2006 (4) TMI 351 - AT - Income Tax

Income from house property, Tax on distributed profits of domestic companies, Minimum Alternate Tax

Summary

Issues Involved:
1. Taxability of rental income received by the appellant.
2. Applicability of dividend distribution tax under section 115-O of the Act.
3. Computation of book profits under section 115JB of the Act.

Detailed Analysis:

1. Taxability of Rental Income:
The appellant contested the decision of the CIT(A) which held that the rental income received by the appellant should be taxed in its hands. The appellant argued that section 27(iii) of the Income Tax Act, 1961, applies, deeming the shareholders as the owners of the property and not the appellant company. The Tribunal examined the facts and found that the investment for the construction was made by the shareholders and not the company. The company merely passed book entries to recognize the legal title. The Tribunal concluded that the shareholders were the beneficial owners of the property as per Articles 53 and 54 of the Articles of Association, which granted them rights over the constructed area. Therefore, the rental income should be taxed in the hands of the shareholders and not the appellant company.

2. Applicability of Dividend Distribution Tax:
The appellant argued that the distribution of rental income to the shareholders did not constitute a dividend as defined under section 2(22) of the Income Tax Act, 1961, and hence, section 115-O did not apply. The Tribunal agreed, noting that the rental income was not the company's income but was received on behalf of the shareholders due to an overriding obligation. Since the company did not have any other income or profits, it could not declare dividends. The distribution of rental income was not a dividend under the Companies Act or the Income Tax Act. Consequently, the tax under section 115-O was not applicable.

3. Computation of Book Profits:
The appellant argued that the rental income received from Samsung should not be included in the computation of book profits under section 115JB of the Income Tax Act, 1961. The Tribunal held that the rental income was received on behalf of the shareholders and distributed to them, and thus, it did not constitute income of the appellant even under commercial principles of accounting. Referring to the decision in Syndicate Bank v. Asstt. CIT, the Tribunal concluded that the rental income should be excluded from the book profits for the purpose of section 115JB, and therefore, minimum alternative tax was not payable for the year in question.

Conclusion:
(i) The rental income cannot be taxed in the hands of the appellant under section 22, as the shareholders are deemed owners under section 27(iii) of the Act.
(ii) The distribution of rental income to shareholders is not a dividend and is not subject to tax under section 115-O.
(iii) The rental income should not be included in the computation of book profits under section 115JB, and thus, minimum alternative tax is not applicable.

The appeal of the appellant was allowed.