DEENA ASIT MEHTA,MUMBAI vs. DCIT 4(1)(1), MUMBAI

ORDER PER N.K. PRADHAN, AM Whether the receipt of interest-free security deposit by a taxpayer can be ignored while computing annual letting value of a property let out to a company where she is the Managing Director? This is what this case is all about. This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-9, Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).

2. The grounds raised

by the assessee in this appeal are (i) the Ld. CIT(A) erred in stating that the assessee received Rs.2,75,00,000/- as interest-free deposit in respect of the office premises given on rent and leave and licence basis; whereas the assessee has received Rs.1,00,00,000/- as deposit in respect of Poddar Chambers office premises given on leave and licence basis from last many years, (ii) the Ld. CIT(A) erred in overlooking the fact that the assessee had received another deposit of Rs.1,75,00,000/- in March 2012 in respect of granting leave and licence of residential premises situated in Abhilasha Building, (iii) the Ld. CIT(A) erred in estimating of Rs.27,50,000/- calculated at 10% on the above amount of Rs.2,75,00,000/- interest-free deposit and confirming the same as income of the assessee, (iv) the Ld. CIT(A) erred in confirming the action of the Assessing Officer (AO) to determine the annual value of the property u/s 23 of the Act and (v) the Ld. CIT(A) erred in ignoring the fact that the assessee was not the owner of the property given on leave and licence basis and that the provisions of section 23 empowering the AO to determine the annual letting value of the property are not applicable to her.

3. Briefly stated, the facts of the case are that the assessee has declared leave and licensee fee of Rs. 4,80,000/- received by her from the office premises situated in Poddar Chambers, under the head ‘Income from Other Sources’. The assessee has received interest-free security deposit of Rs. 2,75,00,000/- from the licensee. The AO held that section 23 is applicable to the assessee and that notional interest is required to be worked out on such deposit. While computing the taxable income of the assessee, the AO calculated notional interest @ 10% on the said interest-free deposit of Rs.2,75,00,000/- and added the resultant figure of Rs.27,50,000/- to the income of the assessee.

4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) observed there is no dispute that the assessee received licence fees of Rs.4,80,000/- from one of the properties i.e. in respect of Poddar Chambers. She, however, received Rs.2,75,00,000/- as interest-free security deposit. Even though, the assessee was not the owner of the above referred property and was a tenant, the Ld. CIT(A) found that she had received Rs.2,75,00,000/- for letting the part of asset to be used by other which amounts to sub-letting of the property. The Ld. CIT(A) further observed that the assessee has not substantiated as to whether the licence fee charged by her was as per prevailing market rate in that area/locality. The Ld. CIT(A) also did not accept the other argument of the assessee that the interest free security deposit was used for business purpose and whatever income could be earned is reflected in the sum total of business income. The reasons given by the Ld. CIT(A) are that the security deposit provided by any tenant is generally kept ready in fixed deposit or in current account or any such account because the tenant can always cancel the leave & licence agreement by giving notice of period 1-1 month. The security money deposit has to be kept always ready for refunding to the tenant and in case any licensor wants to use that money for business or other purpose, still they have to make alternative arrangement to meet such exigencies. This has not been explained by the assessee. Also the assessee argued before the Ld. CIT(A) that the money was used for the business purpose. The Ld. CIT(A) observed that it was for the assessee to demonstrate and substantiate as to how the income was derived and what was the quantum of income offered on the use of Rs.2,75,00,000/- by co-relating such use but the same was not substantiated. Therefore, the Ld. CIT(A) upheld estimated income of Rs.27,50,000/- on Rs.2,75,00,000/- which is only 10% of the amount.

5. Before us, the Ld. counsel of the assessee submits that the assessee has declared an amount of Rs.4,80,000/- being leave and licence fee from office premises situated in Poddar Chambers. The assessee is not an owner of the said Poddar Chambers premises. She is a tenant of the said premises and has granted leave and licence rights to the licensee. Therefore, she has declared leave and licence fees of Rs.4,80,000/- received by her under the head ‘Income from Other Sources’. She has not claimed 30% deduction available to the owners of premises when the income is declared as ‘Income from House Property’. Had she been the owner of the office premises, then the income from leave and licence fees would have been declared under the head ‘Income from House Property’.

