Brigade Enterprises Ltd Vs Additional Commissioner Income Tax (Karnataka High Court)
The assessee, Brigade Enterprises Ltd, a public limited company engaged in construction and sale of residential and commercial buildings, filed an appeal underSection 260-A of the Income Tax Act, 1961concerning Assessment Year 2010-11. The appeal raised three substantial questions of law concerning determination of annual value for an under-construction building, treatment of regularization fees as penalty, and allowability of such regularization fee as business loss.
The Assessing Authority, by order dated 26.02.2013, observed that the assessee had rented out part of a building to M/s. Brigade Foundation. Although the assessee had not admitted rental income for the relevant assessment year, the Assessing Authority held that the building had been completed in part and brought to tax 50% of the annual letting value admitted for the subsequent Assessment Year 2011-12. The resulting net income of Rs.10,50,000/- was assessed as income from house property, and a demand of Rs.9,73,14,776/- was raised.
The Commissioner of Income Tax (Appeals), by order dated 09.06.2014, partly allowed the assessee’s appeal. The Tribunal also partly allowed the appeal by order dated 16.10.2014, but maintained the determination of annual letting value at Rs.15,00,000/- for computing income from house property. The assessee therefore approached the Karnataka High Court.
The assessee contended that notional rent could not be computed for a building which was still under construction. It was specifically submitted that the assessee obtained the occupancy certificate from the Bruhat Bengaluru Mahanagara Palike on 03.08.2010 and that, under Clause 5.7 of the BBMP building bye-laws, occupation of a new building or part thereof was impermissible until an occupancy certificate had been granted. The assessee also relied on the fact that no rental income had been admitted for the relevant year and that rental income was declared in the subsequent assessment year.
The revenue, on the other hand, submitted that the authorities had recorded findings of fact against the assessee and that the building had been handed over to M/s. Brigade Foundation to run a school on a contract basis. According to the revenue, the assessee had failed to declare rental income and therefore the Assessing Authority had correctly computed notional rent on the portion of the building which had been completed.
The High Court examined Clause 5.7 of the BBMP building bye-laws, which provides that no person shall occupy or allow another person to occupy a new building or part thereof until an occupancy certificate has been granted by the authorised officer. The Court held that, in other words, a building legally comes into existence only upon issuance of an occupancy certificate.
The Court further noted that the assessee had declared rental income in the subsequent Assessment Year and had not admitted rental income for the assessment year under consideration. The CIT(A) had also recorded that no rental income had been admitted from the school building handed over to M/s. Brigade Foundation, although rental income of Rs.30,00,000/- was admitted in the return for Assessment Year 2011-12.
The High Court found that the Tribunal had failed to appreciate these aspects and had, in a cursory manner, held that the revenue authorities were justified because the assessee had not produced evidence to the contrary. According to the Court, the findings recorded by the authorities under the Act were based on surmises and conjectures and were therefore perverse.
Accordingly, the first substantial question of law was answered in favour of the assessee and against the revenue. The Court answered the second substantial question of law against the assessee and in favour of the revenue in view of the judgment dated 23.11.2020 in ITA No.428/2016, while making the answer subject to the decision of the special leave petition pending before the Supreme Court.
The High Court consequently quashed the Tribunal’s order insofar as it related to computation of notional rent for the relevant assessment year and bringing such amount to tax. The appeal was disposed of.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Mr.Sharath S., learned counsel for the assessee.
Mr.K.V.Aravind, learned counsel for the revenue.
2. This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2010-11. The appeal was admitted by a Bench of this Court vide order dated 15.02.2015 on the following substantial questions of law:
“1. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in determining the Annual value of Rs.15,00,000/- for an under-construction building on notional basis under sections 22 and 23 of IT Act?
2. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in treating the fee paid towards the regularization of additional construction as against the sanctioned plan as penalty?
3. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in failing to appreciate that regularization fee is allowable as business loss in computing the profits and gains undersection 28 of IT Act?”
3. Facts leading to filing of this appeal briefly stated are that the assessee is a public limited company registered under the Companies Act. The assessee is a builder engaged in the business of construction and sale of residential and commercial buildings. The assessee filed its original return of income on 15.10.2010 and submitted a revised return on 31.03.2012 in which an income of Rs.6,27,87,633/- for Assessment Year 201011 was declared. The case of the assessee was selected for scrutiny and a notice dated 25.08.2011 under Section 143(2) of the Act was issued. The assessee, in response to the aforesaid notice, submitted all the details. The Assessing Authority, by an order dated 26.02.2013, inter a/ia held that the assessee had rented out a part of the building to M/s. Brigade Foundation and even though no rental income has been admitted but the building has been completed in part and therefore, the assessee, in the interest of justice brought to tax 50% of the annual letting value admitted for the subsequent Assessment Year i.e. 2011-12 in 2010-11 itself and determined the net income of Rs.10,50,000/-and the same was brought to tax as income from house property. The Assessing Officer raised a demand of Rs.9,73,14,776/-.
