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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR.
Before: DR. M. L. MEENA & SH. ANIKESH BANERJEE
ORDER Per:Anikesh Banerjee, JM:
The instant appeal of the revenue was filed against the order of the ld. Commissioner of Income Tax (Appeals), J & K, Jammu, [in brevity the CIT (A)] bearing appeal No. 288/2016-17 date of order 28.06.2017, the order passed u/s 250 (6) of the Income Tax Act 1961, [in brevity the Act] for A.Y. 2014-15.The impugned order was emanated from the order of the ld. Assistant Commissioner of Income Tax, Circle-3, Srinagar, (in brevity the AO) order passed u/s 143(3) of the Act date of order 14.12.2016.
The revenue has taken the following grounds: “
1. The Ld. CIT (A) is in error in following ITAT decision treating the income of the assessee as business income and not as income from house property as assessed by the AO ignoring that the assessee derived income from rent earned from lease to Bharat Hotels Ltd. which has to be assessed as income from house property.
2. The Ld. CIT(A) is in error in placing reliance upon cases that are distinguishable on facts in as much as the assessee has only leased property to sister concern and the transaction is not in the business of leasing.
3. The Ld. CIT (A) has erred in allowing the appeal of the assessee by admitting additional grounds during the appellant proceedings without according an opportunity to the AO of being heard. The appellant craves to amend or add any one or more grounds of appeal.”
3. Brief fact of the case is that the assessee is collecting the annual lease rent from the Bharat Hotels Ltd. to its property in Gulab Bhawan Palace, Kashmir.Accordingly, yearly lease rent was collected amount to Rs. 50 lacs to assessee. The ld. AO also found that M/s Bharat Hotels Ltd. (in brevity the BHL) has invested Rs.57,79,46,491/- had commencement of lease agreement with the flagship company of the assessee group. The ld. AO also found that the license fee i.e. BHL had invested with the flagship company of this group had commencement of lease agreement. In order of assessment the ld. AO mentioned that the annual lease rent of assessee is treated as “Income from House Property” instead of “Income from Business”.Considering the market potentiality, the ld. AO determined the yearly rent 1/10 of the Rs.57,79,46,941/- i.e. works out to Rs.5,77,94,694/- as the annual lease rent. The assessee already declared value Rs.50 lacs in the return of income. The balance Rs. 5,27,94,694/- (Rs.5,77,94,694/- - Rs. 50,00,000/-) was taken as value of annual lease agreement. After deduction u/s 24(a) of the Act amount to Rs.3,69,56,286/- was taken as income from house property and calculated tax accordingly. Aggrieved assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) considered the order of the Co- ordinate Bench of ITAT in the case of A.Y. 2006-07 date of order 26.08.2016 and passed the order by dismissing the observation of the ld. AO.
Being aggrieved the revenue had filed an appeal before us.
During hearing the ld. CIT-DRfirst relied on the order of the ld.AO the relevant paragraph of page 7 of the assessment order is reproduced as below:- “In the case of SakarialBalaBhai V/S ITO 1975 100/97 (Gujarat), it was held in the absence better way of estimating the rent of interest on cost of building and land may provide a reasonable basis for determining annual letting value of property.
An amount of Rs. 57,79,46,941/- has been spent at the commencement of-the lease agreement with the flagship- company of the assessee group i.e. M/S Bharat Hotels Limited, logically taking into account the period of 10 years of the lease agreement as entered into 3rd Feb'1998 which has been revised in the year 2009-10. The amount of Rs. 57.79 Crores is taken as the base and considering the period of 10 years from the date of commencement of hotel business (as the hotel could not start) from the year 1998 itself due to heavy amounts spent the lessee. Accordingly this amount of Rs. 57,79,46,941/- is proportionally be considered to be spread over a period of 10 years thereby giving an amount of Rs. 5,77,94,694/- as the amount being actual market rent in the grab of investment in the building/property. The income from the house property is accordingly determined at Rs. 5,77,94,694/-as against the value of Rs. 50,00,000/- declared by the assessee concern. Accordingly, the total addition on this account is Rs. 5,27,94,694/-.”
