Income Tax Appellate Tribunal - Delhi
Anant Raj Industries Ltd. vs Joint Cit, Spl. Range-7 on 17 August, 2007
ORDER
1. The appeal has been ref erred to me under Section 255(4) of the Income Tax Act on a difference of opinion between the Hon'ble Members who heard the appeal. The following points of reference have been referred tome for decision:
(1) Whether on facts and in law could the assessee be treated as the owner of the "Katwaria Sarai" property as is the view expressed by the V.P. or was it the lessee of the property as held by the J.M. (2) Whether on the construction of the agreement between the assesseeand Vaitalik could it be held that it was the case of lease of land to theassessee and a part of the structure on the said land was owned by the assessee (entire cost expended by the assessee) as is the view of the V.P. or there' was no lease of land and the structure was not owned by the assessee as is the view of the J.M. (3) Whether in the light of construction agreement dated 27-7-1994 and lease deed dated 1-8-1995 could the assessee be said to be owner of property within the meaning of Section 22 of the Income Tax Act.
(4) Whether on facts and in law was the income from the property in question taxable under the head "Incorne from house property'' as is the view of the V.P. or was the income taxable under any other head of income as was the view expressed by the CIT and which was confirmed by the J.M. (5) Whether on facts and in law did the CIT act validly under Section 263, the V.P. opining that he did not and quashing his order and theJ.M. expressing a view to the contrary sustaining the order under Section 263.
2. All the relevant facts have been discussed threadbare by both the Hon'ble Vice President and the Judicial Member who have passed separate orders in detail running to about 83 pages in all. There is no need therefore to recapitulate the facts in any great detail except the basic facts that are necessary to focus upon the controversy. The appeal relates to the assessment year 1997-98, the previous year ending on 31-3-1997. The assessee is a company. On 17-12-1986, the Delhi Development Authority (DD A) granted a perpetual lease of land situated in Katwaria Sarai in Delhi to another company by name Vaitalik for development of the land with facilities, such as, auditorium for performing arts, art gallery, lecture room, administrative block, etc. The lease deed was registered on 7-1-1987. Apparently, Vaitalik could not muster the required funds and approached the assessee-company for funds. A contract for construction services was entered into between Vaitalik and the assessee on 27-7-1994 under which the assessee was to put up a structure comprising of 35,773 sq.ft. upon the land. Subsequently, on 2-3-1996 another agreement was entered into between Vaitalik and the assessee which is called a lease agreement under which the Vaitalik was to lease 23,883 sq.ft. of the area to the assessee at Rs. 9.50 per sq.ft. per month as rent and the lease was to begin from the date of completion of the building, which is 31-7-1995.
3. The construction was put up by the assessee using its own funds and it had spent Rs. 3,13,56,918. It is common ground that the funds of Vaitalik were not used for the construction. Since the lease deed dated 2-3-1996 permitted the assessee to use the premises for its own purposes or to let out the whole or part thereof to any person, the assessee-company let out the area of 23,883 sq.ft. to six tenants. The lease deed dated 2-3-1996 was to remain in effect for a period of 5 years from 1-8-1995 to 31-7-2000. On 31-3-1999, a cancellation deed was entered into between Vaitalik and the assessee to the effect that the lease agreement dated 2-3-1996 would stand terminated with effect from 1-4-1999 and both Vaitalik and the assessee will discharge their respective obligations within a period of six months thereof.
4. During the year ended 31-3-1997, which is the year under appeal, the assessee received rent of Rs. 5,75,85,518 and service charges of Rs. 50,27,576 and declared the same under the head "Income from house property". The assessment was completed under Section 143(3) of the Income Tax Act by order dated 31-3-2000 in which the income was assessed under the head "Income from house property" and deduction of 1 /5th thereof was allowed for repairs and collection and for the assessee's share of the rent paid to the lesser as annual charge. The deductions aggregated to Rs. 2,37,09,624 and deducting the same from the rental income of Rs. 5,75,85,518, the balance of Rs. 3,38,75,895 was assessed under the head "Income from house property".
5. The CIT took proceedings under Section 263 of the Income Tax Act on the ground that the assessment so framed was erroneous insofar as it was a prejudicial to the interest of revenue. According to him, the assessee could not be considered to be the owner of 23,883 sq.ft. constructed by it, that it had only taken the above area on lease from Vaitalik for a period of five years, that during this period it was permitted to exploit the property, that it was in the course of such exploitation that the assessee let out the property for rent and earned income, that such income cannot be assessed under the head "Income from house property" under Section 22 of the Act since the assessee was not the owner of the area of 23,883 sq.ft. and that, therefore, it was not entitled to get the allowance for repairs and collection charges and annual charges paid. After considering the detailed reply of the assessee, the CIT came to the conclusion that the assessee cannot be considered to the owner of the above area and, therefore, the income cannot be assessed under the head "Income from house property". In doing so, he also rejected the assessee's arguments based on Section 27(iiib) of the Act and the judgment of the Supreme Court in the case of CIT v. Poddar Cement (P.) Ltd '. He however left it to the assessing officer to consider whether the income constituted "business income" or "Income from other sources" and directed him to examine the question in detail after looking into the memorandum and articles of association etc, and reframe the assessment after giving the assessee reasonable opportunity of being heard. He also directed the assessing officer to examine the admissibility of the deductions claimed by the assessee by way of repairs and collection charges. This order of the CIT was passed in March 2002.
