OBEROI BUILDINGS & INVESTMENTS PVT. LTD.,KOLKATA vs. ACIT, CIR-5, KOLKATA, KOLKATA

The captioned two appeals filed by the Assessee(group companies` appeals), pertaining to Assessment Year 2007-08, in respect of M/s Oberoi Investments Pvt. Ltd. andM/s Oberoi Buildings & Investments Pvt. Ltd., are directed against the orders passed by the Commissioner of Income Tax (Appeals)-VI, which Oberoi Investments Pvt. Ltd. & Oberoi Buildings & Investments Pvt. Ltd. 1205/Kol/2014 Assessment Year: 2007-08 in turn arise out of assessment orders passed by the Assessing Officer u/s 143(3) of the Income Tax, 1961 (hereinafter referred to as the ‘Act’).

Since these two appeals relate to same group of assessee, same Assessment Year, identical issues are involved, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. The appeal of the assessee in ITA No.1204/Kol/2014, A.Y 2007-08, is taken as the lead case. 3. We take assessee’s appeal in ITA No.1204/Kol/2014( lead case) wherein the grounds of appeal raised by the assessee reads as under: “1.That while dealing with ground numbers 1 to 5, the Ld. ClT(Appeals) instead of mechanically following the decision of the ITAT in respect of a group company, should have applied his mind and adjudicated the issue afresh considering the fact that the Hon'ble Calcutta High Court has already admitted the appeal challenging the said ITAT Order and has also stayed the operation of that order. 2.That the Ld. ClT(Appeals) erred in holding that the order of the ITAT in respect of a group-company is operational as on date ignoring the fact that the Hon'ble High Court has already passed an order staying the operation of the said ITAT order. 3.That the Ld. ClT(Appeals) erred in considering the contribution received from the shops as income from ‘house property’ and not as ‘business income’ as claimed by the assessee. 4.That the Ld. ClT(Appeals) erred in holding that 1% of the dividend income should be disallowed under section 14A on an ad-hoc basis. 5.That the assessee craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated here-in-above either before or at the time of hearing of the appeal.” 4.Ground No. 1, 2 and 3 raised by the assessee relate to the same issue whether contribution received from the Shops is assessable under the head “Income from House Property” or under the head “ Income from business or profession”. Assessee claimed contribution received from the Shops under the head “Income from business or profession”, whereas the Assessing Officer assessed the same under the head “Income from House Property”. Page | 2 Oberoi Investments Pvt. Ltd. & Oberoi Buildings & Investments Pvt. Ltd. 1205/Kol/2014 Assessment Year: 2007-08 4.1The brief facts qua the issue are that during the relevant previous year the assessee had booked income towards contribution from shops amounting to Rs.3,52,680/-. Against that income the assessee booked expenses amounting to Rs.1,15,398/- towards compensation for license fees and other charges. During the course of assessment proceedings, the assessee was asked to furnish the details of contribution from shops, details of compensation paid and copies of agreement about acquisition of the space and letting out of the space. The same were furnished by the assessee. On examination of the compensation paid, it was noted by AO that the amount consists of license fees, service fees, air-condition fees and special service charges. The contributions for shops are in the nature of charges received from the tenants. The assessee company acquired 5,665 sq. ft. Shopping area from Oberoi Sheraton Hotel at Bombay by virtue of a written agreement. According to that written agreement, the acquisition of the licensed space by the assessee will take effect not earlier than 1st September,1972 and not later than 31st December, 1972 on certain terms and conditions as mentioned in the said written agreement. According to point No.2(xiv) it has been mentioned that the live and license shall be irrevocable for a period of 50 years i.e. ending on 31st December 2022. After acquiring the said shopping space, the assessee company further let out different portion of shopping spaceto different persons on certain terms and conditions. This letting out income have been shown by the assessee as "contribution from shops” and the amount paid to the Oberoi Sheraton Hotel has been shown as "license fees and other charges". Since the assessee has become irrevocable owner of the space for 50 years, the assessee was specifically asked by the AO to explain why the income from letting out of such assets will not be treated as "income from house property". In response to this question, the assessee replied to the AO stating that in terms of section 22 of the Act any income is chargeable under the head 'lncome from house property' only on fulfilling the following conditions:  lncome should be derived from a property consisting of any building or lands appurtenant thereto.  The assessee is the owner of the said property. Page | 3 Oberoi Investments Pvt. Ltd. & Oberoi Buildings & Investments Pvt. Ltd. 1205/Kol/2014 Assessment Year: 2007-08  The property should not be used for the purpose of business or profession carried on by him, the profits of which are chargeable to Income Tax. Evidently, only in case of legal owner the income from property could be assessable as house property income and the company is not the owner of the shopping arcade.Apart from legal owner, section 27 of the Act also provides for certain circumstances where a person is treated as ‘deemed owner’ of house property for the purpose of taxability under the head “Income from house property'. As per section 27(iiib) of the Act, a person, who acquires any right in or with respect to any building or part thereof by virtue of any transaction which is referred to in clause (f) of section 269UA, is deemed to be the owner of the building.In order to appreciate whether the company could at all be considered as deemed owner under section 27 (iiib), the provision of clause (f) of section 269UA needs to be examined. As per the said clause (f) transfer in relation to any immovable property referred to in sub- clause (i) of clause (d) means transfer of such property by way of sale or exchange or lease for a term of not less than 12 years and includes allowing the possession of such property to be taken or retained in part performance of a contract of a nature referred to in section 53A of the Transfer of Property Act, 1882(4 of 1882). The assessee submitted before AO that section 269UA(f) covers cases of transfer of property only under sale, exchange or lease. However, in the instant case, the shopping arcade has been acquired by the company under lease, which is different from a lease. By entering into a licence agreement with EIH Limited what the company has received is only a right to use the said shopping space. The same would be evident from clause7(i) of the agreement which provides that 'this agreement does not create any interest or any other right in favour of Licensee in the said shopping centre or any part thereof but it is mere license to use the said shopping centre given to the Licensee’. A license to use the property is distinguished from a lease in respect that a licensee does not have any possession or interest in the property. In case of license, all the ingredients of ownership including the right to possession vest in the owner licensor and not in the licensee. Since a leave and license is materially different from lease and also does not transfer any interest in the property to the licensee, it will obviously be outside the scope of section 269UA(f). A pure and simple licensee cannot, therefore, be treated as a deemed owner under section 27(iiib). Again, there are restrictive clauses e.g. Page | 4 Oberoi Investments Pvt. Ltd. & Oberoi Buildings & Investments Pvt. Ltd. 1205/Kol/2014 Assessment Year: 2007-08 clauses 2(v), (vi), (vii), (viii), (ix), (xii), (xv), (xvi), (xvii) & (xviii) in the licence agreement between EIH Limited and the company, which establish the fact that the user right of the company is not absolute. As such section 27(iiib) read with section 269UA(f) is not applicable in the instant case as the agreement is only for use of property and not for the transfer of the same. Since the company is neither the owner nor the deemed owner in terms of section 27(iiib) so the "Contribution from Shops” can not be assessed under the head "Income from house property". The assessee stated before the AO that, the company had basically been formed with the main objective of carrying on the business of an investment company and the business of acquiring on licence or by purchase, Iease, exchange, hire of lands and property and to sublease or sublicense such land or property. lt is the business of the company to acquire premises on licence and to sublicense the same in order to earn revenue. The assessee also pointed out before the AO that the Memorandum of Association of the company clearly provides the objects for which the company has been formed. Clause lll, Part B of the Memorandum providing the objects ancillary to the main objects covers under point No.3 the following: "To acquire on a license premises suitable for housing and accommodating shops, boutiques, stores, offices, show rooms for the purpose of making the same available on the basis of lease and licence or sub-licence (and not for leasing or renting the same out) to any person, firm or company". Therefore, based on the object clause of the company, the assessee submitted before the AO that the company had been formed for the purpose of taking premises on licence and for granting the same for housing shops, offices, etc. together with all infrastructure not on a mere lease or rent but as a business activity and therefore the said income will be assessable under the head business income. The assessing officer has examined the submissions of the assessee and held that the assessee tried to argue that the he is not the legal owner of the said shopping space and it was merely a license.The Assessing Officer also relied on the judgment of Hon’ble Supreme Court in the case of CIT vs. Poddar Cement Ltd., 226 ITR 625, which ruled that under the common law, ‘owner’ means a person who has Page | 5 Oberoi Investments Pvt. Ltd. & Oberoi Buildings & Investments Pvt. Ltd. 1205/Kol/2014 Assessment Year: 2007-08 got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc But, in the context of Section 22 of the Income Tax Act having regard to the ground realities and further having regard to object of the Income Tax Act, namely, ‘to tax the income’, ‘owner’ is a person who is entitled to receive income from the property in his own right. The requirement of Registration of the Sale Deed in the context of Section 22 is not warranted. Based on the judgment of the Hon`ble High Court (supra), the AO held that since the assessee was having the irrevocable right for 50 years over the shopping space, in view of provisions of section 27(iiib) of the I. T. Act, 1961 and findings of the Apex Court of the country stated above, the assessee is the owner of the building or shopping space. Therefore, the income derived from the said building or shopping space are to be taxed under the head “income from House property.