2012 (5) TMI 207 - AT - Income Tax

Income from surrender of possessory rights of premises - tenancy (sub tenancy) right - held that - the assessee is in continuous possession of the property, was continuously conducting the business from the premises, in fact had right to construct buildings therein for the purpose of business subject to permission from the tenants and the authorities and further he had undertaken to pay increased tax, if any, on the said premises. All these factors including the fact that the assessee undertook not to sublet the premises to others do indicate that the assessee is keeping the premises only as a sub-tenant with tenancy rights. - the question of allowing to let out the premises can arise only by a tenant. The landlord/vendor has only received a consideration of Rs. 75 lakhs for sale of the trust property, whereas the assessee for surrendering his possessory title/ other rights has obtained Rs. 1.75 crores - The fact is that the amount received by the assessee was more than the amount received by the vendors per se. This also indicates that there is a right in the said property to the assessee and not mere a license holder as contended. - the assessee is having property as a sub tenant and his tenancy rights were surrendered to the buyer. Therefore, provisions of section 55(2) are applicable. - Decided against the assessee.

Issues Involved:
1. Whether the assessee was holding the rights of premises as a licensee or as a leaseholder having tenancy rights, subject to capital gains tax.
2. Disallowance of interest on loans borrowed by the assessee.

Issue 1: Licensee vs. Leaseholder and Capital Gains Tax

Facts:
The assessee, operating under "Amersey Industries & Exports" (AIE), was in possession of premises at Mathura Mills Estate, Mumbai, under an agreement with M/s Nanu Metal (Brass) Works dated 29.04.1970. The property was later purchased by Mr. Maneck Davar, and AIE surrendered its possessory rights for Rs. 1.75 crores. The Assessing Officer determined that the assessee had sub-tenancy rights, making the amount taxable under section 55(2)(a) of the IT Act, 1961. The CIT(A) upheld this view, leading to the assessee's appeal.

Arguments:
The assessee argued that it held only possessory rights as a licensee, not tenancy rights, citing the conveyance deed and relevant case law. The Revenue contended that the agreement effectively created tenancy rights, supported by the continuous possession and business use of the premises, and the right to make constructions and modifications.

Consideration:
The Tribunal examined the agreement and supplementary agreements, noting that the terms allowed the assessee to use the premises for business, make constructions, and had exclusive possession, indicating tenancy rights. The Tribunal referenced legal principles distinguishing leases from licenses, emphasizing the intention of the parties and the actual use and control of the property.

Decision:
The Tribunal concluded that the agreements created tenancy rights, not mere licenses. The assessee's continuous possession, right to construct, and business use supported this conclusion. The amount received for surrendering these rights was taxable under section 55(2). The Tribunal rejected the assessee's contentions and upheld the decisions of the Revenue authorities.

Issue 2: Disallowance of Interest on Loans

Facts:
The Assessing Officer disallowed Rs. 8,45,352/- out of Rs. 15,32,704/- claimed as interest on loans, citing interest-free advances made by the assessee. The CIT(A) enhanced the disallowance to the entire amount, arguing that the business for which the loans were initially taken had not continued.

Arguments:
The assessee contended that it continued its business, albeit with a shift from export to job work, and that the loans were for business purposes. The assessee also highlighted its credit balances, reserves, and investments in fixed assets and current assets.

Consideration:
The Tribunal noted the CIT(A)'s failure to consider the assessee's submissions regarding the continuity of business and the purpose of the loans. The Tribunal referenced the Supreme Court's judgment in S.A. Builders Ltd. v. CIT, emphasizing the need to examine the nexus between borrowed funds and their utilization.

Decision:
The Tribunal set aside the orders of the Assessing Officer and CIT(A) on this issue, directing the Assessing Officer to re-examine the nexus of borrowed funds and their use for business purposes. The issue was restored to the Assessing Officer for fresh examination, with directions to disallow interest only if funds were diverted for non-business purposes.

Conclusion:
The appeal was partly allowed, affirming the taxation of the surrendered tenancy rights and remanding the issue of interest disallowance for further examination.

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