HEMANT RANJIT KHATAU,MUMBAI vs. ITO WD 18(1)(5), MUMBAI

The assessee alongwith 8 co-owners are owner of a building known as Khatau Mansion situated at Mahalaxmi, Mumbai. The building was -inherited by them. The Block No. 5 which is a part of the building was in possession of a tenant till 1993. He withdrew the tenancy rights in favour of the owners in 1993. In December, 2011, it was let out under a new tenancy agreement dated 30.12.2011. The property was tenanted to Dawat-E-Hadiyah Trust which is a public charitable trust and the tenancy rights were sold for a sum of Rs.14 crores. The amount of compensation each co-owner was paid by separate cheques by the tenant Dawat-E-Hadiyah Trust. The assessee's share in the said property is 25% whereas he had received consideration which worked out to only 8.33% of the total sum received. Upon enquiry by the Assessing Officer the reason for this has been given as under :-

“The 8 co-owners other than the appellant have paid Rs.60 lakhs to get the property vacated by the previous tenant in 1993. Since the appellant has not contributed anything, it was agreed by all the parties that when the flat was given on rent, 2/3rd of the share will be taken by 8 co-owners who made this payment of Rs. 60 lakhs and the remaining 1/3rd will be shared by all the 9 co-owners in the ratio of their shares. Accordingly, the appellant has received 25% 1/3rd share of Rs.14 crores which ultimately worked out to 8.33% of the total consideration. The other co-owners have filed the returns declaring their respective shares of income which has been accepted by the department.”

4 Shri Hemant Ranjit Khatau

The submissions of the learned counsel for the appellant have been considered carefully. Apparently, the property Block No.5, in Khatau Mansion was in the occupation of tenants till Oct., 1993. The tenants were made to vacate by paying them Rs. 60 lakhs. This 60 lakhs was contributed by the 8 co-owners other than the appellant. From that time onwards, the property was in possession of the co-owners and not the appellant. The co- owners in their letter dated 10.3.2015 stated as under :-

“The said tenanted premises being block No. 5 of Khatau Mansion was therefore in possession of 8 co-owners (since 1993) excluding Mr. Hemant till the same was then let out in Dec, 2011 let on monthly tenancy basis to M/s. Dawat-E.Hadiyah Trust at consideration by way of one time premium of Rs.14,00,00,000/- for creation of tenancy in their favour. Normally in case of tenanted premises proceeds of consideration are divided between the tenants/occupants and the landlord in the ratio of 2/3rd and l/3rd respectively. Thus 2/3rd premium amount received would to us i.e. eight co-owners/tenants, who were occupants of block virtue of having paid for vacating the tenant in the year 1993 and, the balance 1/3rd belong to all the nine co-owners as landlords of the building. Hence, as landlord's share, Hemant Ranjit Khatau is entitled to 25% share of 1/3rd share of "Owners" which comes to 8.33% of the total consideration. Thus he has received only 8.33% as agreement duly executed and registered and balance amount received by the other eight co-owners/tenant as stated in the duly executed and registered. Accordingly, Mr. Hemant has in his return of income disclosed 8.33% as his share as received by him under the agreement out of total consideration of Rs. 14 crores. Similarly all other co-owners have declared their individual shares aggregating to balance 91.67%( 100-8.33) as received by them respectively under the agreement as co-owners and tenants in their return of income and they have paid the taxes on their shares accordingly thereon. The PANs of all the co-owners are already on your records."

3.3.1. It is very clear from their statement that they have considered themselves as co-owners and tenants. In their capacity as tenants, they have received 2/3rd of the total consideration. In their capacity as co-owners, they received their share of the 1/3rd of the consideration. They have acted in a dual capacity as co-owners and tenants whereas; the appellant was just the co-owner. It is also mentioned by them that they have filed their return of 5 Shri Hemant Ranjit Khatau income in the name of ‘Krishna Khatau and others' declaring income under the head house property. Therefore the case of Vinod V. Chhapia referred to supra is squarely applicable to the facts of the present case. In this case, there is no time gap between the old tenant and the new tenant. One tenant vacated in Oct, 93 and the property came in possession of the new tenants who are the 8 co-owners. In Dec., 2011, the 8 co-owners vacated the property in favour of the new tenant, M/s. Dawat-E Hadiyah Trust. Dawat-E- Hadiyah Trust has paid the premium of 14 crores which has been shared by the appellant as a co-owner and the other 8 co-owners in their capacity as co-owners and tenants. What the appellant received is for the transfer and the consent given for transfer of tenancy rights from the old tenants to the new tenant. The eight co-owners have in their capacity as tenants. They have also received 2/3rd of the premium amount of Rs. 14 crores in their capacity as tenants. It is only the remaining 1/3rd which has been shares by all the 9 co-owners in the ratio of their ownership. This self confession by the 8 co- owners cannot be ignored. Therefore, the amount of Rs. 1,16,66,000/- received by the appellant has to be treated as income from other sources and not income from capital gains.”

