THE COMMISSIONER OF INCOME TAX CITY-3, MUMBAI vs. M/S. AKSHAYA TEXTILES TDG AND AGENCIES P. LTD.

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IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO.607 OF 2005

The Commissioner of Income-tax-3

Room No.612, Aaykar Bhavan,

Maharshi Karve Road, Mumbai-400 020. )..APPELLANT

Versus

M/s.Akshay Textiles Trading

& Agencies Pvt. Ltd., 84-A, Mittal

Court, 8th Floor, 224, Nariman Point )

Mumbai-400 021.

)..RESPONDENT

Mr. Vimal Gupta with Mr. P.S. Sahadevan, for the Appellant

Mr. J.D. Mistry with Mr. Raj Darab, for Respondent.

CORAM CORAM CORAM : F.I. REBELLO : F.I. REBELLO : F.I. REBELLO &

J.P. J.P. J.P. DEVADHAR, JJ. DEVADHAR, JJ. DEVADHAR, JJ.

DATED DATED DATED : 17TH OCTOBER 2007 : 17TH OCTOBER 2007 : 17TH OCTOBER 2007

ORAL ORAL ORAL JUDGMENT: (PER F.I. REBELLO, J.) JUDGMENT: (PER F.I. REBELLO, J.) JUDGMENT: (PER F.I. REBELLO, J.)

Revenue has preferred this Appeal on the following

questions:-

"A.

Whether on the facts and in the circumstances of

the

case and in law, the rent paid

ultimate

user

will be treated as Annual Letting Value of

the

property as against rent received by the assessee? CNR No : HCBM020247922005 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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"B.

Whether on the facts and in the circumstances of

the

case

and

law,

the

Hon’ble

ITAT

was

justified

holding that the annual letting

value

has

be determined with reference to

the rent

received by the assessee and not what has

been

received by its tenants from the ultimate users?

"C.

Whether on the facts and in the circumstances of

the case and in law, the Hon’ble ITAT was correct

upholding the order of the CIT(A) in holding that

the

capital

gains of Rs.19,74,489/- are not

taken into account while computing the profits liable

be taxed u/s.115JA of the I.T.

Act 1961 and that

the

decision

the Hon’ble Bombay High

Court

Veekaylal’s case (249 ITR 597) was not applicable?"

In so far as question "C", our attention is invited

the

judgment of the Supreme Court in Apollo Tyres

Ltd.

vs.

Commissioner

of Income-tax (2002) 255 ITR

273.

The

question framed therein which is similar to the Question "C"

has

been answered in favour of the assessee and against the

Revenue. In the light of that the question of law as framed

would not arise.

We may now consider questions "A" and "B", as they

are

inter-related.

The

case of the Revenue is

that

the

assessee

let out three properties to M/s.

Elite Mercantile

Pvt.

Ltd., Saumya Finance & Leasing Pvt.

Ltd.

and

Bloom Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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Trading

Pvt.

Ltd.Those tenants further sub-let

the

same

property

M/s.Reliance

Industries

Ltd.,for

higher

consideration.

Based

this it is submitted,

that

the

intermediate

tenant

was in fact the alter ego of

Reliance

Industries

Ltd.

the Corporate veil is lifted,

nothing

but

another face of Reliance.

is, submitted

that for the purpose of Section 23 of the I.T.Act

the

annual value of the property should not be one

entered

into

the

assessee

with its tenants,

but

the

amount

received

by the tenant from Reliance Industries Ltd.

Even

otherwise

submitted that the annual

value

the

property

would

the rent/compensation,

which

Reliance

Industries Ltd., paid to the tenant of the Respondent herein

who

is the owner of the property as that would be the

real

annual letting value. We have been taken through various

documents as also judgments.

Learned Counsel for the Revenue has also invited our

attention

the

judgment

the

ITAT

I.T.A.

No.3285/Mum/99

for the assessment year 1994-95 between

Jt.

CIT,

Special

Range

18,

Mumbai

vs.

M/s.Kedareshwar

Investment

& Trading Co., Ltd., Mumbai.

It is pointed

out

that

the Tribunal has mainly relied on this Judgment

while

dismissing

the

Appeal

preferred

the

Revenue.

