A business centre cannot be said to be a `house’ for purposes of clause (3) of section 2(ea) of Wealth-tax Act

ITAT MUMBAI BENCH `J’,

Cravatex Ltd. Vs. Addl. CIT,

ITA No. 7381/Mum/02 WTA No. 42/Mum/03 WTA No. 38/Mum/03

DECIDED ON June 30, 2010

ORDER

PER N.V. VASUDEVAN, JM :-

ITA No. 7381/Mum/02: This is an appeal by the Assessee against the order dated 16.8.2002 of CIT(A)-VI, Mumbai, relating to A.Y.98-99.

2. Ground No. 1 was not pressed and the same is dismissed as not pressed.

3. Ground No. 2 raised by the Assessee is with regard to the action of the CIT(A) in confirming the action of the Assessing Officer in assessing the service charges of Rs.83,99,300/- received from letting out business centre as Income from House property as against Income from business considered by the Assessee.

4. This issue arose for consideration in Assessee’s case in AY 97-98 and this Tribunal in ITA No. 2834/Mum/2001 held that out of the total sum of Rs.83,99,300/- received by the Assessee from letting out business centre a sum of Rs.5,00,000 can be attributed towards services charges for providing various services which was to be assessed under the head ‘income from other sources’. The remaining sum was to be assessed under the head “Income from House Property”. The AO was further directed to allow deduction u/s. 24 of the Act in respect of income from house property. The AO is directed to follow the aforesaid decision of the ITAT in assessee’s own case and determine income from house property and income from other sources. The appeal of the Assessee is thus partly allowed.

5. WTA No. 42/Mum/03 & 38/Mum/03: WTA No. 42/Mum/03 is an appeal by the Assessee against the order dated 23.10.02 of CIT(A)-VI, Mumbai relating to A.Y.97-98. WTA No. 38/Mum/03 is an appeal by the Assessee against order dated 25.10.2002 of CIT(A)-VI, Mumbai relating to A.Y.98-99. The common issues that arise for consideration in both these appeal are:-

a) Whether the immovable property at No. 6, 4th floor, ‘Sahas’, Veer Savarkar Marg, Prabhadevi, Mumbai-400 025, hereinafter referred to as “the property” owned by the Assessee can be included in the net wealth of the Assessee?

b) If yes, what is the value of the said property for the purpose of determining the net wealth of the Assessee?

6. Before dealing with the above issues, we may clarify that the property which is the subject matter of the income tax appeal and the Wealth Tax appeals is one and the same.

7. Under sec. 3 of the Wealth Tax Act, 1957 (hereinafter referred to as “the Act”) for every assessment year there shall be a charge to tax (called wealth tax) in respect of the net wealth of every individual, HUF and Company, on the corresponding valuation date at the rates specified in Schedule –I to the Act. sec. 2(m) of the Act defines “net wealth” as the amount by which the aggregate value computed in accordance with the provisions of this Act of all the assets, wherever located, belonging to the Assessee on the valuation date, is in excess of the aggregate value of all the debts owned by the Assessee on the valuation date which have been incurred in relation to the said assets. sec. 2(ea) of the Act defines “Assets” to mean any building or land appurtenant thereto whether used for residential or commercial purposes or for the purpose of maintaining a guest house or otherwise including a farm house situated within 25 Kms from local limits of any Municipality or cantonment Board but does not include certain category of assets. For the present appeal the excluded category which is relevant is clause (3) of sec. 2(ea) of the Act which excludes “any house which the assessee may occupy for the purposes of any business or profession carried on by him”.

8. The Assessee owned the property at No. 6, 4th floor, ‘Sahas’, Veer Savarkar Marg, Prabhadevi, Mumbai-400 025. According to the Assessee the aforesaid property had all facilities of being used as a business centre. The Assessee had entered into an agreement dated 10-10-1995 (titled “Agreement for Security Deposit”)whereby the Assessee permitted M/S.Hutchison Max Telecom Pvt.Ltd. (referred to as “client” in the agreement)to use the facilities at the aforesaid property (according to Assessee a business centre) for a period of 9 years on the terms and conditions contained in a separate range of services agreement of 10-10-95. The Assessee received an interest free security deposit of Rs.6,40,00,000/-under this agreement from M/s. Hutchison Max Telecom Pvt. Ltd.. This sum was to be refunded to M/s. Hutchison Max Telecom Pvt. Ltd., by the Assessee on expiry of the period of the agreement or earlier determination of the agreement. The range of services agreement provides that the Assessee would provide air conditioned Executive Suites, “A” and “B” class cabins, conference rooms and open office area. The Assessee had arrangements to provide telephone lines, facilities for faxing, photocopying and word processing. The Assessee had agreed to provide security services and house keeping facilities. The client was at liberty to have his own furniture, office equipment etc. The Assessee agreed to provide two car parking space. The agreement in clause-3 further provides that the Business centre services shall be available to the client on all working days between 8.00 A.M. to 10.00 P.M. It has been further provided in clause-3 that in the event of the client desiring to use business centre services beyond the working hours on any working day or holiday, the centre would extend such services at no extra charges. The rates to be paid are set out in Annexure-2 to this agreement. Annexure-2 gives the following figures:

