred only the tenancy rights in the property owned by the assessee and the tenant has acquired only the right to use the property on payment of monthly rental subject to the conditions stated in the agreement. We further observed that though the agreement does not specify any end date it cannot be said 7 ITA No. 3619/Mum/2023 The Bombay Drug Distributors to be a perpetual agreement since clause-8 as extracted above contains terms by which the assessee has reserved the right to evict the tenant if the terms and conditions are breached. Therefore we tend to agree with the submission that there is no transfer of property in the given case but only the tenancy rights therein. Now coming to the issue of whether section 50C of the Act is applicable, we will first look at the relevant provisions of section 50C which reads as under:
Special provision for full value of consideration in certain cases. 50C. (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer:
Provided that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the capital asset are not the same, the value adopted or assessed or assessable by the stamp valuation authority on the date of agreement may be taken for the purposes of computing full value of consideration for such transfer: Provided further that the first proviso shall apply only in a case where the amount of consideration, or a part thereof, has been received by way of an account payee cheque or account payee bank draft or by use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed7, on or before the date of the agreement for transfer:
Provided also that where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and ten per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration. (2) **** (3) **** (emphasis supplied)
8. From the plain reading of the above section, it is clear that section 50C of the Act is invoked when there is a transfer of capital asset being land or building or both. In assessee's case, however, the transfer is not of a capital asset but the tenancy rights of the property. Therefore, we see merit in the contention of the ld.
8 ITA No. 3619/Mum/2023The Bombay Drug Distributors AR that the AO is not correct in invoking the provisions of section 50C of the Act. We further noticed that the Co-ordinate bench in the case of Ashwin Vardhichand Shah Vs. NFAC (supra) has considered a similar issue and held that "6. We have heard both the parties and perused the records. The assessee along with four (4) brothers had entered into an agreement of tenancy on 15.12.2010 with Shri Chunilal Velaji Prajapati and Shri Tejaram Navaji Prajapati. As per the terms of agreement placed at page no. 32 to 49 of PB in the case of Shri Chunilal; and terms of agreement placed at page no. 52 to 69 of PB with Shri Tejaram, it is noted that the assessee along with his brothers named collectively as the "landlords" had given on rent, second & third floor of the building (Property in question) at Kika Street, Mumbai; and as per agreement, Shri Chunilal have to pay Rs.500/- and Shri Tejaram had to pay Rs.700/- to the land-lords. This agreement (tenancy agreement) has been registered before Registrar. And as per the AIR information, the market value of the property registered by Registrar was at Rs.31,60,080/- and Rs.39,47,400/- on which stamp duty paid was to the tune of Rs.360 + 360/-, registration fee of Rs.30,000/- + Rs.30,000/- and tax value of Rs.1,97,500/- and Rs.1,58,500/- was remitted in the Government Account. Taking note of the aforesaid transaction/AIR information, the AO was of the opinion that the assessee had surrendered his rights in the properties to Shri Chunilal Velaji Prajapati and Shri Tejaram Navaji Prajapati respectively and offered stamp duty value of Rs.71,07,480/- as sale consideration for both floors and calculated the Long Term Capital Gain (LTCG) at Rs.71,07,480/-. The Ld. CIT(A) confirmed the action of the AO by holding that "money paid to the tax- payers for regularizing the tenancy agreement with Mr. TilokChand D Shah and Dinesh Metal Industries is to be treated as income in the hands of the tax- payers in the nature of the tenancy rights". According to him, the cost of acquisition is nil, the excess amount need to be taxed as capital gain. According to the Ld. CIT(A), the assessee/executors/trustees had to be paid consideration by Shri Chunilal & Shri Tejaram for regularizing the tenancy, since the 2nd and 3rd floor properties were given on rent by assessee to M/s. Dinesh Metal Industries and to Shri TilokChand D Shah respectively, and they in-turn gave the property to Shri Chunnilal and Shri Tejaram, (without the consent of land-lords); and vide agreement executed in the relevant year (AY. 2011-12), the assessee had entered into an agreement with Shri Chunnilal and Shri Tejaram for regularizing the tenancy and pursuant to that stamp-duty of two properties (Rs.71,07,480/-) had to be remitted for registration of the agreement. According to the Ld. CIT(A), the Estate of land-lord i.e. Late Jasumathi V Shah (mother of assessee) had given notice for vacating the said 9 ITA No. 3619/Mum/2023 The Bombay Drug Distributors premises to the original tenants i.e. TilokChand D Shah and Dinesh Metal Industries who had illegally given away the said properties by way of sub- tenancy, to Shri Chunilal and Tejaram. According to the Ld. CIT(A), since both these sub-tenants were not paying rent to the land-lord, a settlement was finally arrived at in the month of Oct, 2010 and the tenancy of these two persons were recognized by entering into agreement of tenancy by the land- lord [assessee being one among the four (4) co-owner brother]. Therefore, according to Ld. CIT(A), the AO rightly taxed the transfer of tenancy right and dismissed the appeal of assessee.
