Nanavati Constructions Vs DCIT (ITAT Mumbai)
Conclusion: If the taxpayer was in a position to carry a transaction in two alternative ways, one of which would result in lower tax liability, the assessee would be at liberty to choose that particular method. Pursuant to the terms of both the agreements, the transactions had been carried out and assessee as well as other 6 persons had offered their respective share of rental income in their own tax returns thus, the agreement could not be termed as sham agreement or an artificial structure with a view to evade tax liability.
Held: Assessee being resident corporate assessee stated to be engaged as builder and developer was assessed for year under consideration u/s. 143(3) wherein the income of assessee was determined at Rs.169.67 Lacs after certain additions / adjustments as against returned income of Rs.78.60 Lacs filed by the assessee which was later on revised to Rs.76.45 Lacs to claim deduction of service tax for Rs.3.07 Lacs. During assessment proceedings, it transpired that assessee had entered into two agreements with M/s Diesel Fashion India Reliance Pvt. Ltd. (DFIRPL). One agreement was for leave and license agreement whereas the other agreement pertained to amenities charges in respect of same property. As per leave and license agreement, assessee was entitled for rent of Rs.10 Lacs per month whereas as per amenities agreement, assessee was entitled for amenities charges of Rs.6 Lacs per month. AO observed that assessee before letting out said premises to M/s DFIRPL, gave the premises on rent to various family members for a rent of Rs.2.10 Lacs per month. When DFIRPL approached the assessee to take the premises on rent, the previous lessees were occupying the said premises and therefore, the assessee firm had apportioned rent to the family members and took net rent to the profit & loss account. AO observed that in terms of Sec.23 of the Income Tax Act, the total rent received from M/s DFIRPL was to be taken as rent in the hands of the assessee. AO opined that the rent of Rs.73.12 Lacs received by other 6 family members was to be brought to tax in the hands of the assessee. Therefore, the rental income, in the hands of the assessee, was determined at Rs.121.87 Lacs (Rs.48.75 Lacs + Rs.73.12 Lacs). After providing for deduction of municipal taxes and statutory deduction u/s 24, the taxable rental income, thus, worked out to be Rs.79.59 Lacs. The rental income of Rs.25.20 Lacs stated to be received from 6 persons was disregarded. It was held that before leave and license agreement entered into by the 7 licensors with M/s DFIRPL, there was a pre-existing agreement between assessee and other 6 persons. Pursuant to said agreement, assessee as well as other 6 persons, entered into subsequent leave and license agreement with M/s DFIRPL. The aforesaid agreement had been executed by the 7 licensors and licensee and the same was a registered document. Pursuant to the terms of both the agreements, the transactions had been carried out and assessee as well as other 6 persons had offered their respective share of income in their own tax returns. There was nothing illegal in both the agreements. The agreement could not be termed as sham agreement or an artificial structure with a view to evade tax liability. It is trite law that tax planning is legitimate provided it is within four corners of law and done without any fraudulent intention. If the tax payer was in a position to carry a transaction in two alternative ways, one of which would result in lower tax liability, assessee would be at liberty to choose that particular method. In the present case, nothing illegality in both the leave and license agreement entered into by the assessee. The terms of the agreement were duly honoured by the respective parties and it could not be said that the earlier agreement was a sham agreement. Therefore, clubbing of rental & amenities income of 6 persons, in the hands of the assessee, would not be sustainable in the eyes of law. AO was directed to recompute the income by taking assessee’s share of rental income and amenities charges under the head Income from House Property. The rental income of Rs.25.20 Lacs earned by the assessee from 6 persons would also be taxable under the head Income from House Property. The statutory deductions, as available as per law, should be provided to the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
1.1 Aforesaid appeals by assessee for Assessment Years [in short referred to as ‘AY’] 2011-12 to 2013-14 contest common order of Ld. Commissioner of Income Tax (Appeals)-51, Mumbai [CIT(A)], order dated 09/01/2017 on certain common grounds of appeal. The ground raised in all the years are identical and it is admitted position that adjudication in any of the year would apply to other years also.
1.2 We take up appeal for AY 2011-12 as the lead year wherein the ground raised by the assessee read as under:-
1. On the facts and the circumstances of the case and in law, the learned CIT(A) erred in treating the Rent and Amenities charges amounting to Rs.81,90,000/- (being Rs. 50,40,000/- on account of Rent and Rs.31,50,000/- towards Amenities) received by six others from M/s Diesel Fashion India Reliance Pvt. Ltd. as Rent Income of the appellant disregarding the Tripartite Leave & License Agreement (Registered) executed between the Appellant (licensor), other co-licensors and M/s Diesel Fashion India Reliance Pvt. Ltd. (licensee), which entitled the licensors to only a part of the rent received from M/s Diesel Fashion India Reliance Pvt. Ltd. for part of the property owned and licensed out by them.
2. On the facts and the circumstances of the case and in law, the learned CIT(A) erred in asserting on para 5.13 of page 13 that, “….rent from entire property ought to be offered for taxation in the hands of the appellant firm only” disregarding the lease agreement entered in to between the appellant firm and six other persons (coincidentally family members of the partners of the firm) for leasing out part of the property to six other persons, prior to the tripartite Leave and License Agreement executed and registered with M/s Diesel Fashion India Reliance Pvt. Ltd.
