When assessee exploits a property to derive rental income it has to be held that income realized by him by way of rental income from a building with other asset attached to the building, is to be assessed as `income from house property’ only.
Where the assessee as the owner of the building was only exploiting the property as owner by letting out the same and realizing income by way of rent, such rental income was liable to be assessed under the head `income from house property’
DDIT (I. Tax) Vs G. Raghuram
ITA No. 6/Hyd/2010,
Decided ON April 30, 2010
These six appeals preferred by the Revenue are directed against different orders passed by the CIT(A) VI, Hyderabad and pertains to assessment years 2005-06 and 2006-07. Since common issues are involved in all these appears they are clubbed together, heard together and disposed of vide these common order for the sake of convenience.
2. The first common ground in all these appears are that the CIT(A) erred in holding the income received as lease rentals towards the amenities and furniture and fixtures is to be assessed under the head `other sources’ and accordingly, the depreciation is to be allowed from the income so arrived. Since the assessee is unable to furnish the details of furniture and fixtures, the question of allowing depreciation does not arise.
3. The next common ground in appeal Nos. in ITA No.6, 69 and 7 /Hyd/2010 are that the CIT(A) erred in considering the fact that the real consideration received by the assessee in lieu of the land forgone by him is the superstructure and therefore the same should be considered as sale consideration instead of the market value of the land.
4. In this case, the brief facts of the case are that the assessee filed return of income along with her son and daughter owned land situated at Survey No.12 of Kondapur Village, Hyderabad. The said land was given to M/s SDE engineers Ltd., on development basis. Accordingly, the assessee along with her son and daughter were all allocated an area of 99,702 sq. ft in the super structure constructed on the said land by the developer. All these three persons put together purchased from the developer an area of 7,328 sq. ft in order to become the owners of first, second, sixth and eighth floors of the super structure which was subsequently named as “SDE Prameela Techno park’. The said building was leased out to M/s Satyam Services Ltd. by the assessee along with her son and daughter. Since Satyam Computer Services Ltd., requires further modifications on the bare structure, it appears that a loan has been obtained by the three persons along with the developer M/s SDE engineers Ltd., and with the loan proceeds the bare structure as per their requirement. While leasing out the building the assessee entered into two agreements with the tenant, one towards the rent of the building, and the other towards the amounts for providing the amenities for the same building. Accordingly, the rental income received as per the first agreement is being offered as income from the house property and the other amounts received by the assessee towards amenities were offered under the head `income from business’. From the income offered under the head `business’ the assessee deducted interest paid on the loan taken and depreciation on the amenities, treating the said amenities as `furniture, plant and machinery’. The assessee received as its share in lieu of the land forgone by them. Since the land owner has relinquished his rights on the land forgone, the assessing officer treated it as a transfer u/s 2(47) of the Income Tax Act. Accordingly, capital gain was computed. Regarding the applicability of S.2(47), there is no dispute. However, considering the value of sales consideration, according to the assessee, the market value of the land as to the date of the transfer is to be considered instead of considering the value of super structure. The assessing officer not agreed with this proposition and he placed reliance on the order of the Delhi Bench ITAT, in the case of Smt. Vasavi Pratap Chand Vs. DCIT (89 ITD 73) and considering the value of super structure to determine the sale value and compute the capital gain. Further, against this the assessee went in appeal before CIT (A) and CIT(A) directed the assessing officer to consider the sales consideration as per value of the land adopted by the Registrar for Stamp Duty purpose on the date of registration of the development agreement. Since it is not possible to ascertain the sales consideration at the time of development agreement, as the transfer was in lieu of constructed area and its value was unascertainable at the relevant point of time since the development agreement registered with Registrar for Stamp Duty purpose. Against this the Revenue is in appeal before us. Further, in addition to the capital gains, there was a dispute regarding the `Head of income’. The assessee entered into two agreements one for rental income, and the other for amenities provided. The tenant deducted tax treating the whole amount as rental income and TDS u/s 194 of the IT Act. According to the assessee, the rent on building is to be computed `income from house property’. On the other hand, hire charges collected on amenities provided to be treated as `income from business’. Accordingly, the assessing officer treated the entire income from letting as `income from house properties’. On appeal. the CIT(A) directed the assessing officer to split and treat the hire charges into two, as one is `income from house property’ and the other `income from other sources’. Against this the Revenue is in appeal before us.
