Case Law Details
Income from property let out to a director to be taxed as business income in the hands of the company
In the present case, the property had been let out to Snehal Jalan a share holder who is the daughter of the Director Ms. Rekha Jalan, who had 81.71% shareholding in the company. The Ld. AR for the assessee argued that since property had been let out to an individual, the same was not out of the purview of Rent Control Act as exclusion was available in case of property let out to banks or public sector undertakings or any corporation established by or under any state/central Act or foreign mission, international agencies, multinational companies and private/public limited companies having paid up share capital of Rs.1 crore or more. It has been submitted that since the property was covered under Rent Control Act, the standard Rent determined or determinable under Rent Control Act or actual rent received whichever is higher has to be taken as annual value. We are however unable to accept the arguments advanced. The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities. Therefore, in our view, the provisions of Rent Control Act can not be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. In this case the AO has already made enquiries that similar property being flat No.11C in the same society let out in the year 2005 had fetched a rent of Rs.150 per sq.ft. and another property being flat 18/B-2 let out in the year 2004 had fetched rent of Rs.100 per sq.ft. Thus average fair rent comes to Rs.125 per sq.ft.. The fair adopted by AO is also Rs.125 per sq.ft.. We, therefore, uphold the order of AO assessing the annual value in relation to the portion let out to Ms. Snehal Jalan. As regards the portion let out to Ms. Rekha Jalan, we have already held that rental income has to be assessed as business income and therefore, the same will be out of the purview of the provisions relating to assessment under the head “income from house property”.
ITAT, MUMBAI BENCH “G”
ITA No. 5031/Mum/2011
Assessment Year: 2007-08
Woodland Associates Pvt. Ltd.
Vs.
Income tax Officer
Date of Pronouncement : 21.11.2012
ORDER
PER RAJENDRA SINGH, AM:
This appeal by the assessee is directed against the order dated 28.03.2011 of CIT(A) for the assessment year 2007-08. The dispute raised in this appeal relates to the nature of rental income i.e. business income or house property income; (ii) determination of annual value of property (iii) allowability of deduction on account of municipal tax (iv) allowability of administrative expenses and (v) the nature of interest income i.e. whether business income or other sources.
2. We first take up the dispute relating to assessment of rental income. The AO noted that the assessee during the year had credited the sum of Rs.4,52,000/- on account of rent which included rent of Rs.72,000/- on account of land. It was found that the assessee was owner of two flats at New Woodland Co-operative Housing Society admeasuring 5219.31 sq.ft. which had been let out at meager rent of Rs.3,80,000/- per annum. It was further found that the flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs.26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs.12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The AO asked the assessee to explain as to why rental income should not be assessed a house property income and that annual letting value (ALV) should not be computed on the basis of fair rental value in the market. The assessee submitted that the property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties. It was accordingly urged that the rental income should be assessed as business income. As regards annual letting value, assessee submitted that the flats were occupied by tenants since last several years and it was not possible to revise the rent with respect to market value. It was further submitted that the rent shown for the year at Rs.4,52,000/- was 25% more than the rent of Rs.3,50,000/- shown in the immediate preceding year.
2.1 The AO however did not accept the contentions raised. It was observed by him that leasing out the property could not be considered as trade or commerce. He referred to the judgment of Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. vs. CIT (42 ITR 49) in which case the assessee company had been formed with the object of promoting and developing market and the Apex Court held that rent received from shops and stalls which was derived from letting out the property has to be assessed as house property income as income fell under the specific head. The AO also referred to the judgment of Hon’ble Supreme Court in the case of Shambhu Investments (263 ITR 143). He, therefore, assessed the rental income under the head “house property”. As regards the fair rental value, the AO observed that the flats had been let out to two share holders who were controlling the company. Letting out the flats to the persons who were controlling the company was only an arrangement to reduce tax. There was no formal agreement for letting out property not any efforts had been made to charge rent at market value. The AO also observed that the assessee itself admitted that the property would fetch rent at market rate if given to new tenant. The AO therefore did not accept the argument that fair rental value should be assessed on the basis of rent received. He also made enquiry and found that in the same society flats had been let out at much higher rate as per details below:-
| S.No. | Flat No. |
Area |
Rent per month |
Deposit if any | Date of agreement |
| 1. | 21C |
2550 |
69000 | 3,00,00,000/- | 2004 |
| 2. | 11C |
2800 |
440500 | Nil | 2005 |
| 3. | 18/B-2 |
1150 |
115000 | Nil | 2004 |
2.2 AO after analyzing the comparative rates observed that the average rent charged in respect of similar flat in the same society was 125 per sq.ft. According to the AO, annual value which is defined as sum for which property may be let out from year to year would be the fair rent available in the market. The AO therefore, assessed the fair rent at 125 per sq.ft. which gave annual value of Rs.78,28,965/- for the total area of 5219.31 sq.ft. Accordingly AO assessed the income from house property at Rs.54,80,275/- after reducing the statutory deduction @ 30% under section 34(a).
