Case Law Details
Mascot Constructions (P) Ltd. Vs ITO (ITAT Mumbai)
Conclusion: Nature of income which had been rental earning from the house property would not change just because it had been received by assessee-company formed with the object of carrying out business as builder and developer, therefore, AO had, rightly assessed the rental receipts under the head Income from house property.
Held: Assessee-company was a builder cum developer had acquired 5/6th lease right of an old building alongwith the tenants for the remaining lease period. Assessee could not get the remaining 1/6th portion even after 15 years till date. The tenants continued to occupy the premises. The rent received from the portions/flats which had been acquired by it, had been shown as business income. AO treated assessee as owner of the leased property and taxed rental earnings from the house property under the head Income from house property. It was held assessee company had purchased that old property perhaps with a view to construct the new one but because it could not get hold the right over the remaining 1/6th portion and the tenants continue to reside there, it could not carry out the intended business. But then, for that reason the nature of income could not get changed that of as Business income. ‘Nature’ of the income which had been rental earning from the house property would not change just because it had been received by company formed with the object of carrying out business as builder and developer. AO had, rightly assessed the rental receipts under the head Income from house property.
FULL TEXT OF THE ITAT JUDGEMENT
The present Appeal filed by the assessees against the order of learned Commissioner (Appeal)–5, Mumbai dated 12-12-2013 for assessment year 2010-11 on the grounds mentioned herein below :–
1. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the rental income Rs. 60,281 as income from house property as against the same being offered to tax as Business Income.
2. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the receipt on transfer of tenancy Rs. 7,50,000 as income from other sources as against the same being offered to tax as Business Income.
3. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the receipt of Rs. 5,00,000 (i.e. Rs. 2,50,000 each received from two tenants) on transfer of revisionary rights as long term capital gin as against claimed of capital receipt not liable to tax.
4. Without prejudice to the above ground of appeal No. 3, on the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming the application of section 50C on transfer of revisionary rights and has further erred in replacing sales proceeds at Rs. 43,79,500 as against the actual receipt of Rs. 5,00,000 on transfer of revisionary rights.
5. Your appellant craves to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, to alter, to amend or to furnish fresh and/or detailed grounds of appeal.
2. The brief facts of the case are that assessee is a developer cum builder. The company was incorporated on 14.09.1990. The return of income for the year under appeal was filed on 25.11.10 declaring total income of Rs. at NIL after setting off of carried forward losses of Rs. 1,60,444 Thereafter assessment under section 143(3) was completed by the learned assessing officer on 9.11.12 determining the total income at Rs. 43,53,301 by making additions under different heads.
Aggrieved by the order of assessing officer, assessee preferred appeal before learned Commissioner (Appeals) and learned Commissioner (Appeals) after considering the case of both the parties partly allowed the appeal of the assessee.
Now before us, the assessee has preferred the present appeal by raising the above grounds.
Ground No. 1.
3. This ground raised by the assessee relates to challenging the order of learned Commissioner (Appeals) in confirming the rental income Rs. 60,281 as ‘income from house property’ as against the same being offered to tax as ‘Business Income’.
4. We have heard counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities.
Before we decide the merits of the case, it is necessary to evaluate the orders passed by learned Commissioner (Appeals). The learned Commissioner (Appeals) has dealt with the above grounds raised by the revenue in its detailed order. The operative portion of the order of learned Commissioner (Appeals) is contained in para no. 4.1 of its order and the same is reproduced below :–
4.1 Ground No. 1 : Through this ground, the assessee has challenged taxing of rental income of Rs. 60,281 as ‘income from house property’ as against ‘income from business”. The written submissions on the issue finds place in para 3 of this order. The issue is considered. Briefly, the facts are that in the year 1998, the assessee had acquired 516th lease right of an old building named “Kapoor Mahal” alongwith the tenants for the remaining Lease period. The said building in fact was constructed by one Mr. Kapoorchand Nemchand Mehta on a plot of Land which was acquired on lease in the year 1940 from Governor of Bombay. The period of lease was 99 years. Thus the building, which was named as Kapoor Mahal was constructed on Lease hold land. The building consists of 22 flats, 12 garages and servant quarters. The assessee company is a builder cum developer. It could not get the remaining 1/6th portion even after 15 years till date. The tenants continued to occupy the premises. The rent received is from the portions/flats which had been acquired by it. It has shown that as business income. In view of the provisions of section 27(iiib), the assessing officer treated the assessee as owner of the leased property, as the lease period has been for more than 12 years. Further, the assessing officer has been of the view that the nature of the income which has been rental earnings from the house property will not change just because it has been received by the company formed with the object of carrying out business as builder and developer. The issue is considered. It is to be noted that the nature of receipts was rental income even to the previous owners and was taxable accordingly under the head Income from house property. The assessee company had purchased that old property perhaps with a view to construct the new one but because it could not get hold the right over the remaining 116th portion and the tenants continue to reside there, it could not carry out the intended business. But then, for that reason the nature of income cannot get changed that of as Business income. The assessing officer has also relied onto the decision of Hon’ble Supreme Court in the case of Sultan Bros (P) Ltd. (1964) 51 ITR 53 (SC) wherein its earlier decision in the case of East India Housing Et Land Development Trust Ltd. (1961) 42 ITR 49 (SC) : 1961 TaxPub(DT) 132 (SC) was followed. The assessing officer has, rightly assessed the rental receipts under the head Income from house property.