6. The order of the CIT was taken by the assessee in appeal before the Tribunal. The Hon'ble Vice-P resident who passed the leading order held that the assessee was the owner of the superstructure measuring 23,883 sq.ft. for a specified periodic and, therefore, the rental income was assessable under the head, "Income from house property" and accordingly set aside the order of the CIT passed under Section 263 of the Act. The learned Judicial Member, dissenting from the order of the Vice-President, has upheld the order of the CIT, holding that the ownership of the superstructure measuring 23,883 sq.ft., though constructed by the assessee, was never intended to be vested in the assessee in its capacity as owner and, therefore, he held that the income was not assessable under the head "Income from house property". That is how the matter is before
7. I have heard the learned Counsel for the assessee and Mr. P.V. Rao, the learned CIT-DR at length and I have also carefully perused the several detailed paper books and the synopses filed on behalf of the assessee on various dates of hearing. In my considered opinion, the income received by the assessee cannot be assessed under Section 22 of the Act under the head "Income from house property" as rightly held by the: CIT in his order passed under Section 263 of the Act. My reasons are given below.
8. Under Section 22 of the Act, the income derived from the property can be assessed under the head "Income from house property" only if the assessee is the owner of the property. In. the present case, in order to determine the question of ownership of the superstructure measuring 23,883 sq.ft., one has to consider the entire documentation as a whole. All the documents entered into by the parties at different times have to be read together to gather their intention. Firstly, I find that this is a case where DDA had leased out the land to Vaitalik for a particular purpose, namely, to develop facilities for the performing arts, art gallery, lecture rooms, administrative block, etc. Under the terms of the lease, the land cannot be put to any use other than the aforesaid purpose, except with the prior approval of DDA. Obviously, the development of such facilities on the land would require a huge outlay of funds which Vaitalik somehow could not muster. It, therefore, approached the assessee for putting up the funds.
It is in this background that an agreement was entered into on 27-7-1994 which is styled as "Contract for construction services". The preamble narrates that Vaitalik got the plans for the construction of the building approved and even commenced the work but due to paucity of funds and lack of infrastructure, the activities came to a standstill. Thereafter Vaitalik thought it desires to negotiate a deal with a person "having necessary resources and expertise for carrying out and completing the construction over the property". It, therefore, approached the assessee for completing the construction. The assessee agreed "to take the land on lease" for carrying out the construction. According to Clause (i), the assessee was to construct 35,773 sq.ft. at its own cost and the lease amount "shall be calculated with reference to the area which will be in possession of ARCPL" (the assessee). Clause (2) stated that "in consideration of ARCPL completing construction over the property with own funds", Vaitalik would agree that an area of 23,883 sq.ft. on the basement to third floors out of the total constructed area (35,773 sq.ft.) "shall be owned and possessed by ARCPL and that ARCPL shall pay a lease amount @ Rs. 9.50 per square foot per month". The clause further, provided that the payment of rent would begin from the date of obtaining Forms C & D in respect of construction to be completed. It was further provided in the said clause that Vaitalik authorized the assessee to use the premises either for its own purposes or to let out the whole or part and recover rent for monies for its sole and exclusive use. The clause further stated that the lease of the area by Vaitalik to the assessee was for an initial period of 5 years and 6 months renewable for one term at the option of the assessee and further renewals shall be subject to mutual consent. Clause (3) provided that the assessee shall give interest-free security deposit of Rs. 5 lakhs to Vaitalik. Clause (6) provided that the house tax and other taxes shall be borne by the parties in proportion to their respective shares levied on their respective income from time to time. Clause (7) stated that Vaitalik has given an assurance to the assessee that it has paid all monies due and payable with respect to the property taken on lease to DDA and nothing is due to any other body or authority in relation to the property. Clause (8) provided that the liabilities incurred by Vaitalik in the initial construction of the property shall be its own and the assessee will not be responsible for the same. Clause (9) placed a condition that the construction shall be of first class quality. In Clause (10) Vaitalik assured the assessee that there has been no mis-representation on its part.