2.3 The assessee disputed the decision of AO and submitted before CIT(A) that the property was covered under Maharashtra Rent Control Act, 1999 and, therefore, ALV had to be taken as standard rent and therefore, the AO was not justified in taking the market rent. The assessee also argued that the rental income should have been assessed as business income. The assessee further argued that the AO was not justified in not allowing deduction on account of Municipal tax. CIT(A) after necessary examination of records noted that the rental income in assessment year 2005-06 had assessed as income from house property and no appeal had been filed by the assessee. CIT(A) observed that though rental income was assessed as business income till 2003-04, the principle of resjudicata was not applicable in case of income tax proceedings. CIT(A) therefore confirmed the finding of AO regarding assessment of income as house property income. CIT(A) also rejected the claim of deduction on account of municipal tax after observing that the same was included in deduction allowed by AO © 30% under section 24(a). CIT(A) also did not accept the claim of the assessee that rent actually received or standard rent whichever was higher should be taken as ALV. CIT(A) accordingly dismissed the appeal filed by the assessee on all grounds relating to assessment of house property income aggrieved by which assessee is in appeal before the Tribunal.
2.4 Before us, the ld. AR reiterated the submissions made before the lower authorities that the rental income should be assessed as business income. It was pointed out that in assessment year 2005-06 the rental income was assessed as house property income and assessee had not filed appeal because of low tax effect. In prior years as well as in assessment year 2006-07, the rental income had been assessed as business income though it was admitted that assessment for assessment year 2006-07 was under summary scheme. It was also argued that in so far as the portion let out to Ms. Rekha Jalan who was director, was concerned, it amounted to user of the property and in such cases rental income had to be assessed as business income. Reliance was placed on the judgment of Hon’ble High Court of Andhra Pradesh in the case of CIT vs. Vazir Sultan Tobacco Co. Ltd. (173 ITR 290) and on the judgment of Hon’ble High Court of Madras in the case of CIT vs. New India Maritime agencies Pvt. Ltd. (253 ITR 732).In regard to ALV, it was submitted that the property was covered under Maharashtra Rent Control Act, 1999 and therefore, the standard rent or Municipal Rateable Value (MRV) should be adopted as annual value. Reliance for the said proposition was placed on the following judgments :-
i) 131 ITR 435(SC) in the case of Sheila Kaushish vs. CIT;
ii) 122 ITR 764 (SC)in the case of Dewan Daulat Rai Kapoor vs. NDMC ;
iii) 177 ITR 246 (SC) in the case of M.V. Sonawala Vs. CIT;
iv) 304 ITR 401 (Bom.) in the case of Akshay Textiles Trading and Agencies P. Ltd. ;
v) 323 ITR 104 (Bom.) Smitaben M. Ambani vs. CWT (Mum) and
vi) ITA No.1411/Mum/2007 (A.Y.-04-05) order dated 26.11.2012 in the case of DCIT vs. Reclamation Reality India Pvt. Ltd.
2.5 The ld. DR on the other hand supported the orders of authorities below and argued that the rental income had been rightly assessed as house property income. As regards ALV, it was argued that since property had been let out to director/share holder who was controlling the company, it was only an arrangement to reduce tax and therefore the property could not be taken as covered under Rent Control Act. It was thus argued that the fair rental value has to be adopted as ALV and that municipal ratable value was not binding on the assessing authorities. Reliance was placed on the Third Member decision of the Tribunal in the case of Baker Investor Services (125 ITD 1) and on the full Bench judgment of the Hon’ble High Court of Delhi in the case of DCIT vs. Moni Kumar Subba (333 ITR 38). In regard to municipal tax, the ld. DR placed reliance on the orders of authorities below.
