2005 (1) TMI 601 - AT - Income Tax

Summary

Issues Involved:

1. Deletion of addition on account of enhanced rent
2. Deletion of addition on account of interest on enhanced rent
3. Deletion of addition for alleged services provided to Ministry of Defence
4. Allowance of expenses for alleged services provided to Ministry of Defence
5. Deletion of addition on account of arrears receivable as per lease deed
6. Deletion of addition on account of sub-letting property to sister concerns

Detailed Analysis:

1. Deletion of Addition on Account of Enhanced Rent:

The CIT(A) deleted the addition of Rs. 91,94,850 and Rs. 5,12,00,000 made by the Assessing Officer (AO) on account of enhanced rent. The AO had included these amounts as income from house property for the assessment years 1997-98 and 1998-99, respectively. The CIT(A) held that the amounts received by the assessee pursuant to the award of the arbitrator were in the nature of damages for use and occupation or mesne profits, which were not liable to tax as they constituted capital receipts. The CIT(A) relied on various judicial pronouncements, including the decisions of the Hon'ble Calcutta High Court in CIT v. Smt. Leela Ghosh and the Hon'ble Kerala High Court in CIT v. Mrs. Annamma Alexander, which held that mesne profits are capital receipts and not taxable.

2. Deletion of Addition on Account of Interest on Enhanced Rent:

The CIT(A) also deleted the addition of Rs. 4,21,475 and Rs. 3,94,009 made by the AO on account of interest on enhanced rent. The CIT(A) held that interest on mesne profits is an integral part of the mesne profits and is also not a revenue receipt, thus not taxable. The CIT(A) relied on the decision of the Hon'ble Kerala High Court in CIT v. Mrs. Annamma Alexander, which held that interest on mesne profits is not taxable as income.

3. Deletion of Addition for Alleged Services Provided to Ministry of Defence:

The AO had disallowed the deduction of Rs. 6,60,000 claimed by the assessee for payments made to M/s. Amrit Properties for providing furniture and fixtures, and electrical and sanitary fittings to the Ministry of Defence. The CIT(A) deleted this addition, holding that the arrangement between the assessee and M/s. Amrit Properties was genuine and had been accepted by the Department for over a decade. The CIT(A) noted that the tenant had accepted the arrangement and made payments directly to M/s. Amrit Properties.

4. Allowance of Expenses for Alleged Services Provided to Ministry of Defence:

The CIT(A) allowed the deduction of Rs. 6,60,000 claimed by the assessee for payments made to M/s. Amrit Properties. The CIT(A) found that the work of complying with the Ministry of Defence's requirements and maintaining the premises was entrusted to M/s. Amrit Properties, and this arrangement was continuing from the very beginning of the lease period. The CIT(A) held that the arrangement was genuine and not a sham, and thus allowed the deduction.

5. Deletion of Addition on Account of Arrears Receivable as per Lease Deed:

The AO had brought to tax the entire sum of Rs. 5,12,29,215 received by the assessee towards arrears of enhanced rent and interest on arrears of enhanced rent for the assessment year 1998-99. The CIT(A) deleted this addition, holding that the amounts received by the assessee in pursuance to the award constituted damages/mesne profits, which were capital receipts and not liable to tax. The CIT(A) directed the AO to recompute the income from house property by adopting the revised rent fixed under the terms of the new lease deed dated 27-11-1998.

6. Deletion of Addition on Account of Sub-letting Property to Sister Concerns:

The AO had made an addition of Rs. 19,20,000 on account of property No. 74-75, Scindia House, sub-let by the assessee to its sister concern, M/s. A-One Travels and Tours Pvt. Ltd. The AO had adopted the monthly rent of Rs. 1,60,000 received by the sub-tenant, M/s. DLH World Wide Express, as the annual value of the property. The CIT(A) deleted this addition, holding that the rent received by the assessee from M/s. A-One Tours & Travels Pvt. Ltd. was alone relevant for determining the annual value of the property. The CIT(A) noted that the lease between the assessee and M/s. A-One Tours & Travels was evidenced by proper agreements and was not a sham.

Conclusion:

The appeals by the Revenue were partly allowed. The Tribunal held that mesne profits decreed by a court of law are taxable income in the hands of the decree holder, and the relevant year for taxation is the year in which the income is deemed to have accrued. The Tribunal directed the AO to verify whether interest was payable on enhanced rent as per the revised lease agreement dated 27-11-1998. The Tribunal also held that the deduction of Rs. 6,60,000 claimed by the assessee was not allowable under section 24 of the Income-tax Act, 1961, and thus allowed the Revenue's appeal on this ground. The Tribunal dismissed the Revenue's appeal regarding the addition on account of sub-letting property to sister concerns, upholding the CIT(A)'s order.