The

Tribunal

did

not

address

itself to the

issue

that

the

Agreement

was sham and bogus and in these circumstances the

orders of the Commissioner (Appeals) and ITAT ought to be

set aside. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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In the alternative it is submitted that if the Court

comes

to the conclusion that the order of the A.O.

suffers

from non-consideration of material, that the order of the

A.O. also be set aside be reconsidered by the A.O.

On the other hand on behalf of the Respondent

assessee,

their learned Counsel draws our attention to

the

language of Section 23(1)(a)and (b). Section 23(1)(a) and

(b) read as under:-

"23. (1) For the purposes of section 22, the annual

value of any property shall be deemed to be --

(a)

the sum for which the property might

reasonably

be expected to let from year to year;

(b)where

the property or any part of the property is

let and the actual rent received or receivable by the

owner

respect

thereof is in excess of

the

sum

referred

to in clause (a), the amount so received or

receivable."

submitted that in the hands of the owner the value

can only be determined in terms of clauses (a) and/or

(b).

The

properties

are situated in a

place

where

the

provisions of the Rent Control Act was applicable.

The rent

paid

the assessee and its tenant in fact was more

than

the

standard rent.

In these circumstances it is

submitted

that

the

annual value would be in terms of the

Agreement. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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Dealing

with the contention urged on behalf of the

Revenue

that

the contract between its tenant and Reliance is

sham.

is submitted that the finding of the A.O.

was

reversed

Appeal

by the Commissioner (Appeals).

The Revenue

did

not

challenge the same before the Tribunal.

Once that

was

not

an issue before the Tribunal it is now not open to

the

Revenue to raise the questions that the contract was a sham.

Questions "A" and "B" do not arise from the order.

We have given our anxious consideration to the

matter.

Considerable time was spent as to whether there has

been

departure from the ratio decadenti in McDowell

and

Co.

Ltd.

vs.

Commercial Tax Officer, 154 ITR 148 in

the

case of Union of India and Anr.

vs.

Azadi Bachao Andolan &

Anr

263

ITR 706.

We may address ourselves to that

issue.

The

judgment

McDowell

Co.,

(Supra)

was

Constitution

Bench.

The majority judgment in so far as the

issue of colourable exercise and tax planning observed as

under:-

"Tax planning may be legitimate provided it is within

the framework of the law. Colourable devices cannot

be part of tax planning and it is wrong to encourage

or entertain the belief that it is Honourable to

avoid the payment of tax by dubious methods. It is

the obligation of every citizen to pay the taxes

honestly without resorting to subterfuges....

this

aspect, one of us, Chinnappa Reddy J.,

has Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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proposed

a separate and detailed opinion with

which

we agree."

Chinnappa

Reddy J., while answering the issue of colourable

devices

referred

to various authorities and then

observed

that

time

has come for us to depart from

the

Westminster

principle

as emphatically as the British Courts have

done.

After so saying the ratio on the issue of colourable devices

has been explained as under:-

"In our view, the proper way to construe a taxing

statute, while considering a device to avoid tax, is

not to ask whether the provisions should be construed

literally or liberally, nor whether the transaction

is not unreal and not prohibited by the statute, but

whether whether whether the transaction is a device to avoid tax, and the transaction is a device to avoid tax, and the transaction is a device to avoid tax, and

whether whether whether the transaction is such that the judicial the transaction is such that the judicial the transaction is such that the judicial

process process process may accord its approval to it." may accord its approval to it." may accord its approval to it." (emphasis

supplied).

In our opinion this would be the ratio of that judgment.

In Azadi Bachao Andolan (supra) the issue arose out

Taxation Treaty between India and Mauritius.

learned

Bench

considered some observations made by Chinnappa

Reddy

specially

the

applicability of principles set

out

Westminster,

but after having so said, the Court

addressed

itself as to what was the ratio in McDowell (supra) and was

pleased to observe as under:- Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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"The Court nowhere said that every action or inaction

the

part

the tax

payer

which

results

reduction

tax

liability

which

may

subjected

in future, is to be viewed with

suspicion

and

treated

as a device for

avoidance

tax

irrespective

of legitimacy or genuiness of the

act;

and

inference

which unfortunately, in our

opinion,

the

Tribunal

apparently appears to have drawn

from

the

enunciation

made in McDowell’s case (1958)

154

ITR

148

(SC).