4. The assessee thereafter filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 09.06.2014, partly allowed the appeal preferred by the assessee. The assessee thereupon approached the Tribunal (hereinafter referred to as ‘the Tribunal’ for short) by filing an appeal. The Tribunal, by an order dated 16.10.2014, partly allowed the appeal of the assessee in respect of Assessment Year 2010-11. However, the order of the Assessing Officer as well as the Commissioner of Income Tax (Appeals) insofar as it pertains to determination of annual letting value at Rs.15,00,000/- for the purpose of computing the income from house property, was maintained. In the aforesaid factual background, the assessee has approached this Court.
5. Learned counsel for the assessee submitted that computation of notional rent in respect of a building which was under construction is not permissible in law.
It is also pointed out that the assessee had obtained the occupancy certificate on 03.08.2010 from Bruhat Bengaluru Mahanagara Palike (hereinafter referred to as ‘the BBMP’ for short) and prior to issuance of occupancy certificate, it was not permissible to occupy the building in view of the bye law No.5.7 of building bye laws of the BBMP. It is also pointed out that from paragraph 11 of the order passed by the Assessing Officer, it is evident that the Assessing Officer himself has found that the assessee has denied that he has realized any rent for the period in question. It is urged that the notional income cannot be assessed on a building under construction as the same comes into existence legally only on issuance of occupancy certificate. Therefore, the finding recorded by the authorities under the Act are perverse.
6. It is also submitted that the second substantial question of law involved in this appeal has been answered against the assessee by a Bench of this Court vide order dated 23.11.2020 passed in ITA No.428/2016. In support of aforesaid submission, reliance has been placed on the decision of the High Court of Bombay in ‘SHARAN HOSPITALITY (P) LTD. Vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 9(3) (2020) 268 TAXMAN 443 (BOMBAY).
7. On the other hand, learned counsel for the revenue submitted that all the authorities under the Act have recorded the findings of fact against the assessee and the order passed by the Tribunal does not give rise to any substantial question of law. The findings of fact recorded by the Tribunal is on the basis of the material on record and the same cannot be treated as perverse. It is also pointed out that even the assessee has not disputed the fact that during the Assessment Year, building was handed over to M/s.Brigade Foundation to run the school, on contract basis and the assessee has failed to declare any rental income. Therefore, the Assessing Authority has rightly computed the notional rent on the building in question as the same was completed in part. In this connection, our attention has been invited to paragraphs 29 and 30 of the order passed by the Assessing Authority, paragraph 5.3 of the order passed by the Commissioner of Income Tax (Appeals) as well as paragraph 21 of the order passed by the Tribunal.
8. We have considered the submissions made on both sides and have perused the record. Clause 5.7 of the building bye laws of the BBMP provide that no person shall occupy or allow any other person to occupy any new building or part of a new building for any purpose whatsoever until occupancy certificate to such buildings or part thereof has been granted by an officer authorized to give such a certificate. In other words, a building legally comes into existence only on issuance of an occupancy certificate. From perusal of paragraphs 29 and 30 of the order passed by the Assessing Authority conjointly, it is evident that the assessee has declared the rental income in the subsequent Assessment Year and has not admitted any rental income for the Assessment Year in question. The Commissioner of Income Tax (Appeals), in paragraph 5.1 of its order, has also held that no rental income has been admitted from the school building which was handed over to M/s. Brigade Foundation. However, it has been noted in the return of income filed for the Assessment Year 2011-12. The assessee has admitted the rental income of Rs.3 0, 00, 000/- from letting out the school in question. However, the Tribunal has not appreciated the aforesaid aspect of the matter and in a cursory manner, has held that the revenue authorities have rightly brought the income to tax as the assessee has not been able to produce any evidence to the contrary. The findings recorded by the authorities under the Act is based on surmises and conjectures and has to be termed as perverse.
9. In view of preceding analysis, the first substantial question of law is answered in favour of the assessee and against the revenue. The second substantial question of law is answered against the assessee and in favour of the revenue in view of the judgment dated 23.11.2020 passed in ITA No.428/2 016 for the present. However, the same shall be subject to decision of special leave petition which is pending before the Supreme Court.
10. In view of preceding analysis, the order of the Tribunal dated 08.07.2015 insofar as it pertains to computation of notional rent in respect of the Assessment Year in question and bringing the same to tax, is hereby quashed.
In the result, the appeal is disposed of.