9. The important clauses of the lease agreement dated 2-3-1996 may now be noticed. The preamble recalled the construction agreement dated 27-7-1994 and noted that the lease of the building area of 23,883 sq.ft. to the assessee was to begin from the date of completion of the building and that the building has been completed on 31-7-1995. Clause (/) stated that Vaitalik agreed to lease to the assessee the area of 23,883 sq.ft. to the assessee @ Rs. 9.50 per square feet per month effective from 1-8-1995. Clause (2) authorized the assessee to use the above premises for its own purposes or let it out partly or fully for rent or money. The clause further provided that the lease shall be effected from 1-8-1995 to 31-7-2000 (5 years). Clause (3) acknowledged the receipt of the security deposit by Vaitalik, Clause (4) described the covenants of the lesser. Clause (5) described the covenants of the lessee i.e., the assessee. It provided that the assessee shall hand over vacant possession of the demised premises on the expiry of the lease period, that it should be restored in the same condition in which it was taken, that any damage caused by the lessee to the premises has to be repaired at the cost of the assessee etc. Clause (6) clarified that the rent of Rs. 9.50 per square feet per month was inclusive of running and maintenance expenses of amenities, such as, generators, common lighting, lifts, security, house keeping, car parking, etc. Clause (7) while con-firming that the assessee, their employees and guest will have the right to use the common areas, acknowledged the right of Vaitalik as lesser to restrict the entry of undesirable persons into the building. Clause (8) assured that in consideration of the rent the assessee shall peaceful enjoy the demised premises during the lease without interruption from Vaitalik. Clause (9) prohibited the assessee from making any addition or alteration without the written consent of Vaitalik but this prohibition was not applicable to temporary structures. The assessee was to handover the premises in the original condition to the lesser after the expiry of the lease. Under Clause (10), several restrictions were placed upon the lessee i.e., the assessee while using the premises taken on lease. These related to the look, design and position of the doors, elevation of all sides, fixing nameplates, signboards, etc, fixing grills/glass on the windows, etc. Clause (11) prohibited the assessee from using the premises for carrying on the manufacturing process of any kind or els workshop for repairs. Clause (12) gave Vaitalik as the lesser the right to enter and inspect the leased premises for the purpose of carrying out repairs, laying cables or waterlines, etc. Under Clause (13), it was the duty of the Vaitalik to keep the exterior and interior of the premises and common areas in tenantable condition and in good repair, to carry out repairs of the waterlines, sewers, drains, lavatories, etc. Under Clause 14(c), the assessee was not to use the premises in such a manner as to raise the rate of insurance of the building and in such an eventuality, the assessee shall be liable to reimburse Vaitalik the additional premiums which it may have to bear by reason of the assessee's use. Clause 17 clarified that the terrace at the top of the building shall always remained the property of the Vaitalik who can use the same in any manner including for purposes of publicity, hoarding, neon signs, etc, but without obstructing the business interests of the assessee. Under Clause 18, Vaitalik always had the right to add, demolish or construct further stories of any structure or make additions or alterations to the; building as are found necessary. Under Clause 19, it was the. duty of the lessee (the assessee) to keep the leased space and the interior structural walls, sewers, drains, etc, in the good tenantable condition in which it was delivered to him and particularity to support and protect the other parts of the building. The assessee shall also incur all minor repairs including leakage of water-taps, fuses, etc, but major structural repairs, such as, leakages on roof, cracks in the walls or plastering, bursting of electric cables or water-pipes or sewerage system shall be attended to promptly by Vaitalik at its own cost.
10. By an agreement dated 24-7-1996, Vaitalik and the assessee agreed that the lease shall be renewable for a further term of five years each on expiry of the current term of five years and any further term of five years and that a fresh lease deed shall be executed at the time of each renewal.
11. The last of the important documents was entered into 31-3-1999 which has also been ref erred to by the CIT in his order at page 5. This agreement, again between Vaitalik and the assessee, terminated the lease arrangement with effect from 1 -4-1999 i.e., even before the first term of lease was to expire on 31-7-2000. This agreement further provided that the assessee will discharge the lease money and other obligations towards Vaitalik and Vaitalik will discharge the building cost obligation to the assessee and the respective obligations shall be fulfilled within six months from 31-3-1999.This agreement was described as a deed of cancellation. The CIT has relied on the cancellation agreement to hold that it clarifies that the rights and obligations binding the assessee and Vaitalik were purely contractual in nature without conf erring any rights of ownership on the assessee qua the leased plot or qua the constructed portion standing thereon. The CIT further held that the assessee was not also the beneficial owner and its interest in the constructed portion was limited to the enjoyment thereof for a fixed tenure on the contracted terms and the further extension of the terms was conditioned by Vaitalik's violation. The CIT has accordingly held that the right of the assessee to receive the rental income was under a contractual arrangement allowed by Vaitalik and not by virtue of exercise of its own right over the structure. So far as Section 27 (iiib) of the Act is concerned, the CIT held that the definition of "ownership" in this Section was only for the purpose of Section 269UA of the Act and the assessee's case was not covered by it. He thus held that the assessee's claim of ownership over the property was unsustainable and inasmuch as the assessing officer had accepted the claim and assessed the income under the head "Income from house property" and had also allowed deductions as claimed by the assessee. The assessment, according to the CIT, was erroneous and prejudicial to the interests of the revenue.