3. On the facts and the circumstances of the case and in law, the learned CIT(A) erred in upholding the findings of the Assessing Officer that appellant has diverted differential amount of Rent amounting to Rs.47,92,500/- to the family members disregarding the lease agreement between the appellant and the co-licensors (coincidentally family members of the partners of the firm) and also the Tripartite Leave & License Agreement (Registered) executed between the Appellant (licensor), other co-licensors and M/s Diesel Fashion India Reliance Pvt. Ltd. (licensee).
4. On the facts and the circumstances of the case and in law, the learned CIT(A) failed to appreciate that the property, which was let out / licensed to M/s Diesel Fashion India Reliance Pvt. Ltd. constituted a part of the property, already leased out to six other persons on account of which the money received under a joint tripartite agreement was not entirely belonging to the appellant and cannot be taxed as such entirely in the hands of the appellant.
5. On the facts and the circumstances of the case and in law, the learned CIT(A) failed to appreciate that a part of rent income from M/s Diesel Fashion India Reliance Pvt. Ltd., belonged to the six other persons (other than the appellant firm) and was separately offered to tax by them and therefore cannot be taxed again in the hands of the appellant as this would amount to double taxation.
It is noted that the figures as mentioned in ground no.1 are erroneous since the perusal of assessment order would reveal that correct amount of rent and amenities charges is Rs.78 Lacs which comprise-off of rent of Rs.48.75 Lacs and amenities charges of Rs.29.25 Lacs. Therefore, the correct amount under dispute may be read as Rs.78 Lacs.
2. We have carefully heard the arguments advanced by respective representatives and perused relevant material on record including documents placed in the paper-book. We have also deliberated on various judicial pronouncements as cited before us. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs.
3.1 Facts on record reveal that assessee being resident corporate assessee stated to be engaged as builder and developer was assessed for year under consideration u/s. 143(3) on 20/03/2014 wherein the income of the assessee was determined at Rs.169.67 Lacs after certain additions / adjustments as against returned income of Rs.78.60 Lacs filed by the assessee on 29/07/2011 which was later on revised to Rs.76.45 Lacs to claim deduction of service tax for Rs.3.07 Lacs.
3.2 During assessment proceedings, it transpired that the assessee had entered into two agreements with M/s Diesel Fashion India Reliance Pvt. Ltd. (DFIRPL). One agreement was for leave and license agreement whereas the other agreement pertained to amenities charges in respect of same property. As per leave and license agreement dated 28/08/2009, the assessee was entitled for rent of Rs.10 Lacs per month whereas as per amenities agreement dated 28/08/2009, the assessee was entitled for amenities charges of Rs.6 Lacs per month. The details of the agreement have been elaborated in subsequent paragraphs.
3.3 The documents on record would reveal that the assessee being owner of a commercial premises comprising-off of basement, Ground Floor & First Floor admeasuring about 7043 Square feet situated in a building known as ‘Western Wind’, Plot No. 22A TPS Santacruz No.-II, CTS No. 1029/1, Juhu Tara Road, Mumbai (hereinafter referred to as licensed premises), entered into Leave & License Agreement on 20/04/2009 with 6 persons namely Mr. Shachin Jagdish Nanavati, Mrs. Himadri Shachin Nanavati, Shachin Jagdish Nanavati HUF, Mr. Apurva J. Nanavati, Mrs. Usha A. Nanavati & Apurva Nanavati HUF. All the persons happen to be partner & relative of partners of the assessee firm. As per the terms of the agreement, the assessee gave exclusive license to aforesaid 6 persons with respect to 60% of licensed premises for a period of 108 months against license fees of Rs.2.10 Lacs per month starting from 01/04/2009. As per Clause-15 of the agreement, the licensees had a right to assign, sub-license or to grant on leave and license basis, the licensed premised to third parties without prior consent of licensors.
3.4 Subsequently, the aforesaid 6 persons and the assessee entered into leave and license agreement dated 28/08/2009 with an entity namely M/s Diesel Fashion India Reliance Pvt. Ltd. (DFIRPL) with respect to whole of the premises for a period of 60 months against license fees of Rs.10 Lacs per month (for initial 36 months). The licensee was required to pay the monthly license fees to the extent of 10% to each of the six persons and the balance 40% to the assessee. This agreement is a registered agreement.
3.5 The assessee & other 6 persons also entered into Amenities Agreement dated 28/08/2009, in similar manner, to provide certain amenities and facilities in the licensed premises to the licensee against amenities charges of Rs.6 Lacs per month for first year and Rs.7 Lacs per month for 2nd and 3rd year. The period of the agreement was agreed to be co-existing and co-terminus with the period of the license agreement. The amenities charges were payable to 7 licensors, in similar manner.
3.6 Accordingly, the assessee has reflected following credit to Profit & Loss Account during the year under consideration on account of rent and amenities charges: –
