Income Tax Appellate Tribunal - Mumbai
Priyadarshini Properties And Estates ... vs Assessee on 9 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" Bench, Mumbai
Before Shri R.V. Easwar, President
and Shri B. Ramakotaiah, Accountant Member
ITA No. 5877/Mum/2006
ITA No. 3581/Mum/2007
ITA No. 6317/Mum/2009
ITA No. 3151/Mum/2010
(Assessment Years: 2002-03 to 2005-06)
M/s. Priyadarshini Properties Income Tax Officer - 9(2)-4
and Estates P. Ltd. Vs. Mumbai
601, Pran Kutir, Ram Gully
Kandivali (W), Mumbai 400067
PAN - AAACP 3195 Q
Appellant Respondent
Appellant by: Shri Chetan A. Karia
Respondent by: Shri Alexander Chandy
Date of Hearing: 09.08.2011
Date of Pronouncement:
ORDER
Per B. Ramakotaiah, A.M.
These are appeals by the assessee against the orders of the CIT(A) IX/XX, Mumbai in various assessment years on the issue of determining house property income by considering annual letting value under section 23(1)(a) by the A.O. as against the loss declared by assessee. Since the issues are common in all the four years and the CIT(A) followed the lead order in A.Y. 2002-03 in all other assessment years these appeals are considered together and decided by this common order.
2. Briefly stated, assessee is a private limited company and is in the business of real estate development. Assessee entered into an agreement dated 02.05.1988 with trustees of Madanlal Charity Memorial Trust. The Trust is the owner of a plot of land and structure thereon at 151 Nadiadwalla Colony, Off Swami Vivekanand Road, Malad West, Mumbai 400064. As per the agreement the assessee acquired irrecoverable tenancy 2 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
rights on the land and structure at the monthly rent of `500/- and `1,70,000/- as security deposit on the condition that it shall demolish the existing structure and shall pay `30,000/- being the cost of structure to the Trust, construct a new building on that plot, re-accommodate the 5 existing tenants in the new building and shall have right to let out the tenements in new building to any persons of its choice. The assessee started construction of building known as Spectra Apartment consisting of 11 flats in July 1988. The cost of construction was shown at `73.11 lakhs. Three of the five old tenants surrendered their tenancy rights and left. The assessee accommodated the remaining two tenants and let out the remaining flats to new tenants on irrecoverable leave & license basis at monthly rent varying from `1,100/- to `2,000/- and equal sum payable monthly towards municipal taxes. The new tenants paid a total sum of `73,50,000/- as interest free non-refundable deposit. The assessee considered the transaction as business and filed loss return.
3. The AO considering that assessee had taken interest free deposit for the tenements brought income from House Property. The CIT(A) in AY 2002- 03 considered assessee's submissions and upheld the action of the A.O. by stating as under: -
"6. On a careful consideration of the above facts it can be seen that the appellant company is the owner of the building known as 'Spectra Apartment' Malad (West), Mumbai as stated in agreement dated 2.5.88. I am in agreement with the views of the AO that this is an irrecoverable arrangement as agreed by the owner of the plot of land i.e. trust and the assessee and even if the property is taken on lease and let out the lessor is the owner during lease period as held in the case of S.G. Mercantile Corporation P. Ltd. vs. CIT 83 ITR 700 (SC). Another most significant part of the transaction is that the assessee instead of getting rent from its tenants has received deposits of Rs.57,20,000/- from 8 tenants of the 'Spectra Building'.
