Case Law Details

Case Name : Akola Trading Company P. Ltd. v/s ITO (ITAT Mumbai)
Appeal Number : ITA No. 6481/Mum/2013
Date of Judgement/Order : 01/03/2017
Related Assessment Year : 2010-11
Courts : All ITAT (4421) ITAT Mumbai (1458)

In this case assessee has tenancy rights in the premises. The assessee has let out the premises and is showing receipt as business income. However, authorities below have given finding that assessee is only subletting the property and receiving of house properly income. The authorities below have relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs D S Singh 186 CTR 387 and the Hon’ble apex court decision in the case of Poddar Cement 226 ITR 625. We find that in light of the facts of the case and the case laws relied upon by the authorities below it is clear that the amount received by the assessee on account of subletting the property is only income from house property and has to be treated as such. In such circumstances there is no justification of allowing expenses against the house property income other than that provided as deduction under the scheme of computation of house property income.

Brief Facts of the Case

1. The assessee is a private limited company engaged in the business of providing table space, cabin space and other infrastructural facilities to its clients occupying the place. It furnished its return of income for A.Y.2010-11 on 05.07.2011 disclosing total income of Rs.14,38,437/-. The assessment was made u/s.143(3) of the Act on 31.12.2012 determining total income of Rs.18,43,5801-. In the previously mentioned assessment order dated 27.11.2012, the LAO has decided the issue vide paragraph No.6(i) and 6(ii) on page 3 and 4 of the relevant assessment order, as extracted under:-

“Hon’ble Delhi High Court held that where the assessee in occupation of rented premises sub-let a portion thereof and claimed that income from such sub-letting was assessable as business income, the department was justified in assessing the said income under ‘Income from house property; in view of the fact that the assessee was in full control in his capacity as a tenant, and had earned income by sub­letting of the property. In situations of this type, there is nothing to suggest that ownership of the premises is essential for levying tax under the head “Income from house property”- Smarts (P.) Ltd. v. CIT [2008] 166 Taxman53(Delhi).

In view of forgoing paras and the introduction of section 27(iiib) of the Act by the Finance Act, 1987, by virtue of this provision in case of a lease for a term of not less than 12 years, the lessee is regarded as the owner of the property for the purposes of section 22 to 26 of the Act. On 31.12.2012, the assesse’s representative filed the copies of rent receipts from 1986. Therefore, in the assessee’s ease the assessee is in possession of the said property since 1986 i.e. exceeding 12 years. Therefore, the assessee is deemed owner of the property for purpose of determining “Income from House property.”

With regard to the Business property, the assessee’s representative has argued that Sec.22 is specifically excluded from the Charging itself as the assessee is exploiting the premises for carrying on business activities and the income cannot be chargeable to tax under the head income from House Property.

The assessee company holds the said premises, by virtue of lease agreement, which is sublet and earned monthly rent income from the same. Though, the assessee has taken the said premises on lease, it has let it out on rent to earn rental income. Assessee has earned Rent Income which is chargeable under the Head Income from House Property only.

A specific head of charge is provided in Income Tax Act for income front house property. The annual value of house property cannot be brought to tax under any other head of income. It will remain so even if property is held by the assessee as stock in trade of a business, or if the assessee is a company which is incorporated for the purpose of owning house property. House owning, however profitable, is neither trade nor business for the purpose of the Income Tax Act where income is derived from house property by the exercise of property rights, income falls under the head income from house property”. It is the nature of operations and not capacity of the owner that must determine whether income is from property or therefrom, the true character of the income derived as income from property. The head  of the income is only governed by the Sec.14 of the LT. Act and not by otherwise.

In the above said reply the assessee has stated that it has modified the premises to run the business of providing office premises to various clients and is getting compensation for the services rendered. From the fact that the tenants are fixed for a number of years, it cannot be assessed, based on facts, of providing office premises and used for commercial purpose. Thus, the assessee’s vocation is in the nature of letting of premises for commercial purpose and not running a commercial centre. Therefore, the claim of the assessee that it is used for commercial purpose is only a deceit for tax purpose.”

2. He further relied on the Apex Court decisions in the case of CIT vs. Poddar Cement reported in 226 ITR 625, P.B. Jodha Ma! Kuthiala vs. CIT reported in 82 ITR 570 (SC) and Smarts (P) Ltd. vs. CIT [2008] reported in 166 Taxman 53(Delhi) and held that the appellant company is the owner of the said property within the meaning of section 22 r.w.s.27(iiib) read with section 269(f) and the Lease Rent received of Rs.28,60,401/- is to be taxed under the head ‘Income from House Property’ and consequential expenses as per section u/s.24 is allowed.