2.6 We have perused the records and considered the rival contentions carefully. The dispute relates to various facets of assessments of rental income from letting out of property such as nature of income, determination of annual value and allowability of deduction on account of municipal tax. As regards the nature of income, the issue is settled by the judgment of Hon’ble Supreme Court in the case of East India Housing and Land Development Trust Ltd. (42 ITR 49)(supra), in which it has been held that, in case, income falls under a specific head, it has to be assessed under same head. In the Income tax Act, there is a specific head i.e. “income from house property” for assessing the rental income. In this case, the assessee had received rent from letting out of the property being flats and therefore, income has to be assessed as income from house property. However, the assessee has raised a plea that the part of the property i.e. 65% had been let out to the director Ms. Rekha Jalan for her residence which had to be treated as business user of the property and in such cases income from such asset has to be treated as business income. The plea raised by the assessee is supported by the judgment of Hon’ble High Court of Andhra Pradesh in the case of Vazir Sultan Tobacco Co. Ltd. (173 ITR 290) (supra), and the judgment of Hon’ble High Court of Madras in the case of New India Maritime agencies Pvt. Ltd. (253 ITR 732) (supra), in which it has been held that the buildings owned and occupied by the Director of the assessee company has to be treated as used for business and income derived has to be assessed as business income. No contrary judgment of any other High Court or Apex Court was brought to our notice, by the ld. Departmental Representative, therefore, following these judgments we hold that rental income received from Ms. Rekha Jalan has to be treated as business income and rental income received from Ms. Snehal who was only a share holder has to be assessed as income from house property.
2.7 The other related issue is determination of annual value in case of income found assessable as income from house property. This is relevant to assessment of rental income from Ms. Snehal Jalan. Income from house property is assessable on the basis of annual value which has been defined under section 23(1)(a) as sum for which the property might reasonably be expected to let from year to year. From assessment year 1976-77, clause(b) was inserted as per which in case the actual rent received is more than the value assessable as per clause (a) of section 23(1), the actual rent received will be the annual value. We may point out here that in the period prior to 1.4.1976 when clause (b) was not in existence, the Hon’ble Supreme Court in the case of Mrs. Sheila Kaushish (131 ITR 475) had held that in case of properties covered under Rent Control Act standard rent determined or determinable under Rent Control Act would be the upper limit of the annual value as the properties in such cases could not be let beyond the rent fixed in the Rent Control Act. The same view has been taken by the Hon’ble Supreme Court earlier in the case of Dewan Daulat Rai vs. NDMC (122 ITR 700). These cases relate to property covered under Rent Control Act. In cases where properties are not covered under Rent Control Act, there is no limit fixed on the values for which a property may be let from year to year and, therefore in such cases the fair rent for which property may be let has to be considered as annual value. This aspect has been examined in detail in the Third Member decision of the Tribunal in the case of Baker Technical Services (P) Ltd. (126 TTJ(Mum.)(TM)455). In the said case the Tribunal referred to the judgment of Hon’ble Supreme Court in the case of Motichand Hirachand & Ors vs. Bombay Municipal Corporation AIR 1968 SC AIR 441 in which in the context of phrase “rent at which property might reasonably be let from year to year” it was held that there are various methods applied in order to arrive at such hypothetical rent, for instance, the actual rent paid for the property or for others comparable to it or where there are no rents by reference to the assessments of comparable properties, to the profit earned from property or cost of construction. The Tribunal also referred to the judgment of Hon’ble High Court of Patna in the case of Kashi Prasad Kataruka vs. CIT (101 ITR 810), in which the High Court held that the municipal valuation afforded an indication of reasonable letting value of the building which could be rebutted and either reduced or enhanced on the basis of material or evidence on record. Considering these judgments, the Third member decision upheld the view taken by the division Bench of the Tribunal in the case of Makrupa Chemicals (108 ITD 95)(Bom.) in which it was held that the rateable value determined under municipal law was not binding on the AO while determining the annual value in case the property was not covered under Rent Control Act. It was also held that in case the AO could show that rateable value under municipal law did not represent correct fair rent, then, he may determine the same on the basis of material or evidence on record. Thus in case of properties not covered under Rent Control Act the annual value will be the fair rent in the market which had to be determined after considering comparative cases etc.
2.8 The ld. AR for the assessee has pointed out that the Mumbai Bench of the Tribunal in the case of Reclamation Reality India Pvt. Ltd. (supra), after considering the Third Member decision in the case of Baker Technical Services (P) Ltd. has held that municipal ratable value has to be considered as annual value. We have gone through the said decision of the Tribunal. The Tribunal in the said case observed that the Third member decision in the case of Baker Technical Services (P) Ltd. was based on the decision of the division Bench in case of Makrupa Chemicals P. Ltd. (supra). The said observations are not correct as the Third Member decision in the case of Baker Technical Services (P) Ltd. as pointed out earlier, had decided the issue after considering several judgments of the Apex Court and High Courts. No doubt it had upheld the decision of the Tribunal in the case of Makrupa Chemicals (P) Ltd., it was an independent decision by the Third Member. The decision of the Third Member which has binding force of Special Bench was binding on the division Bench while dealing with case of Reclamation Reality India Pvt. Ltd.(supra) and was required to be followed. The division bench in case of Reclamation Reality India Pvt. Ltd.(supra), had not followed the Larger Bench decision after observing that the same was contrary to the judgment of Hon’ble Jurisdictional High Court in the case of M.P. Sonavala (177 ITR 246).
