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Income Tax Appellate Tribunal, “SMC-C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV
Per Sunil Kumar Yadav, Judicial Member
This appeal is preferred by the assessee against the order of CIT(A), interalia, on the following grounds:
Page 2 of 7 1. The orders of the authorities below in so far as they are against the appellant are opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
2. The finding of the authorities below is perverse and is contrary to the evidence on record and thus is vitiated.
3. The order of the learned CIT (A) is erroneous; as the intention of the Appellant is not considered and the Commercial Contract entered which is purely of Business nature is wrongly interrupted.
The CIT Appeals has not considered the clause applicable for the year of the Appeal and looking into what could be applicable in future if such event happens which is only probability.
5. The learned CIT Appeals failed to appreciate the facts brought in the case of Chennai Properties, where more emphasis is given to the intention and objects of the Appellant.
6. The learned CIT Appeals has observed that the first year of the lease agreement, (It is not Lease Agreement and it was Contractual Agreement) there was revenue sharing in ration of 60 and 40 and has come to conclusion that it cannot be stated as partnership in the business.
7. The Income Tax Officer & The Commissioner Appeals have failed to appreciate that the Business could be done by the Appellant or his representative in the present case the Company whom it is entrusted to the business.
8. For the above and other grounds that may be urged at the time of the hearing of the appeal, your appellant humbly prays that the appeal may be allowed and justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs.
Though various grounds are raised by the assessee but they all relate to the nature of income received from the property. The facts in briefs borne out from the record are that the return of income was filed declaring loss of Rs.8,64,317/- for the first time for the Page 3 of 7 assessment year 2012-13. The building site was acquired out of HUF Funds in the year 1997 and later on 16 apartments of 2/3 bed room were built and furnished by the appellant. He later on entered into Operation & Management agreement with M/s. Prathibha Housing and Finance (Pvt) Ltd., to manage the business with sharing ratio of 60% for the appellant and 40% for the company who manage the business. The proceeds received was treated as Business Income by the assessee and offered to tax, which is disputed by the learned Income Tax Officer and he treated it to be the Income from house property.
Aggrieved, the assessee has preferred an appeal before the CIT(A) with the submission that the assessee has entered into an agreement for doing business with M/s. Prathibha Housing and Finance (Pvt) Ltd. Therefore, the income earned on sharing basis should be treated as business income and not the income from house property. The CIT(A) re-examined the claim of the assessee but was not convinced with it and he confirmed the order of the AO.
The relevant observation of CIT(A) is extracted hereunder for the sake of reference:
“I have considered the above grounds of appeal and oral submissions made by AR of the appellant and also gone through the assessment order passed by the Assessing Officer. The copy of the lease agreement furnished before me has been perused. The relevant clauses of the agreement are given as under: The Lessor and the Lessee shall, after deduction of all expenses, share the net revenue in the ratio of 60 and 40 respectively calculated on a monthly basis and the Lessee shall deposit the Lessor’s share. On the completion of the first year, the Lessor has a choice of continuing the existing revenue share arrangement wherein the Lessor and the Lessee would share the net revenue in the ratio of 65 and 35 respectively. Alternatively, the Lessor could switch to a lease option in the second year wherein the Lessee would pay a lease rent of Rs.1,05,000/- per month and the Lessor would forfeit his right to receive any share on the revenues received by the Lessee in running the business. Further, the lessee would also give an interest free security deposit of Rs.10,50,000/- to the Lessor at the commencement of the lease option. On completion of every year after the second year, should the Lessor opt for the fixed monthly rental, there would be an annual increment would be 5% on previous rent paid. However, after completion of 5 years the increment of the 6th year would be 10% on the previous rent paid. The increment for the 7th year, 8th year, 9th year and 10th year would continue to be 5% itself. Further, in case the Lessee’s occupancy in the scheduled premises on an average is above 70% of the 5th year, then the increment for the 6th year would be 15% instead of the above stated 10% on previous rent paid. Increment for all the other years would remain at 5% as stated supra. From the above clauses of lease agreement it is very clear that the lease agreement between Lessor and Lessee for the purpose of running a home stay in the premises. Though in the first year of the lease agreement there was a revenue sharing ratio of 60 and 40 it cannot be stated as partnership in the business, as the entire business activity was carried out by the Lessee and there was no partnership deep and the Lessor has simply handed over the property owned by him for the purpose of running a home stay in the premises and from subsequent year it was like any other rental agreement. Further the appellant being NRI who has not obtained any license for doing any business in India the income received cannot be treated as business income and therefore the Assessing Officer’s action in treating as house property income is hereby upheld.”
Page 5 of 7 4. Now the assessee is in appeal before the Tribunal and reiterated his contentions that he has not leased out the property to M/s. Prathibha Housing and Finance (Pvt) Ltd., rather he was doing business with them in a profit sharing ratio of 60% for the assessee and 40% for the company. He has also invited our attention to the lease deed through which he has entered into an agreement with the lessee to run the business of providing accommodations.
The learned DR besides placing reliance upon the order of the CIT(A) invited our attention to the terms of lease deed executed between the assessee and M/s. Prathibha Housing and Finance (Pvt)
Ltd. The learned DR has submitted that the premises was given to the lessee to run its business and in the first year the assessee has received 60% of the profit as annual rent of the property and in the succeeding year the lease rent was stipulated. The entire business of renting out the apartments was exclusively done by M/s. Prathibha Housing and Finance (Pvt) Ltd. There was no involvement of the assessee in the day to day affairs of business of providing apartments to the guests on rent. The learned DR further invited our attention to clause 10 of the lease deed that the lessee has lease right for the entire portion of the scheduled premises and the lessee can sublease any portion of premise to tenant for a period during the Page 6 of 7 lease agreement period. Therefore, the assessee has no control over the day to day affairs of the activities of the lessee with regard to the scheduled premises. Thus, the assessee has simply leased out the premises to M/s. Prathibha Housing and Finance (Pvt) Ltd., and the rental income received is to be charged as income from house property.
Having carefully examined the orders of the authorities below and documents placed on record, we find that through lease deed, the assessee has leased out the entire property to M/s. Prathibha Housing and Finance (Pvt) Ltd., vide lease deed dated 31.01.2011.
Through this lease deed, the possession of the property was given to the lessee and the lessee has exclusive right over the entire property for its use and also to sublease any portion of premises to the tenant for a period within the lease agreement period. Day to day maintenance of leased premises shall also be the responsibility of the lessee.
We have carefully perused the other terms of the lease deed and we find that the assessee has simply leased out its property to M/s. Prathibha Housing and Finance (Pvt) Ltd. During the first year of lease he has agreed to receive the 60% profit of the business as annual rental income but subsequently the annual rent has been Page 7 of 7 prescribed in clause 3 of the lease deed. Therefore, by any stretch of imagination it cannot be said that the assessee was doing business with M/s. Prathibha Housing and Finance (Pvt) Ltd., on profit sharing basis. It was simply a case of leasing out of property to M/s. Prathibha Housing and Finance (Pvt) Ltd. Therefore the leased rent received by the assessee is chargeable to tax as income from house property. In the light of these facts, I find no infirmity in the order of the CIT(A) and I accordingly confirm the same..
In the result, the appeal of the assessee stands dismissed.
Pronounced in the open court on 19th May, 2017.