The ld. counsel relied on the order of the Coordinate Bench of ITAT, Amritsar Bench in ITAT No. 323/Asr/2015 date of order 26.08.2016 for A.Y. 2006-07. As per the ld. counsel the issue was already agitated before the bench and covered in case of assessee. The relevant para 6 to 10 is extracted as below:
“6. Apropos the merits of the additional ground, it has been contended as follows:
The assessee is a Public Limited Company. It was incorporated on 22.01.1964 with the main object of, inter-alia, acquiring and leasing properties in the State of Jammu & Kashmir and for further letting out the same. In pursuance of this main object, the assessee took on lease land measuring 222 kanals and 19 marlas under and adjoining Gulab Bhawan Palace for a period of 40 years, vide lease deed, dated 21.03.1973 at an annual rent of Rs.22,897/- from Shri Vikramaditya Singh. This lease was renewed for a period of 99 years vide lease deed, dated 22.11.1997. The said Gulab Bhawan Palace, i.e., building/super- structure thereof was renovated by the assessee and it was let out to Bharat Hotels Limited (‘BHL’, for short) vide licence agreement dated 03.02.1998 for a period of 99 years, where under the BHL was given a right to use, upgrade, renovate and reconstruct the Gulab Bhawan Palace and other adjoining structures, for the purposes of commissioning a 5-Star Hotel, at an annual license fee/rent of Rs.5 lacs. For the assessment year 2006-07, the assessee filed its return of income, on 20.10.2006 declaring income of Rs.28,76,910/- including license fee of Rs. 5 lacs, received from BHL, under the head of business income. This was accepted under section 143(1) of the I.T.Act, 1961 and the return of income was not selected for scrutiny u/s 143(3). However, a notice under section 148 of the Act was issued on 21.03.2013 for the reason escapement of income. The assessee, vide letter dated 25.03.2013, in response to the said notice, the assessee filed a revised return and the rent received was offered to tax as ‘income from house property’, as per the provisions of sections 22 r.w.s. 23 of the Act. This stand of the assessee was consistent with that taken for assessment year 2008-09, the assessment for which year was completed under section 143(3) of the Act, vide order dated 08.12.2010. Thereafter, vide order dated 25.03.2014, reassessment under section 147 of the Act was completed at a total income of Rs.4,29,34,930/-. In this order, addition of Rs.5,70,94,694/- was made on account of alleged notional annual letting value of the property in question under sections 22, 23(1) and 24(a) ofthe Act. By virtue of order, dated 29.05.2015, the Id. CIT(A) confirmed the initiation of assessment proceedings under section 147 of the Act. On merits, the action of the AO in computing total notional annual lettingvalues under section 23(1) of the Act was upheld by the Id. CIT(A).However, the method of determination of ALV, as adopted by the AO, was rejected. The Id. CIT(A) adopted 10% of the estimated cost of land and building as ALV. As such, the addition made by the AO on account of ALV, was reduced to amount of Rs.68,63,054/- and deduction therefrom @ 30% Was allowed to the assessee u/s 24 of the Act. The contention onbehalf of the assessee is that in ‘Chennai Properties and InvestmentsLimited Vs. CIT’, 373 ITR 673 (SC), it has been held that where in termsof the memorandum of association of company, the main object of such company is to' acquire properties and to earn income by letting out the same, such income is taxable as business income and not as income from house property. The assessee covers that this ratio handed down by the Hon’ble Supreme Court, is directly and squarely applicable to the facts of the present case, since the assessee too was incorporated with the main object of, inter-alia, acquiring and leasing out the properties in the State of J & K, which main object was the object which was earned out by the assessee; and that therefore, the rental income earned by the assessee from letting out the property in question, is the assessee's business income, which was also the position taken by the assessee in the original return of income filed by it and it is not income from houseproperty, as wrongly assessed. It has been stated that it is settled law that there is no estopples in law and wrong position taken can legally always be resiled from.