The grounds taken by the assessee in this regard is rejected.
After having gone through the facts of the present case as well as considering the orders passed by revenue authorities, judgment cited by the parties and submissions made by both the parties, we find that learned Commissioner (Appeals) while deciding the said ground has rightly appreciated that in the year 1998, the assessee had acquired 5/6 lease right of an old building named ‘Kapoor Mahal’ alongwith the tenants for the remaining lease period. The assessee company although is a builder cum developer, but it could not get the remaining 1/6th portion, even after 15 years till date. The tenants continue to occupy the premises. The revenue authorities by invoking the provisions of section 27(iiib) of the Income Tax Act has rightly treated the assessee as ‘owner’ of the leased property, as the lease period in the present case has been more than 12 years.
Even from the facts, the revenue authorities rightly concluded that the ‘nature’ of the income which had been rental earning from the house property will not change just because it has been received by the company formed with the object of carrying out business as builder and developer. From the records, we also noticed that the nature of the receipts was rental income even to the previous owners and was taxable accordingly under the head ‘Income from the house property’. While reaching to the said conclusion, the revenue authorities relied upon the decision of Hon’ble Supreme Court in the case of Sultan Bros (P) Ltd. (1964) 51 ITR 53 (SC) and East India Housing & Land Development Trust Ltd. (1961) 42 ITR 49 (SC) : 1961 TaxPub(DT) 132 (SC).
No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by learned Commissioner (Appeals). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the learned Commissioner (Appeals). Hence, we are of the considered view that the findings so recorded by the learned Commissioner (Appeals) are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed.
Ground No. 2.
5. This ground raised by the assessee relates to challenging the order of learned Commissioner (Appeals) in confirming the receipt on transfer of tenancy of Rs. 7,50,000 as income from other sources as against the same being offered to tax as ‘Business Income’.
6. We have heard counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities.
Before we decide the merits of the case, it is necessary to evaluate the orders passed by learned Commissioner (Appeals). The learned Commissioner (Appeals) has dealt with the above grounds raised by the revenue in its detailed order. The operative portion of the order of learned Commissioner (Appeals) is contained in para no. 4.2 of its order and the same is reproduced below :–
4.2 Ground No (2) : Through this ground the assessee has contended that amount received as Rs. 7,50,000 on account of tenancy rights of the property has wrongly been treated as “Income from other sources” as against its claim of “Income from business”. The relevant part of the assessee’s submissions on this issue finds place in para 3 of this order. The issue is considered. It is noted that the assessee received Rs. 7.50 lakh on account of transfer of tenancy rights of some of the flats in the building “Kapoor Mahal” whose 516th portion was acquired by it on lease (reference para 4.1 above). The assessee’s business is of builder and developer. Therefore, the fee obtained on transfer of tenancy rights cannot be taxed as its business income. The assessing officer has rightly taxed it under the head Income from other sources. It is noted that the related expenses on account of legal & professional fees has been allowed by the assessing officer and only the balance amount of Rs. 2,53,888 has been taxed under the head “Income from other sources”. The decision of the assessing officer is correct and does not call for any interference. The assessee’s ground, therefore is dismissed.
After having gone through the facts of the present case as well as considering the orders passed by revenue authorities and submissions made by both the parties, we find that learned Commissioner (Appeals) while deciding the said ground has rightly appreciated that the assessee received Rs. 7.50 lakh on account of transfer of tenancy rights of some of the flats in the building “Kapoor Mahal” whose 5/6th portion was acquired by the assessee on lease. We noticed that since the assessee is in the business of builder and developer, therefore, the amount received on transfer of tenancy rights cannot be taxed as ‘Business income’. The assessing officer had already allowed the related expenses on account of legal & professional fees and the balance amount of Rs. 2,53,888 was taxed under the head “Income from other sources”.
No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by learned Commissioner (Appeals). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the learned
Commissioner (Appeals). Hence, we are of the considered view that the findings so recorded by the learned Commissioner (Appeals) are judicious and are well reasoned. Resultantly, this ground raised by the assessee stands dismissed.