As per the Ld. counsel, it is true that the assessee had received security deposit of Rs.2,75,00,000/- from the licensee. However, since the assessee was not the owner of the office premises, provisions of section 23 are not applicable to her. There are no similar provisions available in the Act particularly in section 56 enabling the AO to work out the notional interest. 5.1 The Ld. counsel files a Paper Book (P/B) containing (i) Stay Order by ITAT in the matter of SA No. 288/M/2017, (ii) Order by CIT(A) for AY 2012-13, (iii) Appeal Form 35, (iv) Income Tax Assessment Order for AY 2012-13, (v) Bank of India-Saving Bank Account, (vi) Deposit Account for Abhilasha Premises, (vii) Deposit Account for Poddar Premises, (viii) Details of Deposit and Analysis, (ix) Lease Agreement Papers, (x) Return of Income along with computation and Balance sheet and Profit and Loss Account for the AY 2012-13 and (xi) Order of the CIT(A) for AY 2006-07.

6. Per contra, the Ld. DRs support the order passed by the Ld. CIT(A). A copy of the decision in the case of CIT vs. Streetlite Electric Corporation (2011) 336 ITR 348(P&H) is filed.

6. M/s Asit C. Mehta Investment Intermediates Ltd. has authorized Mr. Kirit H. Vora, Whole-time Director, to sign and execute the agreement to be effective from April 1, 2004.

7. Whereas both the parties are desirous of reducing the terms and conditions into writing so as to safeguard their mutual benefits and understand their obligations and responsibilities.

NOW THIS AGREEMENT WITNESSTH AND IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: ..... ..... ..... ..... ..... ..... ..... .....

