Income from property let out to a director to be taxed as business income in the hands of the company
In the present case, the property had been let out to Snehal Jalan a share holder who is the daughter of the Director Ms. Rekha Jalan, who had 81.71% shareholding in the company. The Ld. AR for the assessee argued that since property had been let out to an individual, the same was not out of the purview of Rent Control Act as exclusion was available in case of property let out to banks or public sector undertakings or any corporation established by or under any state/central Act or foreign mission, international agencies, multinational companies and private/public limited companies having paid up share capital of Rs.1 crore or more. It has been submitted that since the property was covered under Rent Control Act, the standard Rent determined or determinable under Rent Control Act or actual rent received whichever is higher has to be taken as annual value. We are however unable to accept the arguments advanced. The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities. Therefore, in our view, the provisions of Rent Control Act can not be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. In this case the AO has already made enquiries that similar property being flat No.11C in the same society let out in the year 2005 had fetched a rent of Rs.150 per sq.ft. and another property being flat 18/B-2 let out in the year 2004 had fetched rent of Rs.100 per sq.ft. Thus average fair rent comes to Rs.125 per sq.ft.. The fair adopted by AO is also Rs.125 per sq.ft.. We, therefore, uphold the order of AO assessing the annual value in relation to the portion let out to Ms. Snehal Jalan. As regards the portion let out to Ms. Rekha Jalan, we have already held that rental income has to be assessed as business income and therefore, the same will be out of the purview of the provisions relating to assessment under the head “income from house property”.
ITAT, MUMBAI BENCH “G”
ITA No. 5031/Mum/2011
Assessment Year: 2007-08
Woodland Associates Pvt. Ltd.
Vs.
Income tax Officer
Date of Pronouncement : 21.11.2012
ORDER
PER RAJENDRA SINGH, AM:
This appeal by the assessee is directed against the order dated 28.03.2011 of CIT(A) for the assessment year 2007-08. The dispute raised in this appeal relates to the nature of rental income i.e. business income or house property income; (ii) determination of annual value of property (iii) allowability of deduction on account of municipal tax (iv) allowability of administrative expenses and (v) the nature of interest income i.e. whether business income or other sources.
2. We first take up the dispute relating to assessment of rental income. The AO noted that the assessee during the year had credited the sum of Rs.4,52,000/- on account of rent which included rent of Rs.72,000/- on account of land. It was found that the assessee was owner of two flats at New Woodland Co-operative Housing Society admeasuring 5219.31 sq.ft. which had been let out at meager rent of Rs.3,80,000/- per annum. It was further found that the flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs.26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs.12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The AO asked the assessee to explain as to why rental income should not be assessed a house property income and that annual letting value (ALV) should not be computed on the basis of fair rental value in the market. The assessee submitted that the property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties. It was accordingly urged that the rental income should be assessed as business income. As regards annual letting value, assessee submitted that the flats were occupied by tenants since last several years and it was not possible to revise the rent with respect to market value. It was further submitted that the rent shown for the year at Rs.4,52,000/- was 25% more than the rent of Rs.3,50,000/- shown in the immediate preceding year.
2.1 The AO however did not accept the contentions raised. It was observed by him that leasing out the property could not be considered as trade or commerce. He referred to the judgment of Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. vs. CIT (42 ITR 49) in which case the assessee company had been formed with the object of promoting and developing market and the Apex Court held that rent received from shops and stalls which was derived from letting out the property has to be assessed as house property income as income fell under the specific head. The AO also referred to the judgment of Hon’ble Supreme Court in the case of Shambhu Investments (263 ITR 143). He, therefore, assessed the rental income under the head “house property”. As regards the fair rental value, the AO observed that the flats had been let out to two share holders who were controlling the company. Letting out the flats to the persons who were controlling the company was only an arrangement to reduce tax. There was no formal agreement for letting out property not any efforts had been made to charge rent at market value. The AO also observed that the assessee itself admitted that the property would fetch rent at market rate if given to new tenant. The AO therefore did not accept the argument that fair rental value should be assessed on the basis of rent received. He also made enquiry and found that in the same society flats had been let out at much higher rate as per details below:-