9. Clause-10 of the Agreement provides that Nothing contained in the agreement shall be construed as creating any right, interest, easement, tenancy or sub-tenancy in favor of the client or in or over or upon any part of the Centre’s premises nor shall the contents hereof be deemed as transfer o any interest therein in favor of the client. Clause-11 of the Agreement provides that if the service charges payable by the client are outstanding for more than four weeks from the date of receipt of the bills in respect thereof, the Centre shall be entitled to forthwith terminate this arrangement without notice and thereupon, the centre shall be entitled to prevent access to the Client and its employees into the said business center and call upon the client to remove its belongings therein. Clause-17 of the agreement provides that because of the nature of the business of the client being a sensitive one viz., cellular phone operators/licencees in Mumbai, the client can have its own security also. Clause-20 provides that all the equipments, furniture, fittings and fixtures provided by the Center shall be in the possession of and in the complete control of the management of the centre.

10. The plea of the Assessee was that it was in the business of providing business centre facilities and in the course of such business it had allowed M/s. Hutchison Max Telecom Pvt. Ltd., the right to use the business centre. According to the Assessee since the property was used for the purpose of business carried on by the Assessee it cannot be considered as asset u/s. 2(ea) of the Act by relying on clause (3) of sec. 2(ea) of the Act which excludes from the definition of asset, “any house which the Assessee may occupy for the purposes of any business or profession carried on by him”. According to the Assessee the consideration received is for services rendered and not for occupation of the building. Alternatively the Assessee submitted that it was in occupation of the part of the premises since the Assessee would operate and allow the staff of M/s. Hutchinson Max Telecom (P) Ltd., to enter the office and close on the entire staff leaving the premises. Thus the Assessee claimed that the property was not let out but a business activity was carried on by the Assessee. The WTO relied on the assessment in the income tax proceedings for AY 97-98 and 98-99 whereby the receipts were treated as Income from House property as against the claim of the Assessee that it was income from business. Since the property was not in occupation of the Assessee for any business or profession carried on by him, the WTO held that the value of the property was liable to taken as asset owned by the Assessee u/s. 2(ea) of the Act. On appeal by the Assessee the CIT(A) confirmed the order of the WTO on identical reason as was given by the WTO, giving raise to the first issue before the Tribunal.

11. Before us the learned counsel raised a new argument that was not put forth before the revenue authorities. It was submitted by him that the property was given only on a license basis to M/s. Hutchinson Max Telecom (P) Ltd. It was his further submission that when a property is given on a license, the control and possession is always with the licensor. Therefore it was his submission that the Assessee was in occupation, de jure, of the property. It was his further submission that in the income tax proceedings, the fact that the income from property was assessed as income from house property does not mean that the Assessee did not carry on any business. In this regard it was submitted by him that the head of income is different from the nature of income. According to him the income derived by allowing M/s. Hutchinson Max Telecom (P) Ltd., to occupy the premises is in the nature of business income though it might have been assessed under the head ‘Income from House Property’. He placed reliance on the decision of the Hon’ble Supreme Court in the case of Cocanada Radhaswamy Bank 57 ITR 306(SC) wherein it was held that though interest income on securities is assessed under the head ‘interest on Securities’, the character of the income still remains one from business. According to him the Assessee is in the business of running a business centre and therefore the de jure occupation by the Assessee was for the purpose of a business which he was carrying on. Further reliance was placed on the decision of the Madras Bench of ITAT in the case of Fagun Co. (P) Ltd. Vs. DCWT 45 ITD 117 (Mad) wherein it was held that when activities of Assessee of letting properties was itself its business, the property so let out was itself to be considered as property used for the purpose of its business. It is worthwhile to mention here that this decision will not be relevant as the provisions dealt with by the Madras Bench of ITAT related to the law as it stood in AY 84-85 and 85-86. We have already seen the expression used in Cl(3) of sec. 2(ea) of the Act. It uses the following expression, viz., “any house which the assessee may occupy for the purposes of any business or profession carried on by him”. The expression which was considered by the Madras Bench of ITAT was “building used by the Assessee for the purpose of its business”. The law with which we have deal in the present appeal contemplates actual occupation of the property by the Assessee for a business or profession carried on by an Assessee. In view of the above, we are of the view that the aforesaid decision will not be of any help to the plea of the Assessee. Moreover the Assessee in the case before the Madras Bench of ITAT was admittedly in occupation of the portion of the property which is not the position in the case of the Assessee.