12. It appears to me on a conjoint reading of all the documents entered into between Vaitalik and the assessee, viewed in the background of the inability of Vaitalik to muster the funds required for putting up the construction on the plot taken on lease from DDA, that the arrangement between Vaitalik and the assessee is essentially and in substance one for finance for putting up the construction and a permission to the assessee, as consideration, to exploit the structure measuring 23,883 sq.ft. for a limited period so as to enable the assessee to reimburse itself the cost defrayed on the construction and make a profit, if possible, as remuneration for the use of its funds, by letting out the area. Once the assessee had reimbursed itself of the cost of construction of Rs. 3,13,56,918 and had also made a surplus over and above the sum the arrangement was terminated, the purpose of both the sides having been satisfactorily achieved. It may be remembered that the assessee derived Rs. 6,03,08,180 as rent from the six ten ants during the year ended 31 -3 -1997 apart from service charges of Rs. 50,27,576. Even after paying its share of rent to Vaitalik as annual charge amounting to Rs. 1,21,92,520 and after entering repairs and collection expenses, the assessee still enjoyed a profit and thus it seems to have been adequately compensated for the outlay of its funds. This in crux was the arrangement that was documented between Vaitalik and the assessee and put to effect. The form the arrangement took was not so explicit and required some Uri ravelling but that is no reason to refuse to look into the real intention of the parties.
13. Having said that, I shall now briefly examine the documentation. As already noted, the contract for construction services dated 27-7-1994 ref erred to the background of f acts which forced Vaitalik to approach the assessee. The preamble itself is quite articulate and shows the anxiety of Vaitalik to gather funds for the construction. The nomenclature given to the contract, namely, "contract for construction services" is certainly not conclusive as rightly pointed out on behalf of the assessee but at the same time it gives an insight into what the parties really intended by entering into the document. The nomenclature cannot be ignored altogether. Clause (i), apart from narrating that the assessee was to incur the expenditure on the construction of the building also says that the possession of the plot was handed over to the assessee for carrying out the construction. It was pointed out on behalf of the assessee that Clause (2) clearly stated that the area of 23,883 sq.f t. "shall be owned" by the assessee and this was unequivocal in showing that the assessee was the owner of the aforesaid area but the difficulty in accept this claim is that in the very same clause the last sentence says that the assessee shall pay the rent of Rs. 9.50 per square foot per month from the date of obtaining the completion certificates in respect of the construction. Two things follow from this: (a) that the assessee was not intended to be the owner of the area because there can be no question of an owner paying rent for the premises owned by him; and (b) that the rent, contrary to the contention on behalf of the assessee that it was for the lease of the land, was in fact for lease of the property because it was provided in the clause that the payment of rent shall begin from the completion of the building which would not have been the case had it been the intention of the parties that the rent was for the lease of the land, in which case it would have been provided that the rent would start from the date the assessee entered possession of the land. Thus, Clause (2) read as a whole is a clear pointer to the fact that the area of 23,883 sqit. was not to be owned by the assessee, but was only to be leased to it at a rent of Rs. 9.50 per sq.ft. per month. It also shows that there was no lease of the land to the assessee but only a permission or licence to enter upon the land f or the purpose of carrying out the construction and that the lease was only in respect of the area of 23,883 sq.ft. constructed by the assessee. There is further evidence of such an intention in the very sarae clause when it provides that Vaitalik authorises the assessee to use the premises f or its own purpose or to let out the same fully or partly to any other person and recover rent. If the assessee was the owner of the premises there was no question of any authority from Vaitalik to let out the same or exploit the property in any manner it liked. Again, it is said that the letting out will be "as owner thereof but this again is not conclusive because in the last paragraph of the clause the parties reiterate that the lease of the area shall be for a period of five years and six months, renewable for one term at the option of the assessee and further renewals shall be with the mutual consent. There was no question of leasing out the area to the assessee if the assessee was the owner thereof. The further f act that the assessee gave an interest-free security deposit of Rs. 5 lakhs to Vaitalik, that it was specifically provided that in case the assessee let out the area to others it shall maintain the area properly by incurring capital and revenue expenses and day-to-day expenditure, that the liability of the assessee to pay house-tax and other taxes shall cease on the date on which it vacated the premises, etc, embodied in Clauses (3) to (ó) are also consistent with the position that the assessee was not intended to be the owner of the area of 23,883 sq.ft. The learned Counsel for the assessee placed reliance on Clauses (7), (8) and (10) to submit that these clauses were consistent with the position that the assessee was not a mere lessee of the premises but was the fuil owner thereof. I however find that Clause (7) merely assures the assessee that Vaitalik has paid all the dues to DDA or any other authority and if any further dues are found payable, they shall be paid by Vaitalik. Clause (8) places the liability in respect of certain costs and charges payable in respect of the construction carried out in the past upon Vaitalik. Clause (10) confirms that the representations made by Vaitalik are true and full and the assessee shall be reimbursed by Vaitalik if they are not true. I am unable to see how these three clauses strongly relied upon by the learned Counsel for the assessee would support the position that the assessee was the owner of the area of 23,883 sq.ft. These clauses could have also found a place in the document even if the assessee was a mere lessee of the area. They are neutral clauses. The argument of the learned Counsel for the assessee that the assessee has been given a sublease of the land under the aforesaid "contract for construction services" is based on a reference in the preamble that the assessee has agreed to take the land on lease, but this is followed by the words "for carrying out and completion of construction over the property on the terms and conditions hereinafter appearing" and the reference is thus controlled by the other terms of the contract. To me it appears to be an erroneous description of the right of the assessee (to say that it is the lessee of the land); the right in truth is only to enter upon the land for the purpose of constructing the property; it is inconceivable that the assessee took the land on lease for that purpose. It only required a permission or licence from Vaitalik to the assessee to enter the land. Further, under terms of the lease granted by DDA to Vaitalik, the latter cannot sub-lease the land which would constitute a violation of the terms. In my opinion, by using the expression, albeit erroneously, that the assessee "agreed to take the land on lease" what was meant to be conveyed was only that Vaitalik permitted the assessee to enter upon the land for the purpose of putting up the construction.