The occupants of the flats are only paying maintenance charges to the assessee. However, the assessee has not disclosed 'Income from House Property' and has treated the activities as business activities. The contention of the appellant is not acceptable as from the agreement it is clear that the assessee is the owner of the property and all flats in the Spectra Apartments have been let out on rents to the tenants and instead of getting rent from the tenants assessee has received interest free security deposit therefore the annual letting value adopted at Rs.502330/- u/s. 23(1)(a) of the I.T. Act by the 3 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
assessing officer is correct as in the appellant's case not rent has been disclosed to be received from the tenants. The appellant's case is clearly covered by the Hon'ble ITAT decision in the case of Tivoli Invst and Trading Co. Ltd. vs. ACIT where it is held that if there is no rent paid and in lieu of rent excess deposit is being made, the said deposit may be considered as rent. Thus considering the totality of the facts the income from house property taken by the assessing officer is hereby confirmed."
Following the above the CIT(A) dismissed assessee's contentions and the appeals in all the assessment years.
4. Assessee has raised grounds, which are similar in all the years. Grounds raised in A.Y. 2002-03 are extracted, for the sake of clarity, as under: -
"1) The Learned Commissioner of Income Tax (Appeals) erred in holding that the appellant is owner of Malad property and income from house property is assessable in the hands of the appellant.
2) The Learned Commissioner of Income Tax (Appeals) erred in upholding the action of the Assessing Officer of assessing the income under the head income from house property.
3) The Learned Commissioner of Income Tax (Appeals) erred in confirming determination of income from house property at Rs.5,61,891/-.
4) The Learned Commissioner of Income Tax (Appeals) erred in confirming determination of annual letting value at Rs.8,02,830/-.
5) The Learned Commissioner of Income Tax (Appeals) failed to appreciate that the learned Assessing Officer had passed assessment order without giving opportunity to appellant to controvert the evidence collected.
6) The appellant prays that:
6.1 Income may be determined at business loss of Rs.4,900/- as returned by the appellant.
6.2 Alternatively, income from house property may be determined of Rs.50,693/- as computed by the appellant.
6.3 Any other relief your honour may deem fit."
5. We have heard learned counsel and the learned D.R. and perused the paper book filed in this regard. At our instance the learned counsel also placed on record a list of flat owners. The assessee also filed a letter 4 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
requesting for consent for assessing to tax the business income in A.Y. 1999-2000, which are being dealt with in the course of the order.
6. As briefly stated above, assessee has constructed 11 apartments and two apartments were allotted to the earlier tenants without any right to purchase. Out of the balance nine apartments, eight apartments have been given possession in A.Y. 2002-03 & A.Y. 2003-04 and all nine were given possession from A.Y. 2004-05. It was the submission that one apartment was stock-in-trade in these intervening years as it was not sold/ given on lease. In this regard assessee placed the agreements entered into with the Trust as well as with the tenants. There is no dispute with reference to acquisition of tenancy rights from M/s. Madanlal Mulraj Memorial Trust vide articles of agreement dated 2nd May 1988 w.e.f. 1st April 1988. Vide this agreement assessee company was given permission to demolish the existing structure which was occupied by tenants and to construct a new building with a condition to readjust or resettle the existing tenants in the new building. It was also on record that the project was delayed due to non- cooperation from the existing tenants and the matter was settled in February 1994. Three erstwhile tenants have surrendered their tenancy rights whereas two tenants have opted for continuation of tenancy in the new building. Assessee company got the building plan approved by the BMC in August 1994 for constructing a new building consisting of ground + 5 upper floors having 11 flats. It also acquired TDR for FSI benefits with 350 sq.mts. According to assessee the project was completed but occupancy certificate was given in FY 1998-99.
7. The facts indicate that assessee has entered into two different set of agreements. One set of agreements with the erstwhile tenants, Smt. Muktagauri Shantilal Patel and Gurunanak Sabha indicate that assessee continued the tenancy with a monthly rent of `39.59 per month as rent. The agreement does not assign any right to dispose off but only right to occupy. Since there is no passing of ownership in the property, assessee admits that as far as these two tenants are concerned assessee has let out the property to them on which standard rent is received and accordingly house property 5 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
income has to be considered on two apartments given on lease to the erstwhile tenants.