7. On the other hand, relying on the impugned order, the ld. DR has contended that ‘Chennai Properties And Investments Limited’ (supra), is not at all applicable to the facts of the present case and, therefore, the same has wrongly been sought to be relied on by the assessee. In that case, as per the Id. DR, the assessee had also made claim under one head of income and the AO had applied another. The Id. DR contends that this is not so in the present case.
We have heard the rival contentions on this issue and have perused the material available on record with regard thereto. Initially, the assessee had claimed the income earned by the assessee from letting out the subject property, i.e., Gulab Bhawan Palace, as business income. This position was accepted u/s 143(1) of the Act. However, on the reopening of the completed assessment, in the revised return, the income was offered as income from property, in accordance with the provisions of section 22 read with section 23 of the Act. This was consistent with the assessment completed u/s 143(3) of the Act vide order dated 08.12.2010 for the assessment year 2008-09. In the reassessment, the income was assessed as income from house property.
The decision in ‘Chennai Properties And Investments Limited’ (supra), rendered on 09.04,2015, has prompted the assessee to seek torevert to its original stand of contending that the income revert to itsoriginal stand of contending that income is to be treated as business income and not as income from house property. Let us examine ‘Chennai Property & Investment Limited’ (supra).
The assessee in ‘Chennai Properties and Investment Limited’ (supra), was a company incorporated with its main object to acquire properties in the city of Madras and to let out those properties. The assessee had rented out such property. The rental income received therefrom was shown as income from business. However, the AO was of the opinion that since the income was received from letting out the property, it was in the nature of rental income. Therefore, the AO treated the income as income from house property. The Id. CIT(A) reversed the AO’s action and directed the income to be treated as business income. The ITAT dismissed the appeal filed by the Department. The Hon’ble High Court, reversed the Tribunal order, holding that the income derived by letting out the property would not be income from business, but, it could be assessed only as income from house property. The question before the Hon’ble Supreme Court, therefore, was as to whether the income derived by the company from letting out the property was to be treated as income from business, or whether it was to be treated as rental income from house property. The Hon’ble Supreme Court observed that the main object of the assessee company was to acquire and hold properties and to let them out as well as make an advances upon the security of lands and building or other property, or any interest therein. It was emphasized that the holding of the properties and earning income by letting them out was the main object of the company. In the return filed, the entire income accrued was from letting out the property. The Hon’ble High Court, while holding the income to be income from house property, had relied on ‘East India Housing and Land Development Trust Limited vs. CIT’, 42 ITR 49 (SC). While discussing ‘East India Housing and Land Development Trust Limited’, (supra), the Hon’ble Supreme Court observed that that was a case where the company had been incorporated with the object of buying and developing landed properties and promoting and developing markets; that thus, the main objective of the company was to develop landed properties into markets; that the company had rented out some shops and stalls developed by it and the income derived from the renting of those shops and stalls was in question, i.e., as to whether such income was income from house property, or the income from business; that while holding that the income shall be treated as income from house property, the Hon’ble Supreme Court rested its decision on the context of the main objective of the company and had taken note of the fact that letting out of the property was not the object of the company at all; and that the Hon’ble Supreme Court was, therefore, of the opinion that the character of that income, which was from the house property, had not altered, because itwas received by the company formed with the object of developing and setting up of properties. Discussing the decision of the Hon’ble Supreme Court in the case of ‘Karanpura Development Co. Ltd. vs. CIT’, 44 ITR 362 (SC), their Lordships observed that that was also a case where theassessee company was formed with the object, inter-alia of acquiringand disposing of the underground coal mining rights in coal fields and ithad restricted its activities to acquiring coal mining leases over hugeareas, developing them as coal fields and then sub-leaking them tocollieries and other companies; that the business of the assessee was to lease out the coal fields to the collieries and other companies; that the income deceived from letting out of those mining leases was shown as business income; and that the Department took the position that it was to be treated as income from house property. Recapitulating ‘Karanpura Development Co. Ltd.’ (supra), it was observed that before income, profits and gains can be brought to computation, they have to be assigned to one or the Other head of income; that these heads are inclusive of one another and income which falls within one head cannot be assigned to, or taxed under another head; that therefore, the deciding factor is not the ownership of land or leases, but the nature of the activity of the assessee and the nature of the operations in relation to them; that the objects of the company must also be kept in view to interpret the activities; that where there is a letting out of premises and collection of rents the assessment on property position may be correct, but not so, where the letting out is part of a trading operation; that the dividing line is difficult to find, but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with the property, it is possible to say on which side the operation falls and to what head the income is to be assigned; and that in ‘Karanpura Development Co. Ltd.’ (supra), applying these principles to the facts of the case it had been concluded that the income had to be treated as income from business and not as income from house property.” {Emphasis supplied}
We heard the rival submission and relied on the documents available in the record. The observation of the ld. AO in order is very specific that the assessee is collecting the lease rent of Rs.50 lacs and had treated the amount under the head ‘Income from House Property”. But the room revenue of BHL amount to Rs.37,33,74,717/-. We follow the observation of the ld. AO in page 4 which is reproduced as below: “The perusal of the reply of the assessee as well as the records revels that the licensor i.e. Bharat Hotels Limited had invested Rs. 57,79,46,491/- at the commencement of the lease agreement with the flagship company of the assessee group i.e. to whom the building and land apartment was given on lease for running the luxury hotel under the name and style of Hotel Lalit Grand Palace, this reflects the market potential of the property concerned. It is observed that the assessee company is declaring license fee of Rs. 50,00,000/- only from M/S Bharat Hotels Limited.
During the process of assessment for the A.Y 2008-09 this license fee was treated as income from house property instead from business as shown by the assessee to which the assessee company had no objection. In deciding the income from house property the annual value of the property yet to be determined in accordance with the section 23 of the I.T. Act, 1961 which provides that the annual value is to be determined as a sum for which the property might be reasonably expected to let out from the year to year. In the instant case, it is seen that the rental income has been declared at a ridiculously low amount of Rs. 50,00,000/- lakhs per annum whereas the cost of one room of the assessee company hotel is more than Rs. 5,00,000/- lakhs per annum.” {Emphasis supplied} 6.1 In the appeal order the ld.CIT(A) has respectfully followed the order of the coordinate bench. The said order has followed the order of the Hon’ble Supreme Court in the case of ChennaiProperties & InvestmentsLtd, vs Commissioner of Income- tax, Central -III, Tamil Nadu, [2015] 56 taxmann.com 456 (SC). As per the ld. Counsel for assessee the order of Coordinate Bench of ITAT & the order of Hon’ble Apex court are squarely applicable to assessee. The assessee had accepted the nature of income as ‘Income from House Property’. So, there is no question about the change of the head of income in other stage. Considering the assessee’s declaration in assessment, the ‘Income from House Property’cannot be treated as ‘Income from Business’ in this impugned assessment year. The ld. AO correctly pointed out about the disparity in value of Annual Lease Rent in respect of licence fees received by the flagship company of the assessee. There is no res integra in the order of Coordinate Bench with the assessee as there is distinguishable fact. In the appeal order the observation of the ld. AO was not discussed properly. We find the order of the ld. CIT(A) is perverse. In our considered view, we set aside the order of the CIT(A) & remit back the ground of the revenue to the CIT(A) for further adjudication denovo.
Needless to say, that the ld. CIT(A) shall provide proper and adequate opportunity of being heard to the assessee in set aside proceedings. The evidence/explanation submitted by assessee in its defence shall be admitted by the ld. CIT(A) and adjudicated on merits in accordance with law. We order accordingly.
In the result, the appeal of the revenue bearing is allowed for statistical purpose. Order pronounced in the open court on 24.02.2023