7. According to assessee, the registered documents in question was evidencing only 'tenancy agreement' terms of which was in accordance to Maharashtra Rent Control Act, 1999 (hereinafter "the MRCA 1999) and the tenancy was governed by MRCA Act, 1999. According to assessee, the AIR information was triggered since assessee registered the tenancy agreement of two floors of property in question to Shri Chunilal & Shri Tejaram as per the MRCA 1999, which makes it compulsory on the part of land-lord to register the tenancy/rent agreement as per Registration Act, 1908. And any failure on the part of the land-lord not to register the tenancy would invite imprisonment up to 3 months as per section 55 of MRC Act, 1999. Drawing our attention to the tenancy agreement placed at page 32 to 49 PB with Shri Chunilal and page no. 52 to 69 of PB with Shri Tejaram, the Ld. AR submitted that as per the terms of the agreement it can be seen that ownership of the two floors/property in question has not been transferred to Shri Chunilal or Shri Tejaram. According to the Ld. AR, it can be seen that they were only tenants and didn't enjoy the power to sell or mortgage or sub-lease the property (without permission of land- lords). And both the tenancy agreement has incorporated the provision of MRC Act, 1999 which permits the assessee to evict the tenant for failure to pay the rent as per section 15 of MRC Act, 1999. Moreover, according to Ld. AR, there was no consideration passed between land-lord and tenant. Apart from the aforesaid facts and despite assessee pointing out the aforesaid facts, there was no enquiry on the part of AO/Ld. CIT(A) to verify from the tenants (Shri Chunilal or Shri Tejaram) as to whether there was any transaction of the nature of transfer as contemplated u/s 2(47) of the Act. According to Ld. AR without any material to show that tenancy agreement entered into between assessee [who was one of the four owner of the properties (two flats)] and the two persons, were in the nature of transfer, AO/Ld CIT(A) erred in holding that the agreement was sham or colourable device to avoid tax. Therefore, it was urged that the action of AO/Ld. CIT(A) to bring in deeming section 50C of the Act to tax the transaction is erroneous. The Ld. AR cited the following decisions in support of his aforesaid contention, which are as under: -
10 ITA No. 3619/Mum/2023The Bombay Drug Distributors (1) Atul G. Puranik v ITO (ITAT Mumbai) (2011) 11 taxmann.com 92 Section 50C of the Act applies only to a capital asset, being land or building or both, it cannot be made applicable to lease rights in a land. As the assessee transferred lease right for sixty years in the Plot and not land itself, the provisions of section 50C of the Act cannot be invoked. A distinction has been drawn between 'land or building' on one hand and 'or any rights in land or building' on the other. Considering the fact that we are dealing with special provision for full value of consideration in certain cases u/s 50C of the Act, which is a deeming provision, the fiction created in this section cannot be extended to any asset other than those specifically provided therein.