8. However, with reference to the nine apartments the agreements indicate that it had entered into agreement with nine new persons on irrecoverable permanent leave & license basis. It was the contention that assessee does not have any rights as they have been passed on to the tenants. Referring to the agreement entered into with various parties it was the submission that assessee vide clause 2 of the agreement allowed the said premises to be occupied on the basis of irrevocable permanent leave and license by the occupants. In view of this, the occupants have given interest free refundable deposits. It was the contention that assessee did not get full rights of the property from the Trust due to various legal complications. Assessee in turn could not sell or transfer the property, therefore, by virtue of this irrevocable permanent leave and license, allowed the tenants to occupy the property and as accepted by the A.O. and the CIT(A) no rent or monthly charges were collected by the company. Vide clause 5 (xi) the occupants has given right to let, sub-let or grant of leave and license of the said premises further and vide clause 13 it was agreed that if owner permitting to transfer by way of sale or long lease the property to the company then the company shall take steps to submit the said property under the provisions of Maharashtra Apartment Ownership Act and the amount of consideration for such ownership/assignment right shall be the amount of the said interest free security deposit paid under the agreement. It was further provided that in no event either of the party shall be entitled to vary the figure agreed of the said consideration amount and the occupants shall have the right title and interest granted under this agreement and the said premises and rest of the portion of the premises and terrace shall belong to the company.
9. Referring to various clauses in the agreement it was the submission that assessee has given irrevocable permanent leave and license agreement to the tenants and by virtue of that the tenants became owners and relied on the provisions of section 27, section 279UA clause (f) and various case 6 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
laws to submit that the ownership has been passed on to the tenants and so the company is not the owner of the property. It was the contention that assessee cannot be subjected to income from house property on the flats given to the tenants on permanent leave and licence basis and they became the deemed owners and assessee cannot be subjected to income from house property on the said apartments as per the provisions of the Act. It was further submitted that in the books of account the amount received towards deposit from the tenants were taken as advance for the building and the entire cost of construction is shown as work-in-progress. While admitting that assessee company could not offer any income on project completion method, they consented to offer the income in A.Y. 1999-2000 if directions are given and they accordingly filed a letter with above proposal. It was the submission that in case house property income is to be assessed on the two erstwhile tenants, assessee company has no objection to consider the house property income subject to adopting 'standard rent' as income as they are protected tenants and with reference to other properties they are not liable for income from house property. In the event if the contentions are not accepted, it was the submission that only standard rent/ Municipal valuation can be assessed, the details of which were furnished to the A.O. According to the municipal value it does not exceed an amount of `15,693/-.
10. The learned D.R., however, relied on the order of the A.O. and submitted that assessee never offered income on project completion method and since the properties were given on leave and license they are to be assessed as owner of the property.
11. We have considered the issue. As seen from the documents placed on record there is no dispute with reference to acquiring only tenancy rights from the Trust and right to construct a building and allow tenancy rights. Assessee accordingly demolished the existing structure settling with three of the erstwhile tenants and gave alternate accommodation to the two protected tenants and assigned tenancy rights to others on leave and license basis by accepting substantial amount as deposit and entered into irrevocable permanent leave and license agreements. Therefore, as far as the 7 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
