Income realised from sub-lessee is to be assessed under Head ‘Other Sources’

NEW DELHI, AUG 6, 2007 : PROFESSOR Harnam Singh is the owner of a property in New Delh which was let out to Modi Rubber Ltd. from time to time. Last written lease expired somewhere in 1994 but the company was holding over. Prof. Harnam Singh was not able to get the premises vacated from M/s. Modi Rubber, therefore he executed a lease on 17.11.1998 in favour of the assessee company (appellant) for a period of 9 yrs. and 11 months, the lease to commence from the date the assessee appellant was able to get possession of the property. The appellant negotiated with M/s. Modi Rubber Ltd. to vacate the property and after great deal of negotiations M/s. Modi Rubber Ltd. agreed to pay enhanced rent of Rs.25,000/- per month with retrospective effect from 16.6.1999. Subsequently, lease rent from first June 2001 was enhanced from 25,000/- P.M. to Rs.1,25,000/ – P.M. with retrospective effect from 16th June, 1999. The difference of rent of Rs.1,00,000/ – P.M. (Rs.1,25,000 minus Rs.25,000/-) for the period 16th June 1999 to 31st March, 2001 was offered to tax in Assessment Year 2002-2003 on due basis. The second floor of the aforesaid premises was let out by the appellant to M/s. Gujarat Guardian Ltd. on rent of Rs.1,20,000/ – P.M. for 3 years with effect from 1st April 1999. The appellant claimed that rent received as a lessee was liable to be assessed under the head “other sources” as the appellant was not the owner of the premises.

The AO noted that property in question was in occupation of Shri V.K. Modi, Director of M/s. Modi Rubber Ltd. who was using ground floor and first floor of the property as his residence. Second floor was let out to M/s. Gujarat Guardian Ltd. For all practical purposes entire property was in occupation of Shri V.K. Modi and used by him for his residence. AO also observed that total area in occupation of M/s. Gujarat Guardian Ltd. was less than 1/3 of area in occupation of M/s. Modi Rubber Ltd. The AO also found that assessee had incurred more than Rs.16 Lakhs as expenditure on civil and other works. But no detail of expenses incurred was furnished. The AO assessed the rental income under the head “house property” income by applying sec. 27 of the IT Act by taking annual letting value of property at Rs.36 Lakhs. The AO also disallowed expenditure claimed by the assessee against the rental income.

The assessee challenged above assessment in appeal before the Ld. CIT (A) and reiterated its submission that rental income has to be assessed under the head ‘other sources’, as assessee appellant was merely a lessee. As per registered lease deed dated 17.11.98, Prof. Harnam Singh was the owner of the property and therefore there was no question of taking assessee as beneficial owner under section 22 of I.T. Act or a deemed owner under section 27(iiib) of IT Act.

The ld. CIT(A) held that a beneficial owner could be treated as owner of the property for the purposes of section 22 of the Income-tax Act and held that annual value of the property was liable to be assessed under the head ‘house property” under section 22 of the Income-tax Act. Assessment of rental income under the head “house property” was held to be justified in terms of section 27 (iiib) of the Act. The appeal of the appellant was dismissed. Aggrieved the assessee approached the Tribunal.

Hon’ble Tribunal observed that :-

++ We shall first examine question of applicability of section 27 (iiib) of the Income-tax Act where a person can be “deemed to be the owner of the house property”.

++ Clause (iiib) covers acquisition of any right in or with respect to any building by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Act. The aforesaid clause (f) makes it clear that “transfer in above clause would include a lease for a term of not less than 12 years”.

++ In the present case it is admitted that lease deed dated 17.11.98 is for a period of 9 years and 11 months. It is no doubt stated that said period is fixed “at the first instance” but then there is no material to show that it was extended or could be extended so that total period of lease could be held to be “not less than 12 years”. The gap that exits between 9 years and 11 months and 12 years has been filled up by the Revenue authorities on imagination only. There is no material to support or hold that period of lease fixed between assessee and Prof. Harnam Singh was more than 9 years and 11 months. Thus without material and on imagination, the case cannot be taken to be covered under clause (f) of section 269 UA of Income-tax Act.

++ The other pertinent question is whether assessee could be treated to be the “beneficial owner of the house property” under section 22 of the Income-tax Act.

++ Admittedly, Prof. Harnam Singh is the owner of the property. He has not transferred all his rights to the assessee appellant, though some rights are transferred to the assessee including right to realize rent. Rights exercised by the assessee are referable to agreement with Prof. Harnam Singh. There is no term in the deed to show that Prof. Harnam Singh cannot transfer ownership of property or several other rights retained by him as owner. The assessee is not doing anything in its own right. He is exercising rights given to him or traceable to the documents in his favour.

++ A tenant can be authorized to sub let the premises and realize rent from tenants under him or who has attorned to him. This is quite a well known concept. The appellant in the present case is a lessee and tenants occupying the property and liable to pay rent to the assessee as sub lessees of the premises are with the consent of the owner. While Prof. Harnam Singh is the owner of the property, there cannot be a second owner like the appellant. It cannot be said that the assessee is realizing rent in his own right.

++ There may be cases where the lessee can be treated to be owner of the property. If the lease is for a considerable long time, say for 99 years, and lessee has right to construct property and to sell the property constructed by him. It is also reasonable to hold the lessee to be “deemed owner” of the property u/s 27(iiib) of the I.T.Act where lease is not for less than 12 years. The Legislature having prescribed period of lease for treating the lessee as deemed owner, it is not possible to hold a lessee as a deemed owner where lease is for a period of less than 12 years. Nor such a lessee can be treated to be a beneficial owner.

++ Such an interpretation would tantamount to acting agent the mandate of the Legislature. It would be illegal application of the statutory provision. Having already noted that lease with the assessee appellant is for a period of less than 12 years, he can neither be treated as a beneficial owner nor a deemed owner. To hold otherwise, would be to disregard the agreed terms as well as statutory provisions of the Act.

++ We, therefore, do not find any good reason to hold the assessee as an owner or deemed owner of house property u/s 22 of the I.T.Act. Income realized from sub lessee in occupation of the premises is income of the assessee. There is no dispute on this. The assessee’s contention that above income is to be assessed under the head “other sources” as he is not owner of the premises, is well taken and is required to be accepted. There is no question of estimating annual letting value of the property. It is to be assessed as per agreement between the parties under the head “other sources”. The Revenue authorities were not justified in assessing rental income under the head “house property”. On facts of the case, we direct the AO to take assessee’s rental income under the head “other sources”. The assessee would also be entitled to consequential relieves under the law. This ground of appeal of the assessee is accepted.