there was an agreement amongst them and accordingly the appellant has received only Rs. 1,16,66,000/- which works out to 8.33% of the total consideration. The remaining 91.67% has been distributed amongst 8 of them and they have shown it in the respective returns of income which have been accepted by the department. As already discussed, the provision ofsection 50C or section 56(2) are not applicable to this case. What is received by the co-owners is only Rs.14 crores and what can be taxed is only this amount. The appellant has received 8.33% only of this consideration instead of his share of 25% due to reasons already discussed. There is no revenue loss as the entire amount has been offered to tax, albeit, in different hands. Reliance is placed on the case of CIT vs. Raman Kumar Suri 255 CTR 257 where the jurisdictional High Court held that the AO was not justified in assessing the sale consideration of Rs.7 crores where he has received only Rs.6 crores as per MOD as per an arrangement. This was a case where the property has been sold by two brothers for a consideration of Rs. 14 crores. Each brother should have received a share of Rs.7 crores, but as per personal MOU, one of the brothers received Rs. 6 crore and the other received Rs. 8 crores. The Assessing Officer deemed the consideration received by the brothers as Rs. 7 corres instead of Rs. 8 crores. The Hon'ble Jurisdictional High Court held that this was not justified and that the assessee should be taxed only on the sale consideration of Rs. 6 crores which was actually received by him. In this case as per an agreement, for reasons already discussed, the appellant was due to received 25% of the 1/3rd consideration which he received and offered to tax. This works out to 8.33% of the total consideration. The balance consideration has been received and offered to tax by the remaining 8 co-owners. There is no revenue loss. Therefore, the addition made by the AO which is only a mere presumption of Rs. 3,11,12,000/- cannot be sustained”.

(a) bare perusal of the tenancy agreement dated 30.12.2011 (see pages 10 to 14 of the Paper book) shows that it is a transaction of transfer of tenancy right by the landlords to the tenant and not where such tenancy rights are transferred by the earlier tenant to a new tenant and where simply consent is given by the landlord.

(b) For justifying the transaction as transfer of tenancy rights by the earlier tenant (other 8 co-owners) to the new tenant (Dawat-E-Hadiyah Trust) with the landlords (including the Appellant) giving his consent for such transfer, the A.O. and the CIT(A) have relied on letter dated 10.03.2015 from the other 8 co-owners to the A.O. The said letter is only for justification for payment of 7 Shri Hemant Ranjit Khatau

8.33% of the consideration to the Appellant as against his right to the extent of 25%, it has been urged that he had not shared in the consideration to be paid to the outgoing tenant for surrender of tenancy right in the year 1993. Hence, 2/3rd of the consideration received from the present tenancy agreement is shared only between the other 8 co-owners while the balance 1/3rd is shared between all the 9 co-owners including the Appellant. The reason given for such disproportionate sharing is that as per custom normally tenant at the time of transferring the tenancy right to a new tenant has to pay 1/3rd of the amount to the landlord. The Appellant submits that this is only a methodology used for dividing the consideration between the parties. The transaction in the year 1993 was surrender of tenancy rights by the earlier tenant to the landlords. It was not a case of transfer of tenancy rights by the earlier tenants to the other 8 co-owners as new tenants. After the said surrender the property has remained vacant and unoccupied by any one. At that point of time no tenancy was created in favour of the other 8 co-owners as new tenants.

(c) It is well settled by now that nature of a transaction is to be judged based on the documents executed between the parties. In the present case, the tenancy agreement dated 30.12.2011 is for transfer of tenancy right by all the 9 co-owners as landlords and not a case, where, tenancy right alleged to be belonging to other 8 co-owners has been transferred to new tenant for which consent has been given by the ninth co-owner the Appellant-Landlord. The AO and the CIT(A) erred in disregarding this position.