5. The main contention of the departmental representative is that all amenities are integral part of the buildings. Because there is separate agreement, it does not lead to the conclusion that it is to be assessed separately as income from business and he relied on the order in the case of Sultan Brothers (P) Ltd. Vs. CIT, Bombay City II (51 ITR 353) (SC).
6. The AR submitted that the rental income received from the letting of amenities is `income from business’ and this was covered in favour of the assessee by the order of this Tribunal dated 7.3.2008 in ITA No.528/Hyd/2005 in the case of Lallu Brothers Trust, Secunderabad Vs. ACIT for the assessment years 2000-01. We have gone through this order. There is no ready made formula for deciding this issue. Each case has to be decided on its own facts and as such, we have to see the facts of the present case. As we have gone through the entire facts of the case and also agreement entered between the parties i.e. the Rent agreement and also we have gone through various items given on hire charges to the tenants. We have also gone through the amenities provided to the tenants which are as follows: ANNEXURE – I Workstation and cubicle Modular tables with modular partitions of feather lite / blowplast make Conference tables 20 capacity made with ply and laminated with veneer and melamine polished. Telephone and all cables concealed. Discussion tables 10 capacity made with ply and laminated with veneer and melamine polished. Telephone and all cables concealed. Chairs Good quality cushioned chairs of Himg tie/Euro make Air conditioning Air conditioning units will be with chillers blue star/carrier make Air conditioning in network room and hub rooms Separate precision AC will be provided and designed to achieve 18 deg C with 100% backup False ceiling A mixture of Armstrong grid ceiling and Gyp Board false ceiling Lighting 2 x 36w CFL 2′ x 2′ lighting fixture of Wipro/Phillips make LAN Done with CAT 6 cable of Lucent/Amp make Fire fighting Detectors in all areas with gas flooding system/fire existinguishers etc. in appropriate areas Cafeteria Fiber sheets on MS structure with Granite flooring and false ceiling. Tables and chairs of featherlite make with required with fittings for service and kitchen for the entire complex and to be used commonly by all the building owners. DG set Sound proof DG sets with 100% backup UPS Battery 2 Nos. of the UPS as required for 100% backup for computers only Transformer Full capacity transformer with all required control panels will be Provided Equipment Multimedia projectors, water coolers with Aqua guards, fax machines, will be provided.
7. The main contention of the assessee counsel is that it is not common to provide these amenities and these are provided as per specific requirements of the tenants. He relied on the order in the case of Attukal Shopping Complex (P) Ltd. Vs. CIT (259 ITR 567) (Ker.) wherein it was held:
The income from the building formed part of the business and property. Therefore the income of the assessee had to be divided equally as income from property and income from business for the assessment years 1993-94, 1994-95 and 1995-96.’