12. The learned D.R. relied on the decision of the Mumbai Bench of the Tribunal in the case of Ramnord Research Laboratories (P) Ltd. Vs. WTO 99 ITD 73 (Mum)(AY 97-98 &98-99) wherein it was held that where property is in possession of lessee, it cannot be said that the Lessor is in occupation of the property and therefore the asset in question cannot be excluded on the ground that the Assessee was in occupation of the property for the purpose of any business or profession carried on by him.

13. We have considered the rival submissions. We find that the expression used in sec. 2(ea) cl.3 is “any house which the assessee may occupy for the purposes of any business or profession carried on by him”. Therefore the property in question must be a house. The property in question in the present case, even according to the version of the Assessee, is a business centre. In our view that cannot be said to be a ‘house’, in the sense that it was capable of being occupied as a place where people ‘live’ and not a place where people ‘work’. The definition of ‘Assets’ in the Act has been amended by the Finance (No.2) Act, 1998 w.e.f. 1-4-99, whereby clause(5) was introduced to sec. 2(ea). Clause(5) of sec. 2(ea) of the Act now provides that any property in the nature of commercial establishments or complexes will not be included as assets. Thus prior to the amendment property in the nature of commercial establishments or complexes were well within the purview of the definition of ‘assets’ u/s. 2(ea) of the Act. On this short ground, we feel that the plea of the Assessee can be rejected.

14. Nevertheless, we shall deal with the plea of the Assessee as put forth before us. The plea put forth before us by the Assessee in short is that in the case of a license, the occupation always continues with the licensor and since the business of the Assessee was running a business center, the property can be said to be occupied by the Assessee for the purpose of business or profession carried on by him. We have already set out the terms of the agreement by which the property was given for occupation by M/S. Hutchinson Max Telecom (P) Ltd. The distinction between a license and a lease in law now requires to be considered. Legal position with regard to what would constitute license or lease is that recitals in a document can never be conclusive and one has to look to the substance of the terms agreed upon and not to the nomenclature given to the deed by the parties. It is not however a question of words but of substance. If the effect of the instrument is to give the holder an exclusive right of occupation of the land though subject to certain reservations or to a restriction of the purposes for which it may be used, it is in law a demise of the land itself. The border line, however, between a license and a lease is often exceedingly thin. If the contract is merely for the use of the property in a certain way and on certain terms while it remains in the possession and control of the owner, it is a license. There is, however, a marked distinction between a lease and a license. A lease is 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 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. 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 license. The legal possession, therefore under the license, 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 favor any estate or interest in the property. 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 land ? In Associated Hotels of India Ltd. Vs. R.N. Kapoor their Lordships of the Supreme court held as under :-“The following propositions may, therefore, be taken as well established : (1) To ascertain whether a document creates a license or lease, the substance of the document must be preferred to the form ; (2) the real test is a intention of the parties-whether they intended to create a lease or a license (3) if the documents 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 owners, it is a license, and (4) if under the documents 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. Judged by the said tests, it is not possible to hold that the document is not of license. 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., untrammeled by the control and free form 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 documents although with the consent of the appellants, is destructive of any theory of license. 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-writer hardly conceals the real intent. I, therefore, hold that under the document there was transfer a right to enjoy the two rooms and therefore, it created a tenancy in favor of the respondent.”