two flats given to the protected tenants, assessee is owner of the building and the house property income has to be assessed in the hands of the assessee company for which there is no objection from the assessee. Therefore, to that extent of assessing two flats as income from house property, is to be upheld subject to adopting annual letting value on the basis of the standard rent or actual rent received as per the provisions of law. With reference to the other nine apartments, as seen from the clauses of the agreement it is very clear that assessee has given permanent irrevocable leave and license to occupy the property and as admitted the municipal taxes are borne by the tenants. Even though the municipal rent was agreed to be paid as per agreements, both the A.O. and the CIT(A) agreed that no rent was received but the deposit was accepted. It was the contention that the deposits were accepted in lieu of sale consideration and not for the possession of the apartments pending transfer of the rights from the Trust. At our instance assessee has furnished the list of present flat occupants, which are as under: -
i. Smt. Mutkagauri Shantilal Patel (old Tenant) ii. Gurudwara Sabha (old Tenant) iii. Shri Vinod Kumar R. Gupta & Smt. Anju V. Gupta iv. Shri Bharatbhushan Gupa & Smt. Roopa Gupta v. Shri Manubhai C. Gangadia & Smt. Kailashben M. Gangadia vi. Shri Jayesh A. Shah & Smt. Jyotsna J. Shah vii. Shri Vithalbhai D. Patel viii. Shri Chelabhai D. Patel ix. Shri Sunilbhai V. Shah & Smt. Roopalben S. Shah x. Smt. Roopalben S. Shah & Shri Sunibhai V. Shah xi. Shri Ramavatr S. Jhawar
12. It was the submission that subsequent to the regularisation scheme the tenants have paid Stamp duty on various dates and the properties were registered subsequently. Assessee has given consent for directions to assess business profits on project completion basis in A.Y. 1999-2000. The letter dated Nil filed on 09.08.2011 by the assessee company is as under: -
8 ITA No. 5877, 3581, 6317 & 3151/Mum/2006M/s. Priyadarshini Properties and Estates P. Ltd.
"Re: Priyadarshini Properties P. Ltd.ITA No. 5377/M/06, 3581/M/07, 6317/M/09 & 3151/
M/10) A Y 2002-03,2003-04, 2004-05 & 2005-06 Sub: Consent for assessment on directions in a y 1999- 2000 The above appeals have been filed by the assessee.
The assessee is a developer and had developed Spectra Apartment at Malad. The project was of redevelopment of existing building which had 5 tenants. The land and building belonged to a trust and the appellant was granted development rights under document with land owners titled tenancy agreement addition the assessee had a right to redevelop and allot flats. Out of 5 existing tenants, three settled and two tenants were allotted permanent alternative accommodation in the new building. Totally 11 flats were constructed out of which 2 were allotted to existing tenants and balance were allotted for consideration under agreement. The building was completed and Occupation certificates was granted by the BMC on 20.07.1998. The title of the property had to be perfected by obtaining conveyance of the property from owners being a trust with due approvals. At the relevant time the assessee was hopeful of perfecting the title. The assessee was following project completion method of accounting and cost of construction was reflected as work in progress and amounts received from new allottees was reflected as advance against flats in books of account.
In the assessment order for a y 2002-03, the Assessing Officer treated the assessee as owner of the said premises and assessed income there from u/s. 22. Similar orders have been passed in subsequent assessment orders for a y 2003-04 to 2005-06.
The assessee contends that it is a developer and is not the owner of the said premises in view of provisions of S. 27.
The assessee hereby gives consent to assessment of business income from development of Spectra Apartment in A Y 1999-2000, the year in which Occupation certificate was issued by BMC and the project from development can be said to be complete.
Yours faithfully, For Priyadarshini Properties P. Ltd.
Sd/-
Director (Ashok B Vadalia)"9 ITA No. 5877, 3581, 6317 & 3151/Mum/2006
M/s. Priyadarshini Properties and Estates P. Ltd.
13. While we are not in a position to give any direction, as the issue of completion of project and determination of profit is not subject matter of appeal before us, we however, of the view that the matter requires re- examination by the A.O. Even though it was submitted that assessee has placed all the documents and agreements before the A.O. and the CIT(A), neither the A.O. nor the CIT(A) considered the submissions but invoked provisions of section 22 and 23(1)(a) determined the annual letting value, without examining the ownership issues.
14. Some of the important clauses entered into by the assessee with the new tenants are extracted here: -
"Clause 2: In pursuance of the said authority the Company doth hereby agree to allow the occupant to occupy flat No. 101 admeasuring ____ sq.ft. on FIRST floor in the building SPECTRA APARTMENT on the terms and conditions as set out in this Agreement. The said premises are allowed to be occupied on the basis of irrevocable permanent leave and licence by the Company to the Occupant.