14. The lease deed dated 2-3-1996 also shows that the assessee is only a lessee and not the owner of the area of 23,883 sq.ft. The preamble, as already noted, asserts that Vaitalik has leased the premises to the assessee for a rent and that the lease shall begin from the date of completion of the building. There is a reference to the "contract for construction services" in the preamble and the learned Counsel for the assessee: explained that it was necessary to circumvent any attempt by the DDA to re-enter the land on the ground of violation of the conditions of the head-lease, but admitted that it was an "awkward attempt" at that. Clause (1) reiterated the intention of the parties, that is, to lease the premises for rent; Clause (2) authorised the assessee to use the premises for its own purposes or to let out wholly or partly the same to others; Clause (3) affirmed that the lease shall be for a period of 5 years effective from 1-8-1995 to 31-8-2000. These three clauses leave no doubt that the intention of the parties was only to lease the premises to the assessee for a period of 5 years. The assessee was not constituted the owner thereof. The learned CIT-DR had drawn our attention to various clauses of the lease agreement, such as Clauses 5(b), 6, 7, 9, 10, 11, 14(c), I9(b) etc.;1 to support his contention that the assessee was the lessee of the area of 23,883 sq.ft. I have already briefly noticed these clauses and I agree that they support the CIT. The learned Counsel for the assessee relied on Clauses 17 and 18. Clause 17 only clarified that the terrace of the building shall always remain the property of Vaitalik who can use the same in any manner as desired including the putting up of hoardings, publicity material, neon signs etc. I am unable to appreciate, with respect, how this clause furthers the case of the assessee that it was the owner of the 23,883 sq.ft. area in the building. It was contended that this clause showed that only the terrace will be the property of Vaitalik. I am wholly unable to agree that this is the inference to be drawn from the clause. The clause merely clarifies that the terrace shall be owned by Vaitalik and it can use it as it pleased. From this it does not follow that the area of 23,883 sq.ft. is owned by the assessee. It is a non-sequitur. Clause 18 also merely clarifies that Vaitalik shall always have the right to add, demolish, construct further stories or make additions or alterations to the building or portions thereof at any time in future, subject to the rights of the assessee as "lessee" of the demised premises. Contrary to what the learned Counsel for the assessee contended, it appears to me that this clause reaffirms the assessee's position as a mere lessee of the demised premises and affirms the right of Vaitalik to build or alter or add to the construction by putting up further stories. Again. it does not follow therefrom that the assessee is the owner of the demises premises of 23,883 sq.ft.
15. The agreement dated 24-7-1996 providing for renewal of the lease for a further term of 5 years on expiry of the "current term of 5 years" also reaffirms the legal position that the assessee is not the owner of the 23,883 sqft.
16. I will now refer to the "memorandum of understanding" entered into between the assessee and Ikea Trading Hongkong Ltd. (IKEA) on 16-3-1995, on which reliance was placed by the learned Counsel for the assessee. The contention was that the MOU shows that the assessee started negotiating for letting out the property even though it was still under construction, which was indicative of the conduct of an owner of the property, not merely a lessee. The preamble, if read further and closely, however points to the contrary. It says that when IKEA approached the assessee for taking on lease a portion of the property (area of 23,883 sq.ft) the assessee "confirmed that they are in the possession of the property and they have all legal rights from M/s. Vaitalik to let out the same and recover rent therefrom". The italics part of the sentence is revealing. If the assessee was the legal owner of the property forming part of the area of 23,883 sq.ft. constructed by it, there was no need to derive the right to let out the same from Vaitalik; the assessee could do so in its own right. The preamble thus shows that the assessee was not the owner.