The ratio of any decision has to

understood

the

context it has been

made.

The The The

facts facts facts

and

circumstances

which lead

McDowell’s

and

circumstances

which lead

McDowell’s

and

circumstances

which lead

McDowell’s

decision decision decision

leave

in no doubt that

the

principle

leave

in no doubt that

the

principle

leave

in no doubt that

the

principle

enunciated enunciated enunciated

the above case has not

affected

the

the above case has not

affected

the

the above case has not

affected

the

freedom freedom freedom

of the citizen to act in a manner

according

of the citizen to act in a manner

according

of the citizen to act in a manner

according

toto to

his

requirements,

his wishes in the

manner

his

requirements,

his wishes in the

manner

his

requirements,

his wishes in the

manner

doing doing doing

any

trade, activity or planning

his

affairs

any

trade, activity or planning

his

affairs

any

trade, activity or planning

his

affairs

with with with

circumspection,

within the framework

law,

circumspection,

within the framework

law,

circumspection,

within the framework

law,

unless unless unless

the

same fall in the category of

colourable

the

same fall in the category of

colourable

the

same fall in the category of

colourable

device device device

which

may properly be called a device

which

may properly be called a device

which

may properly be called a device

dubious dubious dubious

method or a subterfuge clothed with apparent

method or a subterfuge clothed with apparent

method or a subterfuge clothed with apparent

dignity." dignity." dignity." (emphasis supplied).

The

Supreme

Court

has

thus explained as

how

understood the law laid down in McDowell (supra).

There is,

therefore, no departure from the law laid down in McDowell &

Co.

Ltd.,

Azadi

Bachao

Andolan.

our

opinion, the

ratio of McDowell (Supra) as understood

by Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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the

Supreme

Court

in Azadi Bachao Andolan,

the

law,

considering

that

that is how the Supreme Court

understood

the

ratio decedandi of the Judgment in McDowell & Co.

Ltd.

our

opinion, therefore, it is not possible

contend

that there is departure on the principles laid down in

McDowell & Co. Ltd.

That bring us to the facts of the case. It is no

doubt true that the Assessing Officer had recorded a finding

para.5.4 that the share holding of the Assessee

Company

well as the intermediary company is held by another

set

group

companies

and the shareholders

these

group

companies

are once again another set of group companies

RIL.

It is further observed that there is a cross

holding

shares of each other by large number of group

companies

RIL.

All these companies had activities in dealing

shares

RIL or holding the shares of RIL as

investment.

Under

these

circumstances

was held

that

not

possible

to hold that the transaction between the

assessee

company

and

its

tenants

independent

business

transaction.

Similarly it was held that it was not possible

accept that the transaction between the tenant companies

and

RIL

independent

transaction

between

two

independent

companies.

Under these circumstances it

held

that the rent paid by RIL to the tenant should be considered

as annual value.

The Assessee aggrieved preferred an Appeal before the

Commissioner

(Appeals).

The

ground of

recomputation

of Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07 letting

value

was

issue.

The

Commissioner

(Appeals)

noted

that in the case of the appellant for

the

assessment

year

1997-98

the addition made on

account

enhanced annual letting value is deleted.

That decision was

followed.

In other words the finding of fact of the tenant

company

being

the alter ego of Reliance was not

accepted.

The finding recorded by the Assessing Officer was thus set

aside by the Commissioner (Appeals).

An Appeal was preferred before ITAT. In the grounds

of Appeal no contention was taken that the Agreement between

Reliance as intermediary tenant is a sham and/or that it was

a colourable device which may properly be called a device or

a dubious method or a subterfuge clothed with apparent

dignity.

From the order of the Tribunal also it does not

appear

that

the issue of colourable exercise

and/or

sham

contract

was argued or raised.

The Tribunal dismissed

the

Appeal preferred by the Revenue.

Once the issue of sham and

bogus

contract had not been raised before the Tribunal

the

finding

of fact recorded by the Commissioner (Appeal) stood

confirmed.

From

the

judgment of the Tribunal

the

issue

which

sought to be now contended or canvassed

sham

contract

colourable device on the

ground

that

the

intermediary

is a an alter ego of RIL was not in issue.

not

the case of the Revenue that the

intermediary

was

another

face of the Assessee and consequently the Agreement

entered

into

with

the

tenant

the

Assessee

was

a Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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colourable

device.

these

circumstances

considering

Section 23, what is assessable to tax is the income received

from

the tenant falling either under sub-section (a) or (b)

Section 23(1).