Clause 5:
(vii) The Occupant shall have right for absolute transfer/assignment from the date hereof. The Occupant shall inform the company of any including deposit paid to the Company under this Agreement to any Transferee or Assignee as a whole by furnishing to the Company copy of such transfer/assignment with full name and address of transferee/assignee within one month from the date of executing such transfer/assignment as the case may be.
(xi) The Occupant shall have right to let, sub-let or grant on Leave & Licence of the said premises entirely only as they may think fit and proper without payment of any further or other amount to the Company. However copy of the said writing shall be submitted to the Company within 48 hours of such right being granted.
Clause 13: It is further agreed that if Owner permitting to transfer by way of sale or long lease the property to the Company then the Company shall take steps to submit the said property under the provisions of the Maharashtra Apartment Ownership Act or to more than two persons as joint holders or otherwise then the Occupant will have only right as conferred upon and granted hereunder. It is further agreed that if Owners permitting to transfer the ownership to Society of the occupants of the Company building or to submit the said property under the provisions of the Maharashtra Apartments 10 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
Ownership Act or to more than two persons as joint holders or granted to the Occupant in respect of the demised premises in the building and shall be co-owner in respect of the said premises as per the terms and conditions of this Agreement only and the amount of consideration for such ownership/assignment right shall be the amount of the said interest free security deposit of Rs.6,00,000/- (Rupees six lakh only) paid under this Agreement the proportionate amount payable to the owner, stamp, registration cost, charges and expenses and in addition thereof a sum of Rs.______ per sq.ft. of for the whole area of the flat. The said amount shall be paid on execution of all the documents and the said security deposit amount shall stand adjusted towards the consideration upon execution of all the documents mentioned hereinabove. In no event either of the parties shall be entitled to vary the figure agreed of the said consideration amount. It is further agreed that in such event the Occupant shall have right title and interest granted under this agreement and the said demised premises being Flat No. 101 and as provided in this agreement and the rest portion of premises and Terrace shall belong to the Company alone as stated hereinabove."
As can be seen from the above clauses assessee has entered into an irrevocable leave and licence and has given possession to the occupant. Not only that the occupant was given right for absolute transfer or assignment and also right to let, sub-let or grant leave and licence of the said premises. Clause 13 also indicates that in case assessee acquires rights on the said property the same will be given to the occupant and the interest free security deposit received/paid under the agreement will be treated as sale consideration and the amount shall stand adjusted to the consideration which was fixed at the time of entering into this leave and licence agreement. These terms make it clear that it is indeed a permanent sale agreement handing over the possession to various occupants on a permanent basis and the rights are irrevocably handed over.
15. As held by the Hon'ble Supreme Court in the case of Associated Hotels of India Ltd. vs. R.N. Kapoor 1959-(SC2)-GJX-0120-SC the leave and license agreement entered by the assessee with tenants on an irrevocable permanent leave and license is in fact a lease agreement. The Hon'ble Supreme Court brought out the distinction between lease and licence in the following words: -
"There is a marked distinction between a lease and a licence. Section 105 of the Transfer of Property Act defines a lease of immovable property 11 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
as a transfer of a right to enjoy such property made for a certain time in consideration for a price paid or promised. Under s. 108 of the said Act, the lessee is entitled to be put in possession of the property. A lease is therefore a transfer of an interest in land. The interest transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor. Whereas s. 52 of the Indian Easements Act defines a licence thus:
"Where one person grants to another, or to a definite number of other persons, a right to do or continue to do in or upon the immoveable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property, the right is called a licence."