2.9 We have carefully gone through the judgment of the High Court in case of M.O. Sonavala (supra), and we find that the same related to property covered under Rent Control Act. This is clear from the reference made to judgments of Supreme Court in case of Sheila Kaushish (supra) and Dewan Daulat Rai (supra), which related to properties covered under Rent Control Act. Even the judgment of Hon’ble High Court of Calcutta in the case of CIT vs. Prabhabati Bansali (141 ITR 419) followed by the Hon’ble Jurisdictional High Court related to property covered under Rent Control Act which is clear from the discussion in the last para at page 433 of the report in which it is clearly mentioned that there has to be overall limit on the rateable value which should not exceed the standard rent which applies only in case of property covered under the Rent Control Act. The Tribunal in case of Reclamation Reality India (P) Ltd. had followed the judgment of High Court in the case of M.V. Sonavala (supra), which was not applicable on the facts of that case as the property in that case was not covered under the Rent Control Act. Moreover, the issue in case of M.V. Sonawala (supra), as observed by the High Court was whether the actual compensation received or the municipal rateable value should be taken as the annual value. The issue was not whether Municipal Rateable Value even if it does not give the correct fair rent should be taken as annual value in case of properties not covered under the Rent Control Act. This aspect as pointed out earlier had been considered by the third member in case of Baker Technical Services (P) Ltd. (supra), in which it was held that fair rent has to be determined after considering various factors and that Municipal Rateable Value was not binding on the AO. The view has been upheld by the Full Bench decision taken by the Hon’ble High Court of Delhi in the case of Moni Kumar Subba (333 ITR 38) relied upon by the ld. DR. In the said case the Hon’ble Court observed that provisions of fixation of annual rent under the Delhi Municipal Corporation Act were pani matenia with section 23(1)(a) of the Act and, therefore, the rateable value under Municipal Laws if correctly determined can be taken as ALV under section 23(1)(a) of the Act. The High Court however made it clear that the rateable value under the municipal law was not binding on the AO and in case the AO could show that rateable value under municipal law did not represent correct and fair rent then he may determine the same on the basis of material/evidence placed on record. We, therefore, hold that in case of properties not covered under Rent Control Act, the fair rent of the property has to be taken as annual value which has to be determined on the basis of facts/material on record such as comparative cases, etc.
2.10 In the present case, the property had been let out to Snehal Jalan a share holder who is the daughter of the Director Ms. Rekha Jalan, who had 81.71% shareholding in the company. The Ld. AR for the assessee argued that since property had been let out to an individual, the same was not out of the purview of Rent Control Act as exclusion was available in case of property let out to banks or public sector undertakings or any corporation established by or under any state/central Act or foreign mission, international agencies, multinational companies and private/public limited companies having paid up share capital of Rs.1 crore or more. It has been submitted that since the property was covered under Rent Control Act, the standard Rent determined or determinable under Rent Control Act or actual rent received whichever is higher has to be taken as annual value. We are however unable to accept the arguments advanced. The provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability. In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities. Therefore, in our view, the provisions of Rent Control Act can not be applied to such arrangements. Accordingly we hold that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases. In this case the AO has already made enquiries that similar property being flat No.11C in the same society let out in the year 2005 had fetched a rent of Rs.150 per sq.ft. and another property being flat 18/B-2 let out in the year 2004 had fetched rent of Rs.100 per sq.ft. Thus average fair rent comes to Rs.125 per sq.ft.. The fair adopted by AO is also Rs.125 per sq.ft.. We, therefore, uphold the order of AO assessing the annual value in relation to the portion let out to Ms. Snehal Jalan. As regards the portion let out to Ms. Rekha Jalan, we have already held that rental income has to be assessed as business income and therefore, the same will be out of the purview of the provisions relating to assessment under the head “income from house property”.
2.11 The third aspect is allowability of deduction on account of municipal taxes while computing income from house property. The authorities below have already held that deduction on account of municipal tax is covered in the over all deduction of 30% allowable under section 24(a). We are however unable to uphold the stand taken by the authorities below. The deduction © 30% under section 24(a) is allowable from the annual value and while determining annual value, under section 23, municipal tax have to be deducted on paid basis. Therefore, it is clear that deduction of municipal value is allowable in addition to deduction allowable © 30% of annual value under section 24(a). We, therefore, set aside the order of CIT(A) on this point and hold that the municipal tax paid by the assessee will be allowable as deduction while computing income from house property. As regards the portion let out to its director income from which has been held as assessable as business income, the deduction on account of municipal tax will obviously be allowable.