(d) In the present case, it is an admitted position as referred to in letter dated 10.03.2015 from the other 8 co-owners to the A.O. that, in the year 1993 vacant possession has been obtained by all the nine co-owners. This is also the basis for the present tenancy agreement as made clear by its second recital at page 11 of the Paper-book. This fact has also been repeatedly asserted by the Appellant before the AO and the CIT(A), which fact remains undisputed. Since the said property remained vacant from 1993 to 31.10.2011, it cannot be a case of transfer of tenancy rights by an earlier tenant to a new tenant. Once it is accepted that the said property was unoccupied and was lying vacant, it is a case of transfer of tenancy right by the landlords to the tenant.

(e) In the letter dated 10.03.2015 from the other 8 co-owners to the AO, at one place, it has been stated that all other co-owners have declared their individual shares aggregating to balance 91.67% (100-8.33) as received by them respectively under the said agreement (as co-owners and tenants) in their return of income and they have paid the taxes on their shares accordingly thereon'. At another place, in the said letter, it has been stated that 'Return of Income under PAN AABAK2550K in the name of Kishore Khatau and others was filed on 28-6-2012 with ITO-16-(3)-(4) for A.Y. 2012-13 declaring income under the heads House property / Interest / dividend etc.'. Relying on the later version, the AO and the CIT(A) have held that even the other 8 co-owners have offered the income received by them as transferor tenants. Based thereon, it is alleged that this is a case of transfer by earlier tenants (the other 8 co-owners) to the new tenant (Dawat-E-Hadiyah Trust). The Appellant submits that there is an inherent inconsistency in the two versions. A bare perusal of the first version shows that the income has been 8 Shri Hemant Ranjit Khatau individually offered for tax in the hands of each of the other co-owners to prove that 91.67% has been taxed in the hands of co-owners and the balance 8.33% has been offered by the Appellant. In fact, one of the co-owner being Mr.Vinay Khatau has been assessed on the entire income received as capital gains. In support thereof, the Appellant has handed over a copy of his assessment order. If, the transaction was that of transfer by earlier tenant to new tenant as contended by the AO and the CIT(A), then, to the extent of 2/3rd consideration the other 8 co-owner ought to have been assessed as capital gains and the balance 1/3rd as income from other sources. Further, it cannot be that the same income has been offered for taxed twice by the 8 other co- owners once in their individual hands and again as an AOP. Lastly, it is submitted that understanding of the parties, does not make the law. There is no estoppel as to law. The legal position has to be ascertained based on the documents that have been executed. Based thereon, it is clear that in the present case, tenancy right has been transferred by the landlords including the Appellant to the tenant being Dawat-E-Hadiyah Trust.

(f) As per the Bombay Stamp Act, stamp duty is to be paid under Article 36 for creation of tenancy i.e., for transfer of tenancy right from the landlord to the tenant. In the present case, stamp duty has been paid under the said article (see page 64 of the paper book). For transfer of tenancy by earlier tenant to the new tenant stamp duty has to be paid as per article 5(g-d) of the Stamp Act. In the present case, stamp duty has not been paid under the said article.

In view of the above, the appellant submits that he has received the consideration for transfer of tenancy rights as a landlord and not for giving his consent as a landlord for such transfer by an earlier tenant to a new tenant. That such transfer by a landlord to a tenant would give rise to capital gains is made clear by judgment of the Hon'ble Apex Court in A. R. Krishnamurthy and Anr. Vs. CIT 176 ITR 417

The order in the case of Vinod V. Chhapia Vs. I.T.O relied upon by the AO and the CIT(A) was a case where, the issue involved related to the amount received by the landlord for giving his consent for permitting the sub tenant to occupy the premises in place of the tenant and retaining the tenancy rights of the tenant. In the present case, since the factual position is different the said order will have no application.

As stated above, the AO had touched upon two distinct aspects relating to the said tenancy agreement being :-

(a) Assessment of the Appellant to 25% of the consideration being Rs.4,27,78,000/- as against the actual amount of Rs. 1,16,66,OOO/-received by him and (b) The head of income under which the said amount was to be assessed. According to the Appellant, the said amount would be assessable as capital gains while the AO assessed it as income from other sources.

Since the aforesaid two issues were raised by the AO, the CIT(A) has also dealt with both of them independently. In so far as the first issue is concerned he

9 Shri Hemant Ranjit Khatau has upheld the Appellant's claim that he can be assessed only on the actual consideration received by him and not what he ought to have received. In this regard he has followed Judgement of High Court at Bombay in Raman Kumar Suri (supra)(see para 4 at pages 10 to 13 of the appellate order). This finding of the CIT(A) has became final as no appeal against the same has been filed by the Revenue before the Tribunal. Since the finding of the AO on the second issue was upheld by the CIT(A) (see para 3 at pages 2 to 9 of the appellate order), the Appellant has filed an appeal against the same. Hence, the issue involved in the present appeal is only with respect to the head of income and consequent grant of exemption u/s. 54EC of the Act.