15. In the light of the principles emerging from the above discussion, we have to see the various terms of the agreement by which the property was allowed to be occupied by M/s. Hutchinson Max Telecom (P) Ltd. The first aspect which we notice is that the tenure of the agreement is for a period of 9 years. In licenses generally no fixed tenure is agreed nor is any notice necessary to terminate the relationship. In the agreements referred to above, there is not even a right reserved to terminate the relationship except on failure to pay the charges agreed under the agreement. The Assessee has received an interest free security deposit of Rs.6.4 Crores which is refundable without interest. In a license such high Security deposit would not be paid because the tenure of occupation is uncertain. The client was at liberty to have his own furniture, office equipment etc. The agreement in clause-3 further provides that the Business center services shall be available to the client on all working days between 8.00 A.M. to 10.00 P.M. It has been further provided in clause-3 that in the event of the client desiring to use business center services beyond the working hours on any working day or holiday, the center would extend such services at no extra charges. Clause-17 of the agreement provides that because of the nature of the business of the client being a sensitive one viz., cellular phone operators/licensees in Mumbai, the client can have its own security also. All the above features in the agreement clearly show that what the parties really intended was a lease and the phraseology that it is a license cannot change the real character of the document. It is difficult to believe that a telecom operator/licensee in Mumbai would occupy a premises on a license basis, especially when the fact that the nature of business involves handling secret and sensitive information is recognized even in the agreement by which the premises was allowed to be occupied by the Assessee. The fact that the premise was to be used only between 8.00 A.M. to 10.00P.M. is nullified by the next sentence in the agreement which says that in the event of the client desiring to use business centre services beyond the working hours on any working day or holiday, the center would extend such services at no extra charges. In effect the Client was entitled to the use the premises at all times. We are of the view that all the covenants are those that are usually found or expected to be included in a lease right. We are of the view that the Assessee had given the property on lease and therefore it cannot be said that he was in occupation of the property for the purpose of a business or profession carried on by him. The exclusion clause in the definition of ‘assets’ u/s. 2(ea) of the Act contemplates physical possession by the Assessee as opposed to dejure possession. The fact that M/S.Hutchinson Max telecom (P) Ltd., were in physical/real possession of the property will itself dis entitle the Assessee to claim the benefit of clause (3) of sec. 2(ea) of the Act. Moreover, the finding in the Income tax assessment was that the premises were given on lease and in the Wealth Tax proceedings it cannot be held that the premises were given on a license basis by the Assessee. We therefore hold that the Value of the the immovable property at No. 6, 4th floor, ‘Sahas’, Veer Savarkar Marg, Prabhadevi, Mumbai-400 025, owned by the Assessee has to be included in the net wealth of the Assessee.

16. The next issue that needs to be determined is as to what should be the value of the property. sec. 7 of the Act lays down that the value of any asset has to be determined in accordance with Schedule-III to the Act. Schedule-III Rules 5 to 8 lay down as to how immovable property has to be valued. Rules-3 lays down that the value of immovable property, being a building or land appurtenant thereto shall be the amount arrived at by multiplying the net maintainable rent (NMR) by the figure of 12.5. Rule-4 lays down as to how NMR has to be computed. It says that NMR shall be the gross maintainable rent(GMR) as reduced by amount of taxes levided by local authority and a sum equal to 15% of the GMR. Rule-5 lays down as to how GMR is to be computed. Rule-5(i) lays down that where the property is let, the amount received or receivable by the owner as annual rent or the annual value assessed by the local authority in whose area the property is situated for the purposes of levy of property tax or any other tax on the basis of such assessment, whichever is higher. The AO arrived at the valuation as per Schedule-III as follows:

17. Before the CIT(A) the first submission of the Assessee was that while computing the GMR, the annual value assessed by the local authority should have been taken rather than the actual rent received by the Assessee. The CIT(A) rejected this argument by pointing out that if the actual rent received is much higher than the annual value assessed by local authority then that has to be taken as laid down in Rule-5(i) of Schedule-III to the Act. The Assessee contended before CIT(A) that the multiplying factor of 10 had to be applied instead of 12.5%. On this the CIT(A) held that the Assessee held the property on a freehold basis and only when the property is held on leasehold basis the multiplying factor of 10 can be applied under Rule 3 of Schedule III to the Act.

18. We have already seen that in the income tax proceedings the ITAT had held that out of the consideration received by the Assessee from letting out the property a sum of Rs.5 lacs had to be considered as consideration in relation to the right to use the furniture, fittings etc., provided by the Assessee and this sum of Rs.5 lacs is to be assessed under the head income from other sources. The remaining sum was directed to be assessed under the head income from house property. In line with the said decision, the CIT(A) held that instead of the entire sum being considered as rent received by the Assessee which figure was taken as GMR, the AO should substitute the said figure by reducing therefrom a sum of Rs.5 lacs and then determine the GMR and the value of the assets. To this extent the CIT(A) gave relief to the Assessee in the matter of valuation of property.