Under the aforesaid section, if a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property. There is, therefore, a clear distinction between the two concepts. The dividing line is clear though sometimes it becomes very thin or even blurred. At one time it was thought that the test of exclusive possession was infalliable and if a person was given exclusive possession of a premises, it would conclusively establish that he was a lessee. But there was a change and the recent trend of judicial opinion is reflected in Errington v. Errington [[1952] 1 All E.R. 149], wherein Lord Denning reviewing the case in law on the subject summarizes the result of his discussion thus at p.155:
"The result of all these cases is that, although a person who is let into exclusive possession is, prima facie, to be considered to be tenant, nevertheless he will not be held to be so if the circumstances negative any intention to create a tenancy."
The Court of Appeal again in Cobb v. Lane [[1952] 1 All E.R. 1199] considered the legal position and laid down that the intention of the parties was the real test for ascertaining the character of a document. At p.1201, Somervell, L.J. stated:
"..... the solution that would seem to have been found is, as one would expect, that it must depend on the intention of the parties."
Denning, L.J., said much to the same effect at p. 1202:
"The question in all these cases is one of intention: Did the circumstances and the conduct of the parties show that all that was intended was that the occupier should have a personal privilege with no interest in the land?"
The following propositions may, therefore, be taken as well- established: (1) To ascertain whether a document creates a licence or 12 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
lease, the substance of the document must be preferred to the form; (2) the real test is the intention of the parties - whether they intended to create a lease or a licence; (3) if the document creates an interest in the property, it is a lease; but if it only permits another to make use of the property, of which the legal possession continues with the owner, it is a licence; and (4) if under the document a party gets exclusive possession of the property, prima facie, he is considered to be a tenant; but circumstances may be established which negative the intention to create a lease. Judge by the said tests, it is not possible to hold that the document is one of licence. Certainly it does not confer only a bare personal privilege on the respondent to make use of the rooms. It puts him in exclusive possession of them, untrammelled by the control and free from the directions of the appellants. The covenants are those that are usually found or expected to be included in a lease deed. The right of the respondent to transfer his interest under the document, although with the consent of the appellants, is destructive of any theory of licence. The solitary circumstance that the rooms let out in the present case are situated in a building wherein a hotel is run cannot make any difference in the character of the holding. The intention of the parties is clearly manifest, and the clever phraseology used or the ingenuity of the document-wrier hardly conceals the real intent."
16. Thus the agreement entered by the assessee even though termed as leave and license agreement is in fact a lease agreement in its form and substance. Further the provisions of section 27 r.w.s. 269UA(f) deem the tenants as owners of the property. Provisions of section 27 and 269UA relevant are as under: -
"Owner of house property", "annual charge", etc., defined.
27. For the purposes of sections 22 to 26--
(i) ;
(ii) ;
(iii) ;
(iiia) ;
(iiib) a person who acquires any rights (excluding any rights by way of a lease from month to month or for a period not exceeding one year) in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA, shall be deemed to be the owner of that building or part thereof;]
(iv) [***]
(v) [***]
(vi) .13 ITA No. 5877, 3581, 6317 & 3151/Mum/2006
M/s. Priyadarshini Properties and Estates P. Ltd.
269UA ..........
....................
(f) "transfer",--
(i) in relation to any immovable property referred to in sub-
clause (i) of clause (d), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882).
Explanation.--For the purposes of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years ;
(ii) in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of any agreement or arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, such property."
17. Applying the above provisions to the facts of this case, as the assessee has given an irrevocable permanent leave and licence to the tenants, by virtue of section 27 r.w. clause (f) to section 269UA, the tenants have become the deemed owners of the premises. The income from house property is taxable in the hands of owner of property. This is evident from section 22 which is extracted for immediate reference:
"22. The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head "Income from house property".
