THE issues before the Bench are - Whether when a part of the residential property owned by the company is occupied by the Directors of the company and the rest by the shareholders, such rental income is to be treated as business income in the first case and rental income in the second; Whether when the rent is given at a lower rate to the shareholder of the company, the AO is justified to consider the market value as the rental income and Whether when the main business of the assessee is not lending in an organized manner and assessee has not filed any appeal in the preceding year treating the
income as income from other source, it cannot be treated as business income. And the verdict partly goes in favour of the assessee.
income as income from other source, it cannot be treated as business income. And the verdict partly goes in favour of the assessee.
Facts of the case
A) Assessee company is owner of two flats. The same were given on rent to the MD of the assessee company and her daughter. The income was treated as business income and the actual rent received had been shown as annual value. Assessee contended 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. Thus, 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.
AO did not accept the claim of assessee stating that leasing out the property could not be considered as trade or commerce referring to the decision of Apex Court in the case of East India Housing and Land Development Trust Ltd. vs. CIT. He assessed the rental income under the head “house property”. As regards the fair rental value, AO observed that the flats had been let out to two shareholders who were controlling the company only in order to reduce tax. There was no formal agreement for letting out property not any efforts had been made to charge rent at market value. AO did not accept the argument that the fair rental value should be assessed on the basis of rent received. AO treated after analyzing the comparative rates the average rent charged in respect of similar flat @ Rs. 125 per sq. ft. and determined the rent at Rs. 78.29 lacs as against of Rs. 4.52 lacs.
Assessee contended 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. Further the rental income had to be considered as business income. CIT (A) rejected the claim of the assessee observing that the similar issue was not appealed by the assessee in preceding year and dismissed the appeal.
Assessee contended that in preceding year, the appeal was not filed due to low tax effect. 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. Assessee contended 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 was higher has to be taken as annual value.
B) AO held that deduction on account of municipal tax was covered in the overall deduction of 30% allowable under section 24(a).
C) AO disallowed administrative expenses stating that assessee was not doing any business since long as rental income was assessable as house property income and interest income as income from other sources. Assessee contended that since 65% of rental income was assessable as business income, 65% of the administrative expenses should be allowed.
D) AO treated the interest income from ICDs and bill discounting as income from other sources observing that lending and advancing was not the main object but ancillary object. Assessee contended that except one year in which assessment was made u/s 143(3), in the preceding years, it has been considered as business income. No appeal was made for the one year as the tax impact was low. Assessee explained that as per main objects the business of the assessee was as financiers.
After hearing both the parties, the ITAT held that,
A) ++ 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., 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 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. In the case of Vazir Sultan Tobacco Co. Ltd. and New India Maritime agencies Pvt. Ltd., the Hon’ble High Court 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. Since no contrary judgment of any other High Court or Apex Court was brought to the notice by Revenue, the income is treated as business income and the rental income from shareholder is treated as income from house property;
++ 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. 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. 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. The division Bench of the Tribunal in the case of Makrupa Chemicals 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. 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;
++ in case of Baker Technical Services (P) Ltd., 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 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. Thus, 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;
++ 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, the provisions of Rent Control Act cannot be applied to such arrangements. Annual value in relation to part of the property let out will be the fair rent in the market based on comparable cases. The fair value adopted by AO is Rs.125 per sq.ft. after making enquiries. Thus, in this regard, the order of AO is upheld. As regards the portion let out to MD, 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”;
B) ++ the deduction @ 30% u/s 24(a) is allowable from the annual value and while determining annual value, u/s 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). Thus, 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;
C) ++ since 65% of the rental income has to be treated as business income and AO is directed to allow 65% of the expenses;
D) ++ in assessment year 2005-06 the aspect had been examined and the AO in the scrutiny assessment u/s 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 u/sn 143(1) in subsequent years cannot be taken as decision by authorities to accept the claim of the assessee. Assessee referred certain letter but those were only 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. Thus, the view taken by AO is accepted.
A) Assessee company is owner of two flats. The same were given on rent to the MD of the assessee company and her daughter. The income was treated as business income and the actual rent received had been shown as annual value. Assessee contended 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. Thus, 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.
AO did not accept the claim of assessee stating that leasing out the property could not be considered as trade or commerce referring to the decision of Apex Court in the case of East India Housing and Land Development Trust Ltd. vs. CIT. He assessed the rental income under the head “house property”. As regards the fair rental value, AO observed that the flats had been let out to two shareholders who were controlling the company only in order to reduce tax. There was no formal agreement for letting out property not any efforts had been made to charge rent at market value. AO did not accept the argument that the fair rental value should be assessed on the basis of rent received. AO treated after analyzing the comparative rates the average rent charged in respect of similar flat @ Rs. 125 per sq. ft. and determined the rent at Rs. 78.29 lacs as against of Rs. 4.52 lacs.
Assessee contended 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. Further the rental income had to be considered as business income. CIT (A) rejected the claim of the assessee observing that the similar issue was not appealed by the assessee in preceding year and dismissed the appeal.
Assessee contended that in preceding year, the appeal was not filed due to low tax effect. 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. Assessee contended 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 was higher has to be taken as annual value.
B) AO held that deduction on account of municipal tax was covered in the overall deduction of 30% allowable under section 24(a).
C) AO disallowed administrative expenses stating that assessee was not doing any business since long as rental income was assessable as house property income and interest income as income from other sources. Assessee contended that since 65% of rental income was assessable as business income, 65% of the administrative expenses should be allowed.
D) AO treated the interest income from ICDs and bill discounting as income from other sources observing that lending and advancing was not the main object but ancillary object. Assessee contended that except one year in which assessment was made u/s 143(3), in the preceding years, it has been considered as business income. No appeal was made for the one year as the tax impact was low. Assessee explained that as per main objects the business of the assessee was as financiers.
After hearing both the parties, the ITAT held that,
A) ++ 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., 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 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. In the case of Vazir Sultan Tobacco Co. Ltd. and New India Maritime agencies Pvt. Ltd., the Hon’ble High Court 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. Since no contrary judgment of any other High Court or Apex Court was brought to the notice by Revenue, the income is treated as business income and the rental income from shareholder is treated as income from house property;
++ 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. 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. 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. The division Bench of the Tribunal in the case of Makrupa Chemicals 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. 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;
++ in case of Baker Technical Services (P) Ltd., 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 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. Thus, 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;
++ 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, the provisions of Rent Control Act cannot be applied to such arrangements. Annual value in relation to part of the property let out will be the fair rent in the market based on comparable cases. The fair value adopted by AO is Rs.125 per sq.ft. after making enquiries. Thus, in this regard, the order of AO is upheld. As regards the portion let out to MD, 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”;
B) ++ the deduction @ 30% u/s 24(a) is allowable from the annual value and while determining annual value, u/s 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). Thus, 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;
C) ++ since 65% of the rental income has to be treated as business income and AO is directed to allow 65% of the expenses;
D) ++ in assessment year 2005-06 the aspect had been examined and the AO in the scrutiny assessment u/s 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 u/sn 143(1) in subsequent years cannot be taken as decision by authorities to accept the claim of the assessee. Assessee referred certain letter but those were only 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. Thus, the view taken by AO is accepted.
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