3. The next dispute is regarding allowability of administrative expenses of Rs.2,71,705/-. The AO had assessed the rental income as house property income and interest on ICDs, interest on bill discounting and dividend as income from other sources. The AO also held that the assessee was not doing any business since long. He therefore, disallowed the claim of expenses which in appeal was confirmed by CIT(A) aggrieved by which the assessee is in appeal before the Tribunal.
3.1 Before us, Ld. A.R submitted that 65% of rental income being received from director was assessable as business income and only 35% of the rent received from the share holder could be assessed as house property income. It was therefore, argued that 65% of administrative expenses should be allowed. The Ld. DR on this issue placed reliance on the orders of authorities below.
3.2 We have perused the records and considered the matter carefully. The dispute is regarding allowability of administrative expenses of Rs. 2,71,705/-. The ld. AR submitted that since 65% of rental income received from the director was assessable as business income, 65% of administrative expenses should be allowed. We find the argument convincing and reasonable. We have already held that rental income from Ms. Rekha Jalan has to be treated as business income and therefore we direct the AO to allow 65% of the expenses.
4. The third dispute is regarding nature of interest income received from ICDs and bills discounting. The AO treated interest income as income from other sources without any discussion in the assessment order. In appeal, CIT(A) remanded the matter to the AO who reported that the assessee vide letter dated 9.7.2009 admitted that the assessee was utilizing the funds lying with them for advancing loan and bill discounting to earn income by way of interest. It was also reported that the claim of the assessee that the main business was bill discounting and advancing loan was not correct as main object in memorandum of association did not include any such object. Lending and advancing of loan was ancillary object. AO further reported that the activity did not have character of business activity. CIT(A) after considering the report of AO, observed that memorandum and article of association did not suggest that bill discounting and money lending was systematic business of the assessee. This activity had been mentioned in clause (iv) of the memorandum of association which was a general clause. He, therefore, upheld the order of AO assessing interest income as income from other sources, aggrieved by which the assessee is in appeal before Tribunal.
4.1 Before us Ld. A.R submitted that from assessment year 1992-93 to 1997-98 interest income had been accepted as business income under section 143(3) of the Act. In assessment year 2005-06, the interest income had been assessed by AO as income from other sources under section 143(3) and because of low tax effect, the assessee had not filed appeal. However, in 2006-07, interest income had been accepted as business income under section 143(1). Ld. AR also referred to clause A(4) of the main objects placed at page 3 of the paper book in which the business of financiers were clearly mentioned and therefore, it was pointed out that AO was not correct in stating that financing was not one of the main objects. He also referred to various letters exchanged in connection with ICDs and bill discounting placed at pages 83 to 104 of the paper book to point out that it was an organized business activity. The Ld. DR on the other hand, strongly supported the orders of authorities below on this issue and placed reliance on the findings recorded in the respective orders. It was pointed out that since surplus funds had been invested, the income had to be treated as income from other sources.
4.2 We have perused the records and considered the matter carefully. The dispute is regarding nature of investment income received from ICDs and bill discounting. The authorities below have treated the interest income as income from other sources. The case of the assessee is that business of financing is one of the objects in the memorandum of association and the assessee had been undertaking these activities in an organized manner. Therefore income should be assessed as business income. We however find that in assessment year 2005-06 this aspect had been examined and the AO in the scrutiny assessment under section 143(3) had treated the income as income from other sources which was accepted by the assessee as no appeal was filed. Though in subsequent years the business income declared by the assessee has been accepted but those assessments were covered in summary scheme in which the AO was not empowered to take any view regarding computation of income and had to simply accept the returned income. Therefore, acceptance of business income under section 143(1) in subsequent years can not be taken as decision by authorities to accept the claim of the assessee. Though the ld. AR has referred to certain letters placed at page 83 to 104 of the paper book, these only relate to reminders for rent, rent receipt and few bill discounting cases. There is nothing to show that the assessee was engaged in these activities in an organized manner. Admittedly the assessee had surplus fund which had been invested to earn interest income which in our view has been rightly assessed as income from other sources. We therefore, confirm the order of CIT(A) on this point.
5. The appeal of the assessee is partly allowed.
Order pronounced in the open court on 21.11.2012.
Respected sir/madom
I have one property, rooftop of the same property let out to bharti airtel for installation of tower for monthly rent 35000/- p.m., please advise me to claim income in relevant head and also give related case law.
Thanks