Opting Legal Lowest tax liability alternative not amounts to Tax Evasion

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: –

The said amount of Rs.103.20 Lacs has been offered to tax under the head Income from House Property after claiming deduction of municipal taxes and statutory deduction of 30% u/s 24. The net taxable income, thus, offered is Rs.66.52 Lacs. Later on, the assessee has revised its return of income to claim the deduction of service tax also. The computation of income of other 6 persons, as placed on record, would reveal that those persons have also offered their respective share in the rent and amenities charges to tax while filing their respective returns of income for the year under consideration.

3.7 In the above background, Ld. AO observed that the 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. On the basis of stated factual matrix, Ld. AO observed that in terms of Sec.23 of the Income Tax Act, if the rent received or receivable was higher than the sum for which the property might reasonably be expected to let out, the rent received or receivable would be the annual value of the property, Therefore, the total rent received from M/s DFIRPL was to be taken as rent in the hands of the assessee. It was also observed that when the assessee was the owner of the premises then how the rent could be apportioned between family members of the partners when they were not the owners of the property. Accordingly, the leave and license agreement dated 20/04/2009 entered into by the assessee with 6 family members was termed as artificial structure in which rent rightfully pertaining to the assessee was transferred without payment of taxes in the hands of the assessee.

3.8 As tabulated earlier, the assessee had, against its share of 40%, reflected rent of Rs.48.75 Lacs from M/s DFIRPL. The assessee also reflected rent of Rs.25.20 Lacs received from 6 family members. The rental received by other 6 members towards balance share of 60% was Rs.73.12 Lacs. Therefore, a conclusion was drawn that the assessee diverted differential amount of rent of Rs.47.92 Lacs (Rs.73.12 Lacs Less Rs.25.20 Lacs) to other persons.

3.9 Therefore, disregarding the computations as offered by the assessee, Ld. 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  eduction
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.

4. Proceeding further, Ld.AO opined that amenities provided by the assessee would not fall under House Property income since the amenities would not flow from letting of the property but arose on account of other services provided in addition to the let out of property. Forming such a belief, the amount of Rs.78 Lacs stated to be received on account of amenities charges was separately brought to tax as Income from Other Source. Finally, the income of the assessee was determined at Rs.169.67 Lacs. In other words, the amenities charges, on gross basis, including the share of 6 persons, was brought to tax under the head Income from other sources which would prejudice the assessee in two ways – i) the share of 6 persons, in amenities charges, was brought to tax in the hands of the assessee; ii) the assessee would be denied statutory deduction of 30% against the same.

5.1 Aggrieved, the assessee assailed the computations made by Ld. AO before learned first appellate authority, by way of elaborate submissions, which have already been extracted in the impugned order.

5.2 Regarding clubbing of rental income in the hands of the assessee, the assessee, inter-alia, relied upon the decision of Bombay High Court rendered in Akshay Textiles Trading Agencies Pvt Ltd. (304 ITR 401) and also on the decision of Hon’ble Calcutta High Court in CIT V/s Indra & Co. (268 ITR 240) for the submissions that only the actual rent received by the assessee was to be brought to tax. The attention was drawn to the fact the leave and license agreement was entered with 6 persons on 20/04/2009 which was much before subsequent leave and license agreement entered into by the assessee and other 6 persons with M/s DFIRPL. It was submitted that the licensors had to spend huge amount in making structural changes in the building in order to lease it to M/s DFIRPL which was evident from the terms of the agreement. The said fact would materially alter the market value / rental value of the property. The assessee also brought on record difference between the two agreements entered into on 20/04/2009 & 28/08/2009.

A plea was also raised that the income could not be taxed twice since the respective share in the income was already offered by 6 persons to tax in their own tax returns. The details of assessment particulars of all the 6 persons was placed on record.

The assessee also raised a plea that the aforesaid method of allocation was accepted in AY 2010-11.

5.3 Regarding taxability of amenities charges, the assessee submitted that amenities were nothing but fixed amenities to the building and there were no separate services provided to the tenants and the receipts were in the nature of rent. The amenities agreement was incidental to leave and license agreement and the income could not be separated partly as income from other sources. The nature of service was stated to be in the nature of security, façade cleaning system, landscaping, decoration and beautification of common areas, cleaning and maintenance of common areas and housing-keeping etc. Therefore, the entire income was to be treated as Income from House Property. The attention was also drawn to the fact that the amenities agreement was dependent on lease and license agreement. There would be no provision of amenities if the leave and license agreement was not in subsistence. The amenities agreement was co-terminus and dependent on and subservient to leave and license agreement. Therefore, irrespective of the nomenclature of the charges, real substance of such charges needs to be looked at. The primary nature of source of income was the ownership of the property. The aforesaid submissions found favor with Ld. CIT(A), who in terms of various judicial pronouncements, held that the rent for use of building as well as maintenance /amenities charges were to be consider as Income from House Property.