7. It is agreed that the fees shall be paid by the Licensee to the Licensor during the each month.”

7.1 The first statute which is relevant for a leave and licence is the Indian Easement Act, 1882. Section 52 of the said Act defines a ‘licence’ as a right granted by one person to another to do something in or upon the grantor’s immoveable property, which act would, in the absence of such a right, be unlawful. It further states that a licence must not amount to an easement or an interest in the property. Thus, a licence is only permission or a right to do something upon an immoveable property. It is solely a personal right or privilege granted to the licensee by the licensor. A licence does not confer any interest in the immoveable property. It is for this reason that a licensee cannot maintain an action for possession of the property in his own name. Thus the crux of a licence is that it is always a right or a permission and never transfers ownership of the property. Under the leave and license agreement, the legal ownership and the possession of the property remains with the licensor, the assessee in the instant case. 7.2 Let us now turn to the receipt of interest-free security deposit by the assessee in the instant appeal. A similar issue arose in Streelite Electric Corporation (supra). The facts in that case are that the assessee earned rental income from letting facilities of factory, land, building and offices. The assessee had taken interest-free security of Rs.35 lakhs from two parties to whom the assets were leased out, but the assessee showed a very low rental income of Rs.1.50 lakhs as annual letting value in respect of those properties. There was no provision in the agreement for increase in rent from year to year. The Assessing Officer determined the annual value of Rs.7,80,000 by adding notional interest of Rs.6,30,000 calculated at the rate of 18% per annum on Rs.35 lakhs taken as security deposit, to the value of Rs.1.50 lakhs shown by the assessee. The Commissioner (Appeals) deleted the notional interest of Rs.6,30,000. The Tribunal affirmed the order of the Commissioner (Appeals). On further appeal, their Lordships of the Hon’ble Punjab and Haryana High Court held as under: A perusal of the lease deeds and on a conjoint reading of all the documents and an analysis of factual aspect, the irresistible conclusion is that the security deposit of Rs.35,00,000 was disproportionate to the actual contractual rent of Rs.25,000 per month, i.e. total Rs.12,500 per month for land and building etc. and Rs.12,500 per month for furniture, fixture, plant and machinery etc. which amounts to 140 times of monthly rent and has no rationale with the agreed rent and the assessee had adopted a device to circumvent its taxable income. Further, rent deed did not contain any provision for increase of rent from year to year. Still further, the security deposit of Rs.35,00,000 where the value of the property let out was Rs.17.62 lacs, plant and machinery of Rs.1.69 lacs and furniture of Rs.48,673/- cannot be held to be justified as genuine transaction of the security deposit. Thus, the security deposit was a sham device to avoid tax and had no real basis with the actual rent that was received by the assessee. (Paras 12 & 13) The annual value of the property is deemed to be the rent which property might be expected to let from year to year or where the property is let and annual rent received or receivable is in excess of the sum, the amount so received or receivable. According to section 23(1)(b) where the property is actually let out, the actual amount of rent received or receivable shall form part of the income from house property. Ordinarily, the notional interest that may accrue on security deposit would not form part of income from house property. However, where payment of the security deposit is to circumvent real rent, the same shall fall within its ambit as income from house property. Interest on the security amount of Rs.35,00,000 will be treated as income of the assessee. Thus, in the facts, as noticed above, it is considered appropriate to hold that interest @ 9% per annum on the security amount of Rs.35,00,000 would be just to meet the ends of justice and the same will be treated as taxable income of the assessee under the head ‘Income from house property’ relating to the land and building. (Paras 17 & 19) Their Lordships concluded that where the security deposit is to circumvent real rent, the same shall fall within its ambit as income from house property; in the facts and circumstances, interest @ 9% per annum on security deposit of Rs.35,00,000, which was received by the assessee from the tenant, would be treated as taxable income of the assessee under the head ‘Income from house property’. 7.3 We find that the instant case the security deposit of Rs.2,75,00,000/- is hugely disproportionate to the leave and license fees of Rs.4,80,000/- shown by the assessee. That said fees of Rs.40,000/- per month in the financial year 2004-05 still remains same in the assessment year 2012-13. 7.4 At this juncture, let us examine whether the clauses relating to ‘Leave and License Fee’ and ‘Security Deposit’ in the ‘Leave & Licence Agreement’ in the instant case are to be read separately or together. The Hon’ble Supreme Court vide order dated 23.03.2009 in Vimal Chand Ghevarchand Jain & ors. vs. Ramakant Eknath Jajoo, [Civil Appeal No. 1784 of 2009], while dealing with the construction of a commercial contract observed : "A document, as is well known, must be construed in its entirety". In assessing the true nature and character of a transaction, the label which parties may ascribe to the transaction is not determinative of its character. The nature of the transaction has to be ascertained from the covenants of the contract and from the surrounding circumstances. In National Cement Mines Industries Ltd. vs. CIT [1961] 42 ITR 69, Justice J.C. Shah (as His Lordship then was) speaking for the Hon’ble Supreme Court emphasized the following principles of interpretation to be adopted by the Court in construing a commercial transaction : " The court has, on an appraisal of all the facts, to assess whether a transaction is commercial in character yielding income or is one in consideration of parting with property for repayment of capital in instalments. No single test of universal application can be discovered for solution of the problem. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little moment, and the true nature and character of the transaction have to be ascertained from the covenants of the contract in the light of the surrounding circumstances." 7.5 The transactions must be viewed as a whole. It is not enough to examine the separate ingredients of a transaction; for the totality of a transaction may be different from the sum of its parts. Viewed as a whole, the transaction adopted by the assessee in the instant case was a device to reduce the tax burden. This is the germ of the “pre-ordained series of transactions”. The two issues i.e. ‘Leave and License Fee’ and ‘Security Deposit’ in the instant appeal are interconnected and part of the same transaction. To persuade the Tribunal to adopt, in relation to closely integrated situation, a step by step, dissecting approach, would be a denial rather than an affirmation of the true judicial process.

7.6 We find from the list of Directors of Asit C. Mehta Investment Intermediates Ltd, given to us by the Ld. counsel in response to a query by us, that the assessee (Licensor) is the Managing Director in Asit C. Mehta Investment Intermediates Ltd (Licensee). The receipt of Rs.2,75,00,000/- by the assessee as interest-free security deposit from the licensee-company in which she herself is the Managing Director cannot be ignored while computing the annual letting value.