19. Before CIT(A), the Assessee had contended that as per the report of a registered valuer the market value of the property is only Rs.5.84 Crores and by applying the provisions of Schedule-III a higher value cannot be attributed to the property. On this objection the CIT(A) held that the registered valuer report was never filed before the WTO and therefore the same cannot be taken cognizance. The CIT(A) also held that if after applying the rules the value of the property is determined then that value has to be applied.

20. Another contention of the Assessee before CIT(A) was that the matter of valuation ought to have been referred to the Departmental Valuation Officer (DVO) by the WTO. On this issue the CIT(A) held that under sec. 16-A of the Act, it was the discretion of the WTO to refer or not make a reference regarding valuation and he cannot be compelled to make a reference to the DVO.

21. The CIT(A) held that under Proviso (iii) to Expln., to Rule 5 Schedule-III to the Act, the addition of 15% interest on interest free security deposit to the annual rent received by the Assessee was proper and in accordance with law.

Thus all the objections raised by the Assessee with regard to valuation were rejected by the CIT(A), except the relief with regard to Rs.5 lacs which we have referred to in the earlier paras. Aggrieved by the order the CIT(A), the Assessee is in appeal before the Tribunal.

22. We have heard the submissions of the learned counsel for the Assessee and the learned D.R. The learned counsel for the Assessee submitted that the nature of the letting by the Assessee was by way of a license and therefore in such cases the annual rent actually received should not be the basis for determining the GMR. In this regard our attention was invited to a decision of ITAT Mumbai in the case of B.Jamasji Mistry (P) Ltd. Vs. Third ITO 12 ITD 546(Bom). We find that the said decision is in the context of sec. 23(1)(b) of the Act. Moreover, we have already held that the nature of letting was by way of lease and not license. Hence this argument of the learned counsel for the Assesseee cannot be accepted. The further submission of the learned counsel for the Assessee was that the provisions of Rule 5(i) were applied by the WTO treating the property as let out by way of lease, whereas the property was let out by way of license by the Assessee and therefore the very basis on which the WTO determined the value of the property is incorrect. He therefore prayed that the order of CIT(A) should be set aside and the matter should be remanded to WTO to apply the correct provisions to determine the value of the property. In this regard our attention was drawn to two decisions of the Hon’ble Supreme Court (i) State of Punjab Vs. Shree Gopal paper mills Ltd. AIR 1963 Supreme Court 1459 (SC) and (ii) The Corporation of Calcutta Vs. Smt. Padma Debi and others AIR 1962 Supreme Court 151 (SC). The first case arose out of the provisions of the Pujan Urban Immovable Property Tax Act, (17 of 1940) where building used for purpose of a factory was exempt from taxation. The workers were allowed to use quarters within the factory compound. The question was whether the quarters were also used for the purpose of a factory. The workers were allowed to use the quarters on a leave and license basis and hence it was held that the building was used for the purpose of a factory and exempt from taxation. If the Assessee charges rent for the quarters within the factory compound the exemption was not available. The payment received by the Assessee was held to be not in the nature of rent as there was no lease in the larger sense of the term and the quarters were occupied by the workers on a leave and license basis. The second decision was a case where in the context of determination of valuation for the purpose of municipal valuation, the Hon’ble Supreme Court had observed that the word “ to let” appearing in the context of use of the property on payment of rent can only mean a situation where the property is let. According to the learned counsel for the Assessee the expression used in Rule 5(i) ‘where the property is let’, would therefore mean that the said rule can be applied only when there is a lease and the consideration received for letting out is in the form of a rent and not a case where charges are received as in the case of the Assessee.

23. We have considered the argument of the learned counsel for the Assessee and are of the view that the same is without any merit. We have already held while deciding the first issue that the property was given on lease by the Assessee and not on the basis of license. Therefore the above arguments of the learned counsel for the Assessee on the assumption that the property was given on a license cannot be accepted. No other arguments were advanced on the aspect of valuation of the properties. We are of the view that the reasons given by the CIT(A) in upholding the valuation by the WTO and the partial relief given by the CIT(A) are proper and calls for no interference. We also find that a registered valuer’s report was filed by the Assessee before CIT(A), which he did not take cognizance. We find that report is for determination of the fair rent of the property. We are of the view that this is irrelevant for the present case because if the actual rent received is much higher than the annual value assessed by local authority then that has to be taken as laid down in Rule-5(i) of Schedule-III to the Act. The fair rent estimation is therefore not relevant in the present case. For the above reasons, We confirm the order of the CIT(A).

24. In the result all these appeals by the Assessee are dismissed.

NF