17. In the course of the arguments, I drew the attention of the learned Counsel for the assessee to the lease agreement dated 8-1-1996 between the assessee and UOP Asia Ltd. for letting out a part of the area constructed by the assessee and requested him to clarify as to why in the preamble it was stated that "the lesser has erected a building" when it would have been much more appropriate to refer to the assessee as the owner of the building if that was the factual position. He submitted that the words in the preamble cannot be changed now and they have to be interpreted as they are, but in the light of all the other documents and surrounding circumstances. He drew my attention to Clause 5(a) of the perpetual lease deed entered into between DDA and Vaitalik which prohibited Vaitalik from selling, transferring, assigning or otherwise parting with the possession of the whole or any part of the land or any building thereon except with the previous consent of DDA in writing and submitted that in view of this prohibition and in an attempt to circumvent the same, the entire documentation in the case was written in the manner they were and not much relevance should be attached to the actual words used in the document. I am unable to see how this can improve the assessee's position. The perpetual lease prohibited Vaitalik from leasing out the land or the building to be constructed thereon to any other personal Vaitalik, in violation of this condition, had entered into a lease agreement with the assessee on 2-3-1996 purporting to lease 23,883 sq.ft. of the constructed area to the assessee. In the light of this, it is difficult to accept the argument of the learned Counsel for the assessee that the words used in the preamble to the agreement dated 8-1-1996 should not be given any importance. Not only this, the very same preamble continued to refer to the f act that Vaitalik had granted leasehold rights on all the floors to the assessee for a period of five years and six months in consideration of the assessee erecting a building on the land possessed by Vaitalik. It thus appears to me that the assessee was not too much worried about violating the terms of the perpetual lease and in f act would appear to have been quite vocal about it. In this light, I am unable to attach any credence to the assessee's explanation for the preamble in the deed dated 8-1-1996. It reaffirms over again the legal position that the assessee was only a lessee of the constructed area of 221,883 sq.ft. In f act, the preamble goes on to say that the possession of the assessee of the space in the building was as a lessee on the terms and conditions contained in the lease agreement with Vaitalik and the space is being sub-leased by the assessee to UOP Asia Limited.
18. I am, therefore, of the view that the assessee was not the owner of the constructed area of 23,883 sq.ft. and, therefore, the income by way of rent is received by the assessee was not assessable under Section 22 of the Income Tax Act under the head "Income from house property".
19. A few further arguments of the learned Counsel for the assessee will have to be noticed. He submitted that Vaitalik never claimed the area of 23,883 sq.ft. as its own, nor did the department ever treat Vaitalik as the owner of the above area. If the legal effect of the arrangement between Vaitalik and the assessee is properly understood, the position is that the assessee is not the owner of the above area. If the department has for some reason or the other not given effect to the legal arrangement in the assessments of Vaitalik, that cannot still constitute the assessee as the owner of the area. It may at best be looked upon as a lapse on the part of the department. The conduct of Vaitalik in not claiming the area of 23,883 sq.ft. as its own may have some bearing on the question before me but that can never be such an overriding consideration which can change the correct legal position flowing from the entire documentation taken together.
20. It was contended for the assessee that a person can in law be the owner of a property for a limited period as in the case of a sale with an agreement to re-sell and in the instant case the assessee became the owner of the area of 23,883 sq.ft. for a period of 5 years or 5 years and 6 months and therefore the rental income should be charged to tax under Section 22. The proposition of law is unexceptionable but it has no application to the f acts of the present case. Herein as I have already held the assessee did not become the owner of the area noted above at any point of time; he was only a lessee thereof at all points of time and therefore the principle of ownership for a limited duration is not attracted to the case.
21. I may now turn to the argument based on Section 27(iiib) of the Act. It was explained that this provision has to be read with Section 269UA(f). It is submitted that the lease was for an initial period of five years and six months and under the agreement dated 24-7-1996, it was extended for a further term or terms of five years and thus the lease was for a period of over 12 years and under the aforesaid statutory provisions in such a case the lessee would be deemed to be the owner of the property with the result that the rental income would f all to be assessed under Section 22 of the Act. It was submitted that the learned Judicial Member has not noticed the argument based on Section 27(iiib) and that the Vice President has taken the correct view of the Section. I have carefully considered the provisions of Section 27(iiib). This clause was inserted into the Section by the Finance Act, 1987, with effect from 1-4-1988. It says that for the purposes of Sections 22 to 26, 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. Section 269UA(/) is placed under Chapter XX-C of the Act which provides for purchase by Central Government of immovable properties in certain cases of transfer. "Transfer" is defined in the clause as follows:
(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 saleor 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, 1883 (4 of 1882).
Explanation.For the purposes of this sub-clause, a lease whichprovides for the extension of the term thereof by a f urther term orterms shall be deemed to be a lease for a term of not less thantwelve 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 toin Sub-clause (ii) of Clause (d), means the doing of anything(whether by way of admitting as a member of or by way oftransfer of shares in a co-operative society or company orother association of persons or by way of any agreement orarrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, such property.
It is common ground that Sub-clause (i) is related to an immovable property referred to in Sub-clause (i) of Clause (d) of the same Section and' Sub-clause (ii) is related to an immovable property of the nature referred to in Sub-clauses (ii) of Clause (d) of the same Section. Clause (d) of the Section is as under:
(d) "immovable property" means -
(i) any land or any building or part of a building, and includes, where any land or any building or part of a building is to be transferred together with any machinery, plant, furniture, fittings or other t hings, such machinery, plant, furniture, fittings or other things also.
Explanation.For the purposes of thii, Sub-clause, "land, building, part of a. building, machinery, plant, furniture, fittings or other g things" include any rights there;
(ii) any rights in or with respect of any land or any building or a part of a building (whether or not including any machinery, plant, furniture,, fittings or other things therein) which has been constructed or which is to be constructed, accruing or arising from any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building.