The taxability of income from house property is not restricted to the actual rent received but tax may be levied on property on the potential of the property to earn income. The Legislature while introducing the concept of deemed owner did not envisage taxing of income in the hands of legal owner 14 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
under the head "income from house property" when such income was taxed in the hands of the real owner. This is evident from paragraph 23.4 of the Circular No. 495 dated 22.09.1997 explaining the provisions of Finance Act, 1987 167 ITR 73 which is extracted as under: -
"23.4 The amending Act has shifted the liability to a taxation, from the legal owner to the real owner in respect of some transfers by introducing deeming provisions. The question of taxing the legal owner, e.g., a builder of multi-storeyed flats under the head "Income from house property" would, consequently, not arise."
The above CBDT circular explains the provisions of section 27. The enactment of legal fiction is binding on the department. Further the Hon'ble Andhra Pradesh High Court in the case of CIT vs. Nandanam Constructions 222 ITR 737 considered this very issue and held that the legal owner could not be assessed in view of the legal fiction created under section 22 and only the real owner or the deemed owner could be assessed to tax as per the provisions of section 27. In the said case, the builder had constructed the property and had given possession of the properties to the buyers. The Income Tax Officer assessing the builder sought to tax the builder under the head "Income from house property" with respect to flats constructed and delivered to the buyers for which registration was pending. The Hon'ble ITAT held that when the buyers were deemed as owners by virtue of section 27, the builder could not be once again assessed with respect to the same properties under the head "Income from house property" as owners. The Hon'ble ITAT accordingly deleted the addition. In the Hon'ble Andhra Pradesh High Court relying on the decision of the Hon'ble Supreme Court in the case of Jodha Mal Kuthiala vs. CIT 82 ITR 570 held that owner in the context of income tax was to be understood as single owner and there could not be two owners, i.e. the legal owner and the real owner. Income from house property could only be assessed once, either in the hands of owner or in the hands of deemed owner. Accordingly, any income from property could only be assessed to tax under the head "Income from house property' only in the one of the hands of legal or deemed owner.
18. Since these aspects have not been examined by the A.O. at all, as there was no discussion in the orders and the agreements entered by the 15 ITA No. 5877, 3581, 6317 & 3151/Mum/2006 M/s. Priyadarshini Properties and Estates P. Ltd.
assessee were not examined in correct perspective, in the interest of justice we are of the opinion that the matter requires re-examination by the A.O. afresh. He is directed to keep the above provisions of law in mind and examine the facts. In case assessee offers income on completion of the project either in A.Y. 1999-2000 as contended before us or in a subsequent assessment year, the A.O. can taken these facts into consideration. It was submitted that those tenants have paid the stamp duty for registration and the properties are being conveyed. A.O. is directed to examine these and necessary decision can be taken in the respective assessment years. The A.O. is also directed to examine whether the tenants have offered any income from house property in their hands so that there is no double taxation of the same incomes in the hands of the legal owner and deemed owner. With these directions, the assessments in these years stand restored to the file of the A.O. We set aside the orders of the A.O. as well as the CIT(A) in respective years with a direction to redo the assessments after necessary examination and according to the provisions of law.
19. In the result, appeals are considered allowed for statistical purposes.
Order pronounced in the open court on September 2011.
(R.V. Easwar) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, Dated: September 2011
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - IX, Mumbai
4. The CIT- IX, Mumbai City
5. The DR, "C" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.
16 ITA No. 5877, 3581, 6317 & 3151/Mum/2006
M/s. Priyadarshini Properties and Estates P. Ltd.
S.No. Details Date Initials Designation
1 Draft dictated on 02.09.11 Sr. PS/PS
2 Draft placed before author 07.09.11 Sr. PS/PS
Draft proposed & placed before
3 JM/AM
the Second Member
Draft discussed/approved by
4 AM/AM
Second Member
Approved Draft comes to the Sr.
5 Sr. PS/PS
PS/PS
6 Kept for pronouncement Sr. PS/PS
7 File sent to Bench Clerk Sr. PS/PS
Date on which the file goes to
8
Head Clerk
9 Date on which file goes to A.R.
10 Date of Dispatch of order