Ground No. 3 & 4
7. These grounds raised by the assessee are inter-connected and inter related and relates to challenging the order of learned Commissioner (Appeals) in confirming the receipt of Rs. 5,00,000 (i.e. Rs. 2,50,000 each received from two tenants) on transfer of revisionary rights as long term capital gain as against claimed of capital receipt not liable to tax and confirming the application of section 50C on transfer of revisionary rights and replacing sale proceeds at Rs. 43,79,500 as against the actual receipt of Rs. 5,00,000 lakhs on transfer of revisionary rights.
8. We have heard counsels for both the parties at length and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities.
Before we decide the merits of the case, it is necessary to evaluate the orders passed by learned Commissioner (Appeals). The learned Commissioner (Appeals) has dealt with the above grounds raised by the revenue in its detailed order. The operative portion of the order of learned Commissioner (Appeals) is contained in para no. 4.4 & 4.4.1 of its order and the same is reproduced below :–
4.4 Ground No (4 & 5): Through these grounds the assessee has contended that assessing officer has erred in treating the compensation of Rs. 2.5 lacs each received from the two tenants for transfer of reversionary rights as income from Capital gain as against its claim of capital receipt; and that the assessing officer had erred in applying Section 50C and adopting the sale proceeds of Rs. 43,79,500 as per stamp valuation authority to work out the capital gain thereon. The relevant part of the assessee’s submission on the issue finds place in Para 3 of this order. The issue is considered. Briefly the facts are that during the course of assessment proceedings, the assessing officer noted the comments of the auditor’s report and Notes to the accounts which says, “the assessee has received Rs. 5 lacs from two tenants for conversion of tenancy rights into ownership right for their flats. On the basis of the legal opinion received, the same has been shown as Capital receipt and transferred to capital reserve.” In the context, it was explained (by the assessee) that it had transferred the reversionary rights to the two of the tenants and received a compensation of Rs. 2.50 lacs each and because the tenant acquired reversionary right from the assessee in respect of the area they already occupied, the same was not covered under section 55(2)(a) of the Act and thus going by the decision of the Supreme Court in the case of B C Srinivas Shetty (1981) 128 ITR 294 (SC) : 1981 TaxPub(DT) 902 (SC) the said receipt was a capital receipt and the provisions of the capital gain are not applicable to the said receipt in the absence of any cost of acquisition. The assessing officer noted that in the context the assessee had entered into an agreement with two existing tenants namely Mr. Bharat Somani and Mr. Vikram Somani by way of Transfer Deed dated 5-12-2009 and transferred its balance interest/ownership interest I reversionary interest onto the purchasers (those two tenants). It is noted that Mr. Bharat Somani is also the director of the assessee company and Mr. Vikram Somani is also a relative of Mr. Bharat Somani. They are said to be tenants (occupants of) in the same old building, ‘Kapoor company in the year 1988 for the rest of the lease period. The assessing officer after examining the issue has been of the view that assessee company had followed that form of transaction only to camouflage the real nature of the transaction i.e., sale of assets in the form of two flats along with one garage at such low throw away price which is otherwise impossible if such sale happen to take place in favour of any third party. From the documents submitted the assessing officer noted that the value taken by the Stamp Valuation authority for stamp duty of the two said flats were Rs. 23,78,500 and Rs. 20,01,000 respectively and thereby he adopted those figures as deemed sate consideration under section 50C of the Act and computed the net capital gain of Rs. 40,57,216. While working out the gain, the assessing officer also allowed the deduction on account of cost of acquisition (indexed).
4.4.1 Before me, during appeal proceedings, similar arguments were placed by the assessee’s counsel. In the context, I have perused the said deeds of transfer dated 5th day of December, 2009 between the assessee and the two of the tenants Mr. Bharat Somani and Mr. Vikram Somani. By that deed, the assessee company has assigned by-and Large all its rights over the said two flats to those persons, so much so, that at one place it was mentioned that, ‘This purchaser would be entitled to sale I transfer and assign the said premises subject to a right of first refusal available to the purchaser as separately recorded’. It is also noted that as per Clause 3 of that deed, the assessee had agreed to sale the reversionary right, title and interest in the said premises for the lump-sum consideration of Rs. 2.50 lacs for each flat to those two persons (tenants). A reference is made thereof to a memorandum of intention dated 27-12-1993. This means decision to transfer that right was taken much earlier (i.e., in the year 1993) for the lump-sum amount of Rs. 2.50 Lacs and the same is executed in the year 2009 i.e., the year under consideration. It is quite obvious that the rates by that time have gone much higher which is also evident from the facts that stamp valuation authorities itself had valued the transaction (transfer of the assessee’s interest in those flats by whatever name i.e., the reversionary right/title and interest in the said property) at Rs. 23,78,500 and Rs. 20,01,000 (totaling to Rs. 43,79,500). It is interesting to note that the assessee had acquired 516th interest in that building in the year 1998 but then how could it have the memorandum of intention prior to that, i.e., on 27-12-1993. This all shows that the language used in such deed is nothing but to camouflage the real nature of transaction. At this juncture, once again I would like to refer that the issue had arisen during the assessment proceedings on the basis of the remarks of the auditor which clearly talks of conversion of tenancy rights into the ownership right for those two flats. Even otherwise, from the language used in those two deeds, it is very evident that assessee has sold its reversionary right (for whatever it means), title and interest in the said property two flats) and that would also bring it within the scope of the provisions of capital gain in my considered view, the assessing officer has rightly taxed the amount under the head, ‘capital gain’ and does not call for any interference. The assessee’s grounds rejected.