The learned Counsel for the assessee submitted that the combined effect of Section 27(iiib) and Section 269UA(f)(i) is that if a lease of a property for a term of not less than 12 years is given it would be a case of transfer and the lessee would be deemed to be the owner of the building. It is thus contended that in the present case, since Vaitalik has given a lease of the area of 23,883 sq.ft. to the assessee for a period of not less than 12 years, the assessee shall be deemed to be the owner of the area and consequently, the rental income was assessable under Section 22 of the Act as income from house property. Under Clause (2) of the contract for construction services dated 27-7-1994, the: lease was for a period of five years and six months, renewable for one term at the option of the assessee. Further renewals were to be subject to mutual consent. The lease agreement entered into on 2-3-1996 modified the same to provide that the period of lease was for five years and it shall expire on 31-7-2000. No renewals or extensions were provided for. However, by agreement dated 24-7-1996, it was provided that the lease shall be renewable for further terms of five years each on expiry of the first term of five years and any further terms of five years. But on 31-3-1999, a deed of cancellation was entered into under which the lease was terminated with effect from 1-4-1999. The deed of cancellation has been taken into consideration by the CIT before whom it was filed at his instance. I agree with the CIT that though the cancellation deed was an unknown f act for the year ended 31-3-1997 it would be clarificatory to support the view that the rights and obligations of the parties were purely contractual and no rights of ownership were conferred on the assessee vis-a-vis the constructed area of 23,883 sq.ft. Not only this, the other important consequence of the cancellation deed is that the lease factually expired on 31-3-1999 and though originally there was a provision for renewal of the lease under the agreement dated 24-7-1996 taking the aggregate terms of the lease for 12 years or more, factually there was no lease beyond 31-3-1999. Section 269UA(/)(i) read with the Explanation thereto contemplates a situation where there is in existence a lease which provides for extension thereof for periods aggregating to 12 years or more and such a deed is not modified thereafter to pro vide for a lesser period or for cancellation. When the lease itself is terminated, all the terms of the lease also get terminated and thereafter the terminated lease agreement has no legs to stand and is a dead document and cannot be relied upon for the purpose of showing that it provided for an aggregate term of 12 years or more. The effect of the deed of cancellation is that there was no lease beyond 31-3-1999 and to say that even in such a situation since the lease agreement dated 24-7-1996 provided for renewal of the lease for an aggregate term of 12 years or more, the provisions of Section 269UA(f)(i) read with the Explanation thereto would be attracted and the assessee should be deemed to be the owner of the property under Section 27(iiib) of the Act would be, with respect and in my very humble opinion, making a mockery of the statutory provisions. I am, therefore, unable to uphold the argument based on Section 27 (iiib).
22. Reliance was placed on behalf of the assessee upon the judgment of the Supreme Court in Poddar Cements (P.) Ltd. 's case (supra). The basic question in this case arose in the context of the facts that the assessee purchased two flats in a building in Bombay, paid the full purchase consideration and took possession of the same. It let out the flats for rent to various persons. The rental income was shown under the head "Income from other sources" on the footing that the assessee was not the legal owner of the flats since the title to the flats had not been formally conveyed and ownership was not transferred in the name of the assessee. The assessing officer however assessed the income under Section 22 under the head "Income from house property". It was on these basic facts that the Supreme Court held that for the purposes of Section 22, owner is a person who is entitled to receive the income from the property in his own right and since the assessee was receiving the income in its own right, the income was assessable as income from house property. This factual position does not obtain in the case before me. Herein, it is a case of a lease of the area of 23,883 sq.ft. by Vaitalik to the assessee for a rent of Rs. 9.50 per sq.ft. per month. It is this area taken on lease which was let out by the assessee for rent. The assessee was not the owner of the area. The question herein is one of intention of the parties which according to me was only to constitute the assessee as the lessee for a period of five years in respect of the property. In the case before the Supreme Court, the intention of the parties was to constitute the assessee the owner of the flats and possession had been given after payment of the entire purchase consideration. The only legal formality which remained to be completed was that of formal conveyance of the title over the flats in favour of the assessee. It was in these circumstances and where the intention of the parties was never in doubt that the rental income was held assessable as property income. Where the agreement between the parties is not to sell and purchase the property but only to lease it, the ratio of the judgment cannot apply. I, therefore, hold that the judgment is of no assistance to the assessee in the present case.
23. It was then submitted by the learned Counsel for the assessee that if the income is not assessable as property income under Section 22, it cannot automatically be assessed under the head "Income from other sources" and it will then be a case of application of income. The CIT has not held the income to be assessed under the head "Income from other sources". He has only directed the assessing officer to examine the issue as to under which head of income - "Business" or "Income from other sources" - the rental income should be taxed. The assessee may take up all its contentions as to which of these heads is the proper head of assessment before the assessing officer. It is not to be decided by me.
