2008 (11) TMI 435 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income.
2. Computation of annual value of the property.

Summary:

Issue 1: Classification of Rental Income
The first issue is whether the rent received from letting out properties should be assessed as 'Business Income' or under the head 'Income from House Property'. Both parties agreed that this issue is covered against the assessee by the Supreme Court decision in Shambhu Investment (P.) Ltd. v. CIT [2003] 263 ITR 143. Respectfully following this precedent, the ground raised by the assessee was dismissed.

Issue 2: Computation of Annual Value of the Property
The second issue pertains to the computation of the annual value (ALV) of the property. The Assessing Officer (AO) determined the ALV at Rs. 27,36,000, contrary to the Rs. 6,00,000 declared by the assessee. The property was let out to Mrs. Resham Wadhwa, who sub-let it at a higher rent. The AO concluded that the arrangement was a colorable device to avoid tax, thus determining the ALV based on the sub-tenant's rent. The CIT(A) confirmed this order.

The assessee argued that the rent received by the tenant from the sub-tenant cannot be considered as ALV u/s 23 in the landlord's hands, citing various case laws and a Board Circular. However, the Tribunal noted that the genuineness of the tenancy agreement was questionable due to the relationship between the assessee and the tenant and the unusually low rent compared to the market rate. The Tribunal held that the agreement was a device to reduce tax liability and determined the ALV at Rs. 27,36,000.

The Tribunal's decision was supported by the Madras High Court ruling in N. Nataraj v. Dy. CIT [2004] 266 ITR 277, where a similar arrangement was deemed non-genuine. The Tribunal also referenced the Supreme Court decision in ITO v. Ch. Atchaiah [1996] 218 ITR 239, emphasizing that income must be assessed in the right hands, regardless of assessments made in other hands.

The Tribunal rejected the assessee's contention that there was no tax evasion since both parties were in the highest tax bracket, noting the difference in tax rates between the company and an individual. The Tribunal concluded that the rent and security deposits received by Mrs. Resham Wadhwa were deemed to be on behalf of the assessee, and any municipal tax paid by her should be allowed as a deduction in computing the assessee's income.

Conclusion:
The Tribunal upheld the CIT(A)'s order with a modification to allow the deduction of municipal taxes paid by Mrs. Resham Wadhwa. The appeal of the assessee was dismissed subject to this modification.