8. We have heard both the parties and perused the material available on record. After, going through the facts of the case, we are of the opinion that most of the items listed above are common in nature which are to be provided to software companies to carry out their day to day works by the landlord, without these they cannot function. Keeping in view the nature of activities of the tenant, the amenities are provided by the assessee to exploit the property in most profitable manner. In the present case, the assessee made separate lease agreements in order to help the assessee in tax planning only, the lease from the lessees point of view is only for the property as a whole. This is evident from the following (a) the TDS certificates clearly show that the entire payments made by Satyam Computers is towards rent – a simple composite payment done every month (b) the assesee in spite of repeated requests, could not furnish for the details of the assets on which lease receipts was being shown and depreciation was being claimed. The only thing that assesee could produce was that the interiors of the property was done by SDE engineers and going by general trends, the amount charged was put as 60%to equip et and what furniture was leased out, on which the income from other sources was being shown (c) the agreement of providing the interiors was done with SDE engineers which is the same entity with whom the assesee had entered into development property, i.e., the property developer was providing for the interiors – this proves the point that the amenities which are being stated as leased out separately are in fact nothing separate but are part of the property, integral to make the property viable for being used as a commercial building (d) . The building itself is the amenity being provided here and that is why the agreement for lease of amenities prescribes the lese amount in terms of sq.ft – Rs.15 per sq.ft. per month, which is the same rate at which the property lese was also agreed upon. Without these amenities, the bare building is of no use, which is a common feature in any property. For a property to be used as residential certain kinds of same amenities and fixtures would be required or else people cannot inhabit it – such as kitchen, ventilations, electrical fittings etc. and the same goes for a commercial property – without some amenities such as provision for air conditioning and cabins, it cannot be useful for any purpose. Therefore, just because there is something beyond the bare structure that is being provided, it cannot be said that these amenities are not part of the property itself. However, since these amenities are not separate assets such Plant and Machinery, the provisions of sec.56(2) do not apply here. In our opinion, though the assessee entered separate agreement, these agreements cannot be acted upon as foolproof documents. When the apparent is not real, we have to see the actual background of the situation. The sec. 22 of the IT Act, 1961, deals with `income from house property’ which is to be computed w.r.t. the `annual letting value (ALV) of the property’. The mode of determining that ALV is set out in sec. 23. Sec. 23(1)(a) deems annual value of the property to be the sum for which the property might reasonably be expected to be let from year to year. Clause (b) deems the actual rent received or receivable by the owner to be the annual value if that sum is in excess of the sum referred to in clause (a). Explanation (1) Sec.23 defines `annual rent’ for the purpose of that sub section. The explanation reads as under:
Explanation 1: For the purposes of this sub section `annual rent’ means:
a) in a case where the property is let throughout the previous year, the actual rent received or receivable by the owner in respect of such year and
b) in any other case, the amount which bears the same proportion to the amount of the actual rent received or receivable by the owner for the period for which the property is let, as the period of twelve months bears no such period.
9. The annual rent in a case when the property is let through out the year is the actual rent received or receivable by the owner. When the amount of the actual rent received or receivable by the owner, is known that would constitute the basis for determining the annual value and it is that value which will have to form the basis for determining the income from house property and for allowing deduction from income from house property to the extent is permitted under the other provisions of the Act. In the present case, the assessee made two agreements one for let out of the property and another for providing amenities and there is a doubt in the mind of the assessing officer regarding the correctness of the income declared by the assessee as `income from house property’ and income from business. He has treated the entire income i.e. as `income from house property’. Admittedly, the authorities have the freedom to go beyond the documents to find out the real intention of the parties. In this case, though there is two agreements the real intention of the parties to a document is different what appears from it ex facie. Since there is a doubt, then the assessing officer is justified in going beyond the documents to find out real intention of the parties by ignoring the apparent has to be and has always been conceded. In this circumstance, the assessing officer has to remove the façade to expose the real intention of the parties cleverly cloaked and the actual agreement cannot be given effect. The only bona fide document to be acted upon not otherwise. There is a serious doubt and also it is shocking the conscious of the Bench, whether the assessee is getting hire charges equal to the rental amount for providing amenities. It cannot be real one and assessing officer required to see the actual rental value of the property in that place and bring that amount into tax under the head `income from house property. As such, in the present case, the assessing officer came to the correct conclusion that real rental value was bifurcated into two separate income viz., one is rental income of house property and another is hire charges of the equipment. Further, in the case of letting of the machinery, plant or furniture, sec.56(2) (iii) of the Act is applicable, but only letting of building with certain amenities, this provision is not applicable and in that event, the income from