The other issue that has been referred to in the clarification hearing on 20.12.2019 is that why the transfer of tenancy right should not be hit by section 50C of the Act. In the present case, the AO sought to invoke the provisions of section 50C of the Act, in the course of assessment proceeding for which show-cause notice dated 20.10.2014 was issued (see pages 15 of the Paper-book) In response thereto, the Appellant has filed his submission vide letters dated 20.10.2014 (see pages 16 and 17 of the Paper-book) dated 28.10.2014 (see pages 18 and 19 of the paper book), dated 12.01.2015 (see page 31 of the paper book) and dated 16.02.2015 (see pages 39-40 of the paper book). Satisfied with the Appellant's submission, the AO has not made any addition by invoking the provisions of section 50C of the Act. In view thereof, the Appellant submits that the said issue does not arise in the present appeal. Assuming without admitting that the said issue also needs consideration it is submitted that the said section would apply only when there is a transfer of land and/or building. In the present case, there is a transfer of 'tenancy rights' in building and not transfer of the building. In this regard, reliance is placed on Tribunal's order in the case of Atul G. Puranik v. ITO 132 ITD 499 (Mum). The said order of the Tribunal has been accepted by the Revenue as no appeal against the same has been filed before the High Court. Considering this fact, the Bombay High Court in CIT v. Greenfield Hotels and Estates Pvt. Ltd. 389 ITR 68 has dismissed the Revenue's appeal.

In view of the above, I submit that the Tribunal may be pleased to allow the appeal and hold the nature of the receipt in the hands of the Appellant as capital gains and, consequently grant exemption under section 54EC of the Act.”

10 Shri Hemant Ranjit Khatau explained that there were eight co-owners. The said property was having tenants earlier. These tenants were got vacated in the year 1993. For this other co-owners except the assessee contributed sums of money and hence in the said property assessee’s share of 25% got altered. Other co-owners retained 2/3rd as their shares devoid of assessee having share therein. Assessee was considered as co-owner in the remaining 1/3rd. Hence, assessee’s 25% shares in 1/3rd came to 8.33% of receipt, which the assessee offered as his share of capital gain. Assessing Officer went by the assessee’s share in the property of 25%. He held that assessee should be entitled for 25% of the receipt as his share. However, the Assessing Officer thereafter went by the other submissions of the assessee wherein it was submitted that 2/3rd portion have been retained by other co-owners as they have contributed to get building vacated in 1993. He also opined that since then other co-owners were tenants of assessee in that respect. Hence, he held that assessee’s share will amount to income from other sources as the assessee has only consented to the sale tenancy rights. The Assessing Officer in this regard placed reliance upon the decision of Vinod V. Chhapia (supra). When the matter travelled to learned CIT(A), learned CIT(A) went by the assessee’s submission that co-owners got property vacated by paying sums to the tenants. That they agreed that their 2/3rd shares amongst themselves and thereafter 1/3rd share alongwith the assessee. Hence, he rejected the Assessing Officer’s addition of 25% in the hands of the assessee. Furthermore learned CIT(A) held that it was submitted before him that other co-owners have offered 2/3rd shares in their capacity as AOP and remaining 1/3rd was shares with assessee. Hence, learned CIT(A) agreed that assessee’s share came to 8.33%. However, he further upheld Assessing Officer’s action in this regard that assessee had only consented to transfer of tenancy rights and his share was to be taxed as ‘income from other sources’ and he denied the assessee’s claim u/s. 54EC of the Act.

11 Shri Hemant Ranjit Khatau The learned counsel of the assessee states that in the submissions of the assessee and his letters before the authorities below the purport was only to establish that assessee share has become 8.33% from the original 25%. In this regard ld counsel of the assessee submits that the other part of the submission are merely other version which the learned counsel of the assessee not only wants to be ignored but also disputes them as regards their veracity.

12 Shri Hemant Ranjit Khatau submitted by the assessee along with other co-owners before the authorities below which established the above. If the above submission has to be given effect it has to be given effect fully and not in bits and pieces as the learned counsel of the assessee submits. This as already noted by us is not permitted by the common-law maxim of approbate and reprobate.

13 Shri Hemant Ranjit Khatau appeals. Learned CIT(A) is directed to consider the issue afresh in light of our observations and submissions of the learned counsel of the assessee as above.

Order has been pronounced in the Court on 17.3.2020.