Held by CIT (A)

4. I have carefully and dispassionately considered the facts and circumstances of the case, statement of facts, relevant assessment order, written submission and the arguments made by the LAR before the undersigned. In the present case, the appellant company had disclosed the compensation received as business income and claimed the some against the operational expenses related thereto.

5. Hon’ble Supreme Court in Podar Cement’s case [CIT vs. Podar Cement (P)Ltd. Etc. (1997) 226 ITR 625 (SC)] has held that the liability u/s. 22 is on a person who receives or is entitled to receive the income from the property in his own right. The requirement of registration of the sale deed in the context of the u/s. 22 is not warranted. This view is strengthened/supported by a subsequent amendment to u/s. 27. The said amendment was introduced to u/s. 27 by the Finance Act, 1987 by substituting cls. (iii), (iiia) and (iiib) in the place of old cl. (iii) w.e.f. 1st April, 1988. From the circumstances narrated and from the memorandum explaining the Finance Bill, 1987, it is crystal clear that the amendment was intended to support an obvious omission or to clear up doubts as to the meaning of the word “owner” in u/s. 22. In the light of the clear exposition of the position of a declaratory/certificatory Act, it is not necessary to multiply the authorities on this point. There is, therefore, no hesitation to hold that the amendment introduced by the Finance Bill, 1988 was declaratory/clarificatory in nature so for as it relates to cls. (iii), (iiia) and (iiib) of u/s. 27. Consequently, these provisions are retrospective in operation. In the context of u/s. 22, having regard to the ground realities and further having regard to the object of the IT Act, namely, ‘to tax the income, ‘owner’ is a person who is entitled to receive income from the property in his own right and the requirement of registration of sale deed in the context of u/s. 22 is not warranted. In this decision the Hon’ble’ Supreme Court thus settled the controversy which prevailed in this regard. The Supreme Court set aside the decision in Sushil Ansal vs. CIT (1986) 160 ITR 308 (Del), overruled the decision of the Bombay High Court in CIT vs. Zorostrian Building Society Ltd. (1976) 102 1 W 499 (Bom) and approved the decisions in Addl. CIT vs. U.P. State ,Agro Industrial Corp. (1981) 127 177? 97 (All), Smt. Kola Rani vs. CT (1981) 130 ITR 321 (P&H), Addl. CIT vs Sahay Properties & Investment Co. (P) Ltd. (1983) 144 ITR 357 (Pat), Sailfuddin vs. CIT (1985) 156 ITR 127 (Raj), Madgul Udyog vs. CIT (1990) 184 ITR 484 (Cal), Maharani Yageshwari Kumari vs. CIT (1995) 213 ITR 541 (Raj), CIT vs. General Mktg. & Mfg. Co. Ltd. (1996) 222 ITR 574 (Cal) and CIT vs. Krishna Lal ,4Ajmani ((1996) 222 ITR 653 (Pat)].

6. Following Hon’ble Supreme Court decision in the case of Podar Cement (P) I Ltd. (supra) it has been held by Hon’ble Delhi High Court in CIT vs. Diljinder Shivdayal Singh (2004) 186 CTR (Del) 387 that rental income from the house property was assessable in the hands of the assessee under the head ‘income from house property’ and not as ‘income from other sources’ once he had been put in possession of the property on payment of full consideration, though no registered document was executed.

7. Having regard to the facts and circumstances of the case and in the light of decisions of Hon’ble Apex Court and Hon’ble High Courts as discussed in the preceding paragraph and also discussed in the assessment order, the action of the LAO is confirmed. Corresponding grounds of appeal are dismissed.

Held by ITAT

8. We have heard the learned departmental representative. None appeared on behalf of the assessee. It is noted that this appeal has been fixed for hearing on several occasions and none has appeared on behalf of the assessee. Hence we proceed to adjudicate the issue raised by hearing the learned departmental representative and perusing the records.

9. We find that in this case assessee has tenancy rights in the premises. The assessee has let out the premises and is showing receipt as business income. However, authorities below have given finding that assessee is only subletting the property and receiving of house properly income. The authorities below have relied upon the decision of Hon’ble Delhi High Court in the case of CIT vs D S Singh 186 CTR 387 and the Hon’ble apex court decision in the case of Poddar Cement 226 ITR 625. We find that in light of the facts of the case and the case laws relied upon by the authorities below it is clear that the amount received by the assessee on account of subletting the property is only income from house property and has to be treated as such. In such circumstances there is no justification of allowing expenses against the house property income other than that provided as deduction under the scheme of computation of house property income. Accordingly, in the background of aforesaid discussion and precedents we find that the order’s of the learned CIT-A is a reasonable one and doesn’t need any interference on our part. Accordingly, we uphold the same.

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