The compensation received by the

tenant

would

be taxable in the hands of the tenant.

Appeal

would

lie

substantial question of law from the order

the

Tribunal

respect

of the matters which

were

taken

before

and/or

pure question

law

based

undisputed material on record. That is not the case over

here.

We may also note that Section 23 before its amendment

by Finance Act, 2001 with effect from 1st April, 2001 read

as under:-

"23(1) For the purposes of Section 22, the annual

value of any property shall be deemed to be:

(a)

the sum for which the property might

reasonably

be expected to let from year to year;

(b)

where

the property is let and the rent

received

receivable

the

owner

respect

thereof is in excess of the sum referred to in clause

(a), the amount so received or receivable."

This

was

necessitated

account of

the

Supreme

Court

interpreting

Section

23(1) as it then stood and

bring

within

its

ambit

those cases where higher rent

had

been Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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received than the annual letting value.

In other words were

the annual rent receivable was more than the annual letting

value.

On behalf of the Revenue considering the expression

’receivable’

in Section 23(1)(b), learned Counsel seeks

contend

that what has to be considered is the rent which is

receivable

rent from the premises.

is, submitted

that the rent which the tenant was receiving from

Reliance would be the rent receivable.

On the other hand on

behalf

the assessee learned Counsel explains

that

the

expression

"receivable"

the context

the

rent

reserved

in terms of the agreement.

As an illustration, it

submitted

that

the

rent

received

per

annum

Rs.12,000/-

even though Rs.6,000/- is paid for the

purpose

of tax incidence what has to be considered is Rs.12,000/- as

that is the rent receivable.

We have given our anxious consideration to the rival

contentions.

Section 23(1)(a) uses the expression " the sum

for

which

the property might reasonably be expected to

let

from

year to year.

This has to be considered

the

context

the

applicable

rent laws.

The

Courts

have

construed

the

rent receivable in such circumstances to

either

the standard rent or the rateable value as fixed

the

local authority.

Though the rateable value may also on

occasions

has to consider the standard rent in cases

where

the

rent

law

may

be applicable.

Before

the

amendment

brought

about

to Section 23 by the Finance Act

2001

with Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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effect from 1st April, 2002 even if an assessee had received

higher

rent

then the standard rent the

additional

amount

would not be the subject of tax.

To over come this omission

the

Section was substituted to cover also those cases where

rent

received

was

higher than the standard rent

rent

based

on municipal rateable value.

If the argument of

the

assessee

to be considered then expression

"reasonable"

would have to be given different meaning.

In our opinion it

not possible to give a meaning wider amplitude than what

contained

Section 23(1)(a).

The

Legislature

has

substituted the provision and brought in Section 23(1)(b) to

cover the part of the annual value which otherwise would not

fall

with

the

tax ambit before its

amendment.

that

context

the expression "receivable" would mean that

though

the value is fixed in terms of the

Agreement

even

though it is not received in the relevant year, yet the same

would

assessable

to tax in terms of

the

illustration

given on behalf of the assessee.

The contention, therefore,

as urged on behalf of the Revenue on the construction or

expression "receivable" will have to be rejected.

10.

The issue whether the contract between Reliance and

the intermediary tenant is a sham cannot be gone into as the

question would not arise in the absence of it being in issue

raised

before

the Tribunal.

That question as framed

does

not therefore arise.

Further as noted earlier it is not the

contention of Revenue that the contract between the assessee

and

the tenant is sham.

The annual value would and be

the

value

terms

of that contract.

the

annual Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07

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value

the

annual value received or receivable

the

owner from the tenant irrespective whether tenant on such

letting has received higher rent from RIL.

Considering the above, in our opinion the question of

law

at "A" as framed would not arise.

Question B has to be

answered in the affirmative and against the Revenue.

Consequently Appeal stands dismissed.

(J.P. (J.P. (J.P. DEVADHAR, J.) DEVADHAR, J.) DEVADHAR, J.)

(F.I. (F.I. (F.I. REBELLO, J) REBELLO, J) REBELLO, J) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 06:02:07 Powered by TCPDF (www.tcpdf.org)