letting out was chargeable under the head `income from house property’. The hire charges said to have been collected for the purpose of providing amenities and the rent for the building not come under the purview of sec.56(2)(iii) of the Act. The word `plant’ cannot be liberally construed so as to include all items noted in Annexure I appearing elsewhere in the order, within the ambit of the word `plant’. It is not possible to give such a wide construction as suggested by the learned counsel for the asessee. In the case of Sultan Brothers Pvt.Ltd. v. CIT 51 ITR 353 (SC) what was let out to the tenant was a building fitted up with the furniture and fixtures, for being run as a hotel. Therefore, the Supreme Court held that since the building was let along with the furniture and fixtures, the provisions of sec.56(2) (iii) would be applicable and the income from building should be assessed under the head `other sources’. But according to the fact arising in the present case, plant and machinery or furniture was not hired by the assessee along with the building. Therefore, the decision of the apex court in Sultan Bros case supra, will not be applicable to the facts of the present case. Thus, on a plain reading of sec.56(2) (iii) of the Act, in the light of the facts of the case, we hold that conclusion reached by the CIT(A) is not correct. Further, no precise test can be laid out to ascertain whether income referred to by whatever nomenclature, lease amount, rent or license fee received by an assessee from leasing or letting out of assets would fall under the head `profit and gains of business or profession and it has to be determined from the point of view of a businessman in that business depending upon the fact and circumstances of each case and there is no ready made jacket formula. The ratio laid down by one case cannot be applied or fit to the facts of the present case. We have to see the intention of the assessee whether the letting was the doing of a business or to exploitation of his property by an owner. The assessee when exploited the property to derive rental income it has to be held that the income realized by him by way of rental income from a building if the property with other asset attached to the building to be assessed as `income from house property’ only. The only exceptions are cases where the letting of the building is inseparable from letting of the machinery, plant and furniture. In such cases, it has to be held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore, rental received for the building is to be assessed under the head `income from other sources’. In the present case, on the facts of the case, it is clear that the assessee as the owner of the building was only exploiting the property as owner by letting out the same and realizing income by way of rent. Such rental income was liable to be assessed under the head `income from house property.’ The various assets let out to the tenants are incidental to letting out the building being integral part of the letting. Accordingly, we reverse the order of the CIT(A) and restore that of the assessing officer. This ground of the revenue is allowed.
10. The next common grounds in ITA Nos.6, 7 & 69/Hyd/2010 is regarding determining of the sales consideration u/s 48. The learned counsel for the assessee submitted that this issue is covered in his favour by the order of this Tribunal dt.9-6-2006in the case of Smt.Shanta Vidyasagar Annam, Hyderabad in ITA No.885/Hyd/2003 for the assessment year 1997-98. We have carefully gone through this decision and this order is relating to the whether there is a transfer u/s 2(47) (vi) of the I.T.Act or not on transfer, in which possession was handed over in the process of exchange of 40% of the constructed area of the building, which is to be constructed in future, which enables the developer to enjoy 60% of the undivided share of land. In our considered opinion, this decision will not come to the rescue of the asessee. In our opinion, the consideration for the transfer of capital asset is what the transferer receives in lieu of the assets he parts with and therefore the very asset transferred or parted with and full value of consideration cannot be construed as having a reference to the market value of asset transferred and the said expression only means that full value of the asset received by the transferer in exchange for the capital asset transferred by him. Since the development agreement specifiesthat certain part of constructed area shall be surrendered to the owner by the builder on the completion of the contract and the value of the constructed area to be transferred to the assessee to be considered as consideration received and as such full value of consideration in the case of not by applying the ratio of the order of the Delhi Bench of the Tribunal in the case of M/s Vasavi Pratap Chand Vs. DCIT (89 ITD 73) (Del.) is the only the cost of construction of proposed building to the extent of which were falls to the assessee in the ultimately constructed area and not the market value of such share of constructed area which may be after the completion of the construction. In view of this, we do not find any infirmity in the order of the assessing officer on this issue as he has followed the order of the Tribunal in the case of M/s Vasavi Pratrap Chand Vs. DCIT (supra). Accordingly, this ground taken by the Revenue is allowed.
11. The assessee relied on the judgement of Madras High Court in the case of M/s T.V. Sundaram Iyengar & Sons Ltd. Vs. CIT Madras (37 ITR 26) wherein it was held as follows:
As on the facts there was nothing to show that the price was to be of any future time, the price of the assets transferred to company C became payable forthwith, viz., in the accounting year, the assessees obtained the right to receive the price in the accounting year and the capital gains in respect of the sale of those assets arose in that year: what the parties did subsequent to that year did not have any bearing on the liability of the assessees to tax in respect of that year. There was, therefore, material to support the assessments made on the assessees.
12. In our opinion, the above judgement supports the view taken by us rather than the assessee.
13. Since the issues involved in the other appeals are identical, applying the same reasoning herein above, those appeals are also allowed. In the result, the Revenue’s appeals are allowed.