(2) ACIT v M/s. Munsons Textiles (ITAT Mumbai) Only for the limited purpose of computation of capital gain in respect of sale of land and building, stamp duty value has to be substituted for sale consideration in view of specific provisions of section 50C of the Act.
Therefore, provisions of section 50C of the Act cannot be applied in case of transfer of tenancy rights in respect of land or building or both.
(3) DCIT v Tejinder Singh (2012) 19 taxmann.com 4/50 SOT 391 The Tribunal held that the phrase 'land or buildings or both' will not include rights in land or building or both such as tenancy rights.
(4) Kishori Sharad Gaitonde v ITO (ITAT Mumbai) ITA No.1561/M/09 In case of Kishori Sharad Gaitonde v ITO (ITAT Mumbai) ITA No. 1561/M/09 take a same view that section 50C of the Act not applied on tenancy right.
Observation of Tribunal is as follows:
Section 50C of the Act does not apply to "rights" in land and building like tenancy rights The assessee, a tenant in a flat, sold tenancy rights for Rs.30 Lakhs and offered long-term capital gains on the basis that the said sum was the consideration. The AO took the view that as the market value adopted the Sub-Registrar was Rs.33,11,200/- the said market value had to be adopted as the consideration u/s 50C of the Act. This was confirmed by the Ld. CIT(A). On appeal by the Ld. Assessee, held allowing the appeal;11 ITA No. 3619/Mum/2023
The Bombay Drug Distributors
(i) Section 50C of the Act is a deeming provision and incorporates a legal fiction that if the consideration received on transfer of land or building is less than the stamp duty value, the said stamp duty value shall be deemed to be the full value of consideration for purposes of computing capital gains;
(ii) It is trite law that a legal fiction cannot extend beyond the purpose for which it is enacted. As long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent is impermissible. The statute has to be interpreted on the basis of the language used. No words can be added and only the language used can be considered so to ascertain the proper meaning and intent of the legislation.
(Las on interpretation discussed in detail);
(iii) Section 50C of the Act does not apply to all capital assets but only to "land or building". A tenancy right is not "land or building" (It is "rights" in building). Consequently, section 50C of the Act has no application and the capital gains have to be computed on the basis of the actual consideration and not the stamp duty value.
8. In the light of the aforesaid discussion, we find that there is no material on record to find that the registered agreement between parties be treated as sale/transfer of properties in question. Assessee is one of four (4) co-owners of two flats and from the averments of the registered tenancy agreement, the Ld. DR could not show that title of the property has been passed on to the tenant;(Shri Chunnilal or Shri Tejaram). From the terms of the agreement between the assessee who was one of the four (4) owners of the facts in question, we find it is a tenancy agreement and the terms of the agreement shows that provisions of MRC Act, 1999 are incorporated and therefore applies to the agreement between parties. Moreover, there was no evidence of any consideration being passed between the assessee and Shri Chunnilal and Shri Tejaram. The agreement between parties was for giving the flats in question on rent. Thus, the Ld. CIT(A) erred to upholding the action of the AO who erroneously treated the transaction of tenancy/rental agreement to be that of transfer of property without any material to hold otherwise. Therefore, in the facts and circumstances of the case in hand, we are inclined to delete the addition made by AO, that also by applying section 50C of the Act, which deeming provision in no case is applicable to the facts of the case."
9. The facts of assessee's case being identical in our considered view the ratio of the above decision is applicable to assessee's case also. In view of the above discussion and respectfully following the decision of co-ordinate bench, we hold 12 ITA No. 3619/Mum/2023 The Bombay Drug Distributors that the AO is not correct in making the addition under section 50C of the Act. Accordingly, the addition is hereby deleted.
10. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 19-02-2024.
Sd/- Sd/-
(ABY T VARKEY) (MS. PADMAVATHY S)
Judicial Member Accountant Member
*SK, Sr. PS
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. DR, ITAT, Mumbai
4. Guard File
5. CIT
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai