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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAOShri Sanjay Munshi, Shri B.M. Parekh Shri S.K. Mishra, DR
सुनवाई की तायीख / Date of Hearing : 04.11.2016 घोषणा की तायीख /Date of Pronouncement : 03.01.2017 आदेश / O R D E R
PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 18.5.2015 is against the order of the CIT (A)-Mumbai dated 16.3.2015 for the assessment year 2007-08. In this appeal, assessee raised the following grounds which read as under:- “a) The Ld CIT (A), on the facts and in the circumstances of the case and in law, has erred in accepting the Ld AO order of treating the rent received by Alt Property Private Limited as the rent of the appellant resulting into addition of income under the head income from house property to the appellant. The said addition may please be deleted and the returned income of the appellant under the head income from house property may please be accepted. b) Without prejudice to the above, if the income of Alt Property Private Limited may be treated as income of the appellant, suitable directions be given towards giving credit of taxes paid by Alt Property Private Limited towards such income. c) Without prejudice to the above grounds of appeal, the Ld CIT (A) has erred in estimating the Alt Property Limited share of income @ 30% for the various services rendered by the said company to the tenant. The said proportion may kindly be revised considering the expenses incurred by the said company for the provision of the various services and addition if any may please be restricted to certain percentage of the profits earned in totality.” Briefly stated relevant facts of the case are that the assessee owns 50% share 2. in a building named „Munshi Manor‟, which was called „Gandhi Mansion‟ earlier, and the other 50% share is owned by the assessee‟s uncle. The said property has Ground plus 4 floors (G + 4). The ground and the second floors were let out to Ashoka Guest House, a proprietorship concern. The first and third floors were let out to Sanjay Munshi (HUF). Fourth floor was let out to Ravikanth Munshi. The said Ashoka Gust House, Sanjay Munshi HUF and Ravikanth Munshi subleased the respective premises to a private limited company named M/s. Alt Property Pvt Ltd (APPL) which is substantially owned by the assessee. The yearly rents paid by the said three lessees ie Ashoka Gust House, Sanjay Munshi HUF and Ravikanth Munshi are Rs. 16,380/-; Rs. 2,988/- and Rs. 14,655/- respectively. Assessee owns 50% of the above yearly rent Rs. 17012/-. The said G + 4 floors were sub-leased by these three entities to M/s. Alt Property Pvt Ltd which in turn started exploiting the said property by way of service centre. As a part of its business, the ground and first floors were let out by the APPL to South African Consulate for yearly rent of Rs. 9 lakhs. Second floor was rented out to Gamma Corporation for yearly rent of Rs. 12 lakhs. Third floor was partly rented out to Mecaplast India Pvt Ltd for yearly rent of Rs. 12 lakhs and the other part was rented out for a business income of Rs. 14.85 lakhs to MTV India Pvt Ltd. Finally, the fourth floor was rented out to ABP Pvt Ltd for an income of Rs. 12.05 lakhs. The total income earned by these assessees works out to Rs. 59,90,000/-. M/s. Alt Property Pvt Ltd offered the above income of Rs. 59.90 lakhs as „business income‟ in the return of income and claimed expenses before determining the profit amounting to Rs. 5,42,006/- for the AY 2007-2008. Simultaneously, assessee (Sanjay C Munshi), with the 50% share in the above Gandhi Mansion (supra), filed the return of income for the year under consideration offering the ALV of his shares of Rs. 17,012/- as per the Municipal Tax assessments. The assessment was completed u/s 143(3) of the Act before the same was reopened by issuing notice u/s 148 of the Act. The ALV offered by the assessee is much lower than what is received by him from Ashoka Gust House, Sanjay Munshi HUF and Ravikanth Munshi and also the income of M/s. Alt Property Pvt Ltd returned for the AY 2007-2008. In other words Rs. 17,012/- (ie 50% of the share of rent from Gandhi Mansion) is no comparison to Rs. 59.09 lakhs earned by the Alt Properties Pvt Ltd. AO is of the opinion, the market value of the property as declared by the assessee, who owns Alt Property Pvt Ltd, is much higher than what is shown by the assessee-individual. AO also noticed that Alt Property Pvt Ltd offered the said income of Rs. 59.90 lakhs as „business income‟ and adjusted the same against the expenses before arriving at the taxable income of the company which has earned Rs. 55 lakhs (page 199 of the paper book is relevant in this regard). Considering the fact that the assessee is the part ownership of the said Gandhi Mansion and his family members were roped in to have a collusive understanding and arrangement for ultimate purpose of earning huge income out of the said property and avoid paying proportionate taxes by entering into a collusive arrangement and legal quagmire. AO also noticed that the said company earned income from South African Consulate by letting out the property in which case such property is outside the ambit of Maharashtra Rent Control Act, 1999. Accordingly, the income earned by the company M/s. Alt Property Pvt Ltd is considered as the ALV of the property and ignored the municipal rateable values before reassign the 50% of Rs. 59.90 lakhs as ALV of the said property to the extent of its share. The assessment for the AYs 2008-09; 2009-10; 2010-11 and 2011-12 were also assessed / re-assessed or pending for assessments. Ld AR submitted that the assessments for the AYs 2008- 09 and 2011-12 are finalised in the lines mentioned above for the earlier AY 2007-08 and the matters are pending for adjudication before the Division Bench of the Tribunal. He also submitted that the re-assessments for the AYs 2009-10 and 2010- 11 are still pending before the AO. The Tribunal has given the date of hearing for AYs 2008-09 and 2011-12 as 29.3.2017. So far as the re-assessment for the AY 2007-08 is concerned, the assessed income of the assessee is determined at Rs. 28,83,410/-, which is arrived at after treating his 50% share of the business income of Rs. 25,45,750/- earned by M/s. Alt Property Pvt Ltd. The said amount of Rs. 25.45 lakhs is arrived at after reducing 15% of the total rent out of the gross income of Rs. 59.90 lakhs. Ld Counsel for the assessee submitted that no action is initiated in the case of the other 50% shareholder, Shri N.K. Munshi. The Department completely ignored about taxing the other 50% share in the case of Shri N.K. Munshi. Aggrieved with the above re-assessment order, assessee filed an appeal before the first appellate authority.
3. During the first appellate proceedings, assessee filed written submissions and reasoned out various objections raised by the AO, the contents of which are extracted in para 4.1 of the FAA. After considering the submissions of the assessee, CIT (A) approved the conclusions of the AO in principle. However, CIT (A) granted relief regarding the extent of deduction out of total rent. CIT (A) allowed 30% of the total rent as deduction against the 15% allowed by the AO in the re-assessment. The contents of para 5.1 [Grounds No.(c) & (d)] of the CIT (A)‟s order are relevant in this regard. Briefly stating, CIT (A) is of the view that the provisions of section 23(1)(a) provides for ALV ie the sum for which the property might reasonably be expected to let from year to year. The rent realised by the property by its own company constitutes litmus test for quantifying the sum, the property might reasonably be expected to earn. CIT (A) distinguished the decision cited by the assessee. CIT (A) mentioned that the assessee has shown meagre figure of rent from three persons (Ashoka Gust House, Sanjay Munshi HUF and Ravikanth Munshi) when the same property is the source of income of Rs. 59.90 lakhs. Aggrieved with the above conclusions of the CIT (A), assessee fled the present appeal with the above extracted grounds.
4. During the proceedings before us, Ld Counsel for the assessee narrated the above facts of the case and mentioned that the CIT (A) erred in approving the AO‟s contention that the income earned by M/s. Alt Property Pvt Ltd constitutes “rent” in the hands of the assessee to the extent of his share in the property. In the process, CIT (A) ignored the business income of M/s. Alt Property Pvt Ltd and the independent existence of that person-company. A sum of Rs. 59.90 lakhs earned by the company constitutes „business income‟ in essence and the same was treated as „income from house property‟ in the hands of the assessee. Without prejudice, Ld Counsel for the assessee submitted that he has no objection for taxing the same in the re-assessment as done by the AO / CIT (A). However, Ld AR objected to the failure of the AO in giving credit to the taxes by M/s. Alt Property Pvt Ltd on the sum, which is now taxed in the hands of the assessee as „income from house property‟. Further, Ld Counsel for the assessee also mentioned without prejudice that the CIT (A) erred in granting deduction of increased percentage of 30% towards expenses, when the expenses claimed are genuine. Ld Counsel for the assessee argued for further increase. Further, Ld Counsel for the assessee submitted that the rental arrangement between the assessee and N.K. Munshi on one side and Ashoka Guest House, Sanjay Munshi HUF and Ravikanth Munshi on the other, is dated prior to the Maharashtra Rent Control Act, 1999 and therefore, it is binding on the Department to accept the rateable value as per the municipal records for computing the ALV of the property. It is another contention of the assessee that the rental / lease documents among the concerns are undisputed by the Revenue. In that case, the suspicion of collusiveness for tax avoidance is undisputable. Without prejudice to the above, Ld Counsel for the assessee agreed to the fact that all these arrangements among the family members are done as a part of tax planning and the same is legally valid. Referring to the Department‟s failure to take any initiatives under the Statute in the case of Shri N.K. Munshi, the50% co-owner of the Gandhi Mansion, Ld Counsel for the assessee submitted that the Department accepted the returns filed by the assessee, which is based on rateable values of the Municipal Authorities. Referring to the assessment in the case of M/s. Alt Property Pvt Ltd, Ld Counsel for the assessee submitted that the claim of that assessee as a „business income‟ was accepted by the Revenue for the AYs 2003-04; 2005-06 and 2006-07 u/s 143(3) of the Act, after due process of scrutinising the case of the assessee. In such circumstances, the Revenue cannot assess the total income earned by the company in the hands of the assessee, which is against the principle of consistency. For the AYs 2005-06 and 2006-07, the returns filed by M/s. Alt Property Pvt Ltd are accepted u/s 143(1A) of the Act and no reopening or any other proceedings are initiated against the said company. If no corresponding relief is granted in the case of the said company, no credit of taxes paid by the company is granted by the present assessee and the whole exercise amounts to „double taxation‟ of the same income relatable to Gandhi Mansion. With these arguments, Ld Counsel for the assessee submitted for accepting the claim of the assessee as claimed in the original return of income. Alternatively, Ld AR pleaded for granting the credit to the taxes by the company in addition to the further increase in the extent of deduction out of gross rental income, over and above 30% granted by the CIT (A). Further, Ld Counsel for the assessee also argued for the exemption of the property from the ambit of Maharashtra Rent Control Act, 1999, in the case of tenancy of South African Consulate.
5. Per contra, Ld DR for the Revenue argued stating that there is an arrangement involving assessee‟s mother and HUF and the assessee‟s private limited company ie M/s. Alt Property Pvt Ltd. This arrangement has the effect of playing with the provisions of the Act with ultimate aim of avoiding paying taxes on the real ALV of the property in question ie Munshi Manor. The documents signed among the parties are created and the arrangement constitutes “self-serving documents”. It is the responsibility of the Revenue to delve into the original intention of the assessee and its arrangements. It is only the responsibility of the AO to bring out the real rental value (ALV) of the Munshi Manor for tax purposes as per the provisions of section 23(1)(a) of the Act. However, conceded to the fact that the assessee deserves to the tax credit paid by the company M/s. Alt Property Pvt Ltd, which substantially owned by the assessee. The original rent arrangement by the assessee, with Ashoka Gust House, Sanjay Munshi HUF and Ravikanth Munshi, is original and final one as they are different entities of the same person. Shri Ravikanta Munshi is a passive tenant in the whole claim of arrangement. Drawing out arrention to the shareholding of M/s. Alt Property Pvt Ltd, Ld DR submitted that the said company owned by the assessee. In that case, the intrinsic value of the property in terms of rent is the income offered by the company out of the exploitation of the said Munshi Manor. Therefore, the AO is justified in considering Rs. 59.90 lakhs as the gross ALV of the Munshi Manor. On confirming the same, AO allowed 15% on the said sum as a deduction towards expenses