After having gone through the facts of the present case as well as considering the orders passed by revenue authorities and submissions made by both the parties, we find that learned Commissioner (Appeals) while deciding the said ground has rightly appreciated that the revenue authorities considered the comments of the auditor’s report and Notes to the accounts which says, “the assessee has received Rs. 5 lacs from two tenants for conversion of tenancy rights into ownership right for their flats. The assessee entered into agreements with two existing tenants namely Mr. Bharat Somani and Mr. Vikram Somani by way of Transfer Deed dated 5-12-2009 and transferred its balance interest/ownership interest onto the said purchasers. It has also come on record that Mr. Bharat Somani is also the director of the assessee company and Mr. Vikram Somani is also a relative of Mr. Bharat Somani and since they are said to be tenants in the same old building, ‘Kapoor company’ in the year 1988 for the rest of the lease period. In such circumstances, the assessing officer after examining the issue has been of the view that assessee company had followed that form of transaction only to camouflage the real nature of the transaction i.e., sale of assets in the form of two flats along with one garage at such low throw away price which is otherwise impossible if such sale happen to take place in favour of any third party. Hence, from the documents submitted, the revenue noted that the value taken by the Stamp Valuation authority for stamp duty of the two said flats were Rs. 23,78,500 and Rs. 20,01,000 respectively and thereby adopted those figures as deemed sate consideration under section 50C of the Act and computed the net capital gain of Rs. 40,57,216 and while doing so, the revenue allowed the deduction on account of cost of acquisition.
From the contents of the deeds, the assessee company has assigned by and Large all its rights over the said two flats to those persons, so much so, that at one place it was mentioned that, ‘This purchaser would be entitled to sale I transfer and assign the said premises subject to a right of first refusal available to the purchaser as separately recorded’. Even as per Clause 3 of that deed, the assessee had agreed to sale the rights, title and interest in the said premises for the lump-sum consideration of Rs. 2.50 lacs for each flat to those two persons.
In this respect, the reference was made to memorandum of intention dated 27-12-1993, which reflects that the decision to transfer that right was taken much earlier (i.e., in the year 1993) for the lump-sum amount of Rs. 2.50 Lacs and the same is executed in the year 2009 i.e., the year under consideration.
Therefore, in view of these facts, it was correctly concluded that the rates by that time have gone much higher which is also evident from the facts that stamp valuation authorities itself had valued the transaction at Rs. 23,78,500 and Rs. 20,01,000 (totaling to Rs. 43,79,500). The revenue authorities after considering the memorandum of intention dated 27-12-1993 had reached to the conclusion that the language used in such deed is nothing but to camouflage the real nature of transaction. Even from the records, it is evident that assessee had sold its right, title and interest in the said property, therefore it was rightly taxed under the head ‘capital gain’.
Learned Authorised Representative relied upon the judgments in the case of Voltas Ltd. v. ITO (2016) 48 CCH 274 Mum-Trib, ITO v. Prem Ratan Gupta (2012) 31 CCH 384. These judgments are of no help in the case of the assessee as the same pertains to Development Rights, etc. and judgment of Hon’ble Gujrat High Court in the case of CGT v. Gautam Sarabhai Ltd., Malabar Hill Cooperative Hsg. Socity v. Union of India, (1990) 58 CCH 229 (Mum HC), Gemini Pictures Circuit (P) Ltd. v. Dy. CIT (2012) 82 CCH 115 (Mad HC). The para materiacontained in the above decisions are different from the facts of the present case. Therefore they are not applicable to the facts of the present case.
No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by learned Commissioner (Appeals). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the learned
Commissioner (Appeals). Hence, we are of the considered view that the findings so recorded by the learned Commissioner (Appeals) are judicious and are well reasoned. Resultantly, this ground raised by the assessee stands dismissed.
Ground No. 5.
9. This ground is general in nature, thus requires no specific adjudication.
10. In the net result, the appeal filed by the assessee stands dismissed with no order as to cost.