5.4 However, assessee’s submissions as to clubbing of rental income could not find favor with Ld. CIT(A) who opined that rental income was to be charged to tax under the head Income from House Property in the hands of owner of the property. If a person receiving the rent is not the owner then income is not be charged as Income from House Property but as Income from Other Sources. Income from a house property is taxable in the hands of its legal owner in whose name the property stands. Owner would mean a person entitled to receive income from a property in his own right even if no registered document was executed in his favor. Rental income of a person other than the owner could not be charged to tax under the head Income from House Property. Therefore, rental income received by tenant from sub-letting could not be charged to tax under the head Income from House Property. When the assessee was the sole owner of the property, the entire income was to be offered to tax by the assessee. The plea that other person offered the same to tax would be of no relevance. The rental income earned by other persons by sub-letting was chargeable under the head Income from other sources or as business income and it was illegal on the part of the family members to offer the income under the head Income from House Property. Therefore, Ld. AO should have taken corrective measures about income shown as income from house property by the family members. Finally, the plea raised by the assessee was rejected and it was held that the entire rental income was to be treated as Income from House Property in the hands of the assessee. Aggrieved, the assessee is under further appeal before us.

6. Upon due consideration of factual matrix as enumerated in preceding paragraphs, the undisputed position that emerges is that before leave and license agreement dated 28/08/2009 entered into by the 7 licensors with M/s DFIRPL, there was a pre-existing agreement dated 20/04/2009 between the assessee and other 6 persons. As per terms of this agreement, certain license was granted to these persons against license fees for valuable consideration of Rs.2.10 Lacs with respect to 60% of the licensed premises. 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. Pursuant to said agreement, the assessee as well as other 6 persons, entered into subsequent leave and license agreement with M/s DFIRPL. The terms of the said agreement have duly been recognized in leave and license agreement dated 28/08/2009 and the share of the assessee and other 6 persons find specific mention in this agreement. The aforesaid agreement has been executed by the 7 licensors and licensee and the same is a registered document. Pursuant to the terms of both the agreements, the transactions have been carried out and assessee as well as other 6 persons have offered their respective share of income in their own tax returns. There is nothing illegal in both the agreements. This being the case, the agreement dated 20/04/2009 could not be termed as sham agreement or an artificial structure with a view to evade tax liability. The said argument would be further weakened by the fact that proportionate income has already been offered to tax by the assessee as well as other 6 licensors. The observations of Ld. CIT(A) that the said income should have been offered as Income from House Property by the 6 persons could not be a ground to make impugned additions in the hands of the assessee. It is also fortified by the fact that learned first appellate authority, himself, observed that Ld. AO should have taken corrective measures about income shown as income from house property by the family members. However, the said error, in our considered opinion, could not empower Ld. CIT(A) to confirm the additions in the hands of the assessee. It is trite law that tax planning is legitimate provided it is within four corners of law and done without any fraudulent intention. Colorable devices could not be a part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. 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, the assessee would be at liberty to choose that particular method. In the present case, we find 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. The rule of consistency would also favor assessee’s case since similar apportionment done in AY 2010-11 has been accepted by the revenue. The case laws referred to in para 5.2 would also support the cause of the assessee that annual value of the property would be the annual value received or receivable by the assessee from the tenant irrespective of the fact that tenant on further sub-letting had received higher rents.

7. Therefore, keeping in view the entirety of facts and circumstances, we hold that the clubbing of rental & amenities income of 6 persons, in the hands of the assessee, would not be sustainable in the eyes of law. The Ld. AO is 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, shall be provided to the assessee. Accordingly, the appeal stands allowed.

ITA Nos.2632-33/Mum/2017, AYs 2012-13 & 2013-14

8. Facts are pari-materia the same in these years. The impugned order is common order for all the three years. The assessee is before us with similar grounds of appeal. Therefore, our adjudication as for AY 2011-12 shall mutatis-mutandis apply to both these years. Accordingly, both the appeals stand allowed.

Conclusion

9. All the appeals stand allowed.