incurred for earning of the said gross income of Rs. 59.90 lakhs. Ld DR also submitted that the CIT (A) is magnanimous in doubling the extent of deduction from 15% to 30% towards the expenses on ad-hoc basis. Ld DR also mentioned that no further deduction is allowable as 30% is the cap provided u/s 24 of the Act. Further, Ld DR mentioned that it is the responsibility of the AO not only to assess the income but also investigate into the actual substance of the transactions. The Assessing Officer is justified in lifting the veil of arrangement for taxing the real ALV of Munshi Manor in the year under consideration. Referring to the AO‟s failure in taking action against Shri N.K. Munshi and also scrutiny action in the case of M/s. Alt Property Pvt Ltd for the AYs 2006-07 and 2007-08, Ld DR submitted that there is an issue of clarification among the officers of the Departments as the assessee‟s files have reference at different addresses and the same should not come in the way of taxing the AL of the Munshi Manor.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On perusal of the facts, we find, the case of the Revenue, in principle, is that the assessee‟s rental income of the property should be based on the earning of the APPL-company, which runs a business centre in the said premises and also other rentals from other tenants in it (ie Gandhi Mansion / Munshi Manor). But in practice, there are number of issues that were thrown to dust bin. (i) Principle of consistency:- Assessee partly owned the said Munshi Manor / Gandhi Mansion for many years and the Revenue has been accepting the claim of assessee qua the rateable rental value of the buildings without any disturbances. Details are already discussed in the portion of the order meant for arguments of the Ld Counsels. Disturbing the claims of the assessee in the year under consideration is not appreciated as the facts and the property in question are one and the same. (ii) Income of the APPL:- Assessee incorporated the said company validly and legally and entered into a valid lease agreement with all the stakeholders of the property and started a business centre for exploiting the said property for business based on the principles laid down for the same. The business income earned by the company out of the said principles cannot constitute the intrinsic rental value of the said Mansion. In our view, the rental value of the building is conceptually different from that of the building when the same is used for commercial profits. Commercial profits of the company cannot be equated with the rental value – ALV of the property alone. It has the element of profit motive of the businessman and the skilled employees of any organization. It has human element involving decisions of the management / employer and individuals. Rental value of the property is not synonymous with the business profits earned out of the property. From this point of view, the profits of the APPL minus same percentage of expenses do not constitute the ALV of the said Mansion. Therefore, based on this reasoning, we dismiss the relevant conclusions of the AO / CIT (A).
Further, we find the Revenue has not taxed / re-assessed the other 50% of the said Mansion for he reasons unknown to us. This kind of half-backed attempt of AO in taxing the income of property is unsustainable in law.
Further also, we find that the Revenue has not considered the fact of valid incorporation APPL and object of the said company. Without any sustainable reasons, the profits of the said company are taken as the basis for taxing 50% of the ALV of the said Mansion in the hands of the assessee. In the process, the profits are twice-taxed ie once in the hands of the assessee partly and then in the hands of the APPL. In this regard, AO has not granted any relief to the said company. Rather, same is taxed twice and he denied the tax credit too while reassessing in the hands of the assessee. Actually, assessee raised this as the ground of appeal
without prejudice. Thus, the approach of the Revenue in dealing with the whole issue is deplorable and legally unsustainable. We find, the AO / CIT (A) has allowed certain percentage of business income of the APPL as expenses and allowed the same before taxing the rental income in the hands of the assessee. As such, AO / CIT (A) failed to justify the said percentage with any data or comparable cases. Whole of this exercise of the officers lack the strength of the Statute or the judicial precedents and it is a case of adhocisam. The same is unacceptable and unsustainable. Further, the Apex Court in the case of M/s. Chennai Properties & Investments Ltd, Chennai vs. CIT in Civil Appeal No. 4494 OF 2004, dated April 09, 2015 held that the object of the company matters so far as the „head of income‟ is concerned. AO cannot alter the business income to property income and cannot alter the company status to AOP or otherwise, whimsically, without making out the good case with evidence. The conclusions of the AO / CIT (A), when unsupported by the evidence, become mere opinions and surmises. Such mere opinions do not constitute validity legally.
9. Thus, in our view, the conclusions drawn by the AO / CIT (A) in the assessment order and CIT (A) order are unsustainable in law. Accordingly, we allow the Ground no.1 in favour of the assessee. Considering the same, the other grounds raised without prejudice are dismissed as academic.
10. In the result, the appeal of the assessee is partly allowed.