24. The last submission on behalf of the assessee was that the view taken by the assessing officer was a possible view and, therefore, the action under Section 263 was unwarranted. The judgments of the Supreme Court in Malabar industrial Co. Ltd. v. CIT (2000) 243 ITR 83 and CIT v. G. M. MittalStainless Steel (P.) Ltd. were cited in support of the contention that where two possible views exist, the mere fact that the assessing officer preferred one view is no ground to initiate proceedings under Section 263. The judgment of the Delhi High Court in Nabha Investments (P.) Ltd. v. Union of India (2000) 246 ITR 41 was also cited for the proposition that a change of opinion on the same f acts cannot justify proceedings for revision under Section 263. These propositions do not apply to the facts of the present case because, in my humble opinion, this is not a case where from the facts more than one view is genuinely possible. The CIT has attempted to show how the view taken by the assessing officer that the rental income is assessable under Section 22 of the Act is untenable on the facts of the case and on the basis of the documentation entered into between the parties. I am also of the view, for reasons given earlier, that the view taken by the assessing officer cannot be considered as a plausible view on the facts of the case and on the basis of the documentation. Technically or theoretically on any given set of facts and evidence, more than one view is possible, but the views should also be plausible and must have a semblance of reason and a f actual and/or legal basis. While the CIT has demonstrated in his order that the view taken by him, viz-, that the income is not properly assessable under the head "Income from house property" under Section 22, is tenable and is the only view plausible the assessing officer has failed to substantiate his decision to accept the assessee's claim to the contrary. He has f ailed to show that his decision is a plausible or tenable decision on the very same facts and documentation. The CIT is, therefore, right in initiating proceedings under Section 263. There is nothing in the assessment order to indicate that the assessing officer had examined the documentation in the case to find out whether the assessee was right in declaring the rental income under Section 22 of the Act and in claiming the deductions therefrom on account of repairs and collection charges and share of the annual charge for the lease. It has been contended before me that in the assessment year 1996-97, the Assessing Officer has accepted the income as property income but has later re-opened the assessment to hold that it was assessable as "income from other sources" but the Commissioner (Appeals) has, by order dated 30-1-2004, allowed the appeal holding that the income was assessable as property income. An appeal to the Tribunal is stated to be pending for this year as well as the assessment years 1998-99 and 1999-2000. But, as I have already found, the assessee was clearly not the owner of the area of 23,883 sq it. but was only a lessee thereof and, therefore, the rental income cannot be assessed under the head "Income from house property" under Section 22 of the Act. Ownership of the property is the sine qua non for the assessment of the income under the head "Income from house property" under Section 22. The CIT's action is justified in view of the f act that the assessment order was erroneous insofar as it is prejudicial to the interest of revenue, inasmuch as the Assessing Officer assessed the rental income under the head "Income from house property" even though the assessee was not the legal owner of the property.
25. In the course of the arguments, the learned Counsel has drawn my attention to several authorities compiled in paper book No. 2 as also to the judgments of the Supreme Court in Charandas Haridas v. CIT , CIT v. Sitaldas Tirathdas and Coca Cola Export Corpn. v. ITO . I have carefully gone through all the authorities cited by the learned Counsel for the assessee but I have found none of them to be of any assistance to him in his contentions. This case is essentially one where the crucial task is to ascertain the intention of Vaitalik and the assessee from the documentation entered into by them and to glean the substance of the transaction or arrangement embodied therein. This is what I have attempted to do.
26. In the light of the above discussion, my answers to the points of difference referred to me are as under:
Question No. 1 : The assessee cannot be treated as the owner of the property. It was the lessee of the property.
Question No. 2: There was no lease of the land in favour of the assessee nor was the structure owned by the assessee.
Question No. 3 : The assessee cannot be said to be the owner of the property within the meaning of Section 22 of the Act in the light of the construction agreement dated 27-7-1994 and the lease deed dated 1-8- 1995.
Question No. 4: The income from the property in question is not taxable under the head "Income from house property". It was taxable under any other head of income (business or other sources) as held by the CIT.
Question No. 5: The CIT acted validly under Section 263.
27. I accordingly agree with the view expressed by the learned JM. The appeal will now be placed before the Bench which heard it originally for passing orders in accordance with the opinion of the majority.
N.V. Vasudevan, Judicial Member
1. In this Appeal there was a difference of opinion between the Members of the Bench and points of reference have been ref erred to the Hon'ble Vice-President as Third Member under Section 255(4) of the Act, who has concurred with the view expressed by the Judicial Member. Accordingly the appeal was posted today for passing order in conformity with the majority opinion.
2. Mr. Salil Agarwal learned Counsel for the assessee filed written submissions and prayed that the contents thereof be incorporated in the order to be passed giving effect to the view expressed by the majority of member. We are of the view that under Section 255(4) a decision has to be rendered in accordance with the opinion of the majority of the members of the Tribunal who have heard the case, including those who first heard it. At this stage the assessee cannot seek to place on record submissions and pray that the same be incorporated in the order giving effect to the view expressed by the majority. The prayer of the learned Counsel for the assessee is therefore rejected.
3. In accordance with the view of the majority of the Member, the appeal of the assessee is dismissed.