2017 (1) TMI 1289 - AT - Income Tax

Rental income of the property - whether 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 (i.e. Gandhi Mansion / Munshi Manor)? - Held that - 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. Also 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 i.e. 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. - Decided in favour of assessee Apex Court in the case of M/s. Chennai Properties & Investments Ltd, Chennai vs. CIT 2015 (5) TMI 46 - SUPREME COURT 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. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of rent received by Alt Property Private Limited as the rent of the appellant.
2. Credit of taxes paid by Alt Property Private Limited.
3. Estimation of Alt Property Limited's share of income for services rendered.

Issue-wise Detailed Analysis:

1. Treatment of Rent Received by Alt Property Private Limited as the Rent of the Appellant:
The appellant contested the CIT (A)'s decision to treat the rent received by Alt Property Private Limited (APPL) as the appellant's income from house property. The property in question, Munshi Manor, was partly owned by the appellant and subleased to APPL, which then rented it out to various tenants. The AO considered the income earned by APPL as the appellant's rental income, arguing that the market value of the property declared by the appellant was much lower than the income generated by APPL. The CIT (A) upheld this view, concluding that the rent realized by APPL should be considered the Annual Lettable Value (ALV) of the property. However, the Tribunal found that the business income of APPL, derived from commercial exploitation, cannot be equated with the rental value of the property. The Tribunal emphasized the principle of consistency, noting that the Revenue had previously accepted the appellant's claims based on municipal rateable values without disturbance. Therefore, the Tribunal dismissed the AO and CIT (A)'s conclusions, ruling that the business income of APPL should not be treated as the appellant's rental income.

2. Credit of Taxes Paid by Alt Property Private Limited:
The appellant argued that if the income of APPL is treated as the appellant's income, credit should be given for the taxes paid by APPL on that income. The Tribunal noted that the AO failed to grant such credit, resulting in double taxation. The Tribunal found this approach legally unsustainable and emphasized that the profits of APPL were taxed twice—once in the hands of APPL and again in the hands of the appellant. The Tribunal highlighted the need for consistency and fairness in tax treatment, ruling that the appellant should be granted credit for the taxes paid by APPL if the income is taxed in the appellant's hands.

3. Estimation of Alt Property Limited's Share of Income for Services Rendered:
The CIT (A) had allowed a 30% deduction from the total rent as expenses incurred by APPL, while the AO had allowed only 15%. The appellant argued for a further increase in the deduction percentage, contending that the expenses claimed were genuine. The Tribunal found that the AO and CIT (A) failed to justify the percentage of deduction with any data or comparable cases, resulting in an ad-hoc and unsustainable approach. The Tribunal emphasized that the business income of APPL, derived from its commercial activities, should not be conflated with the rental value of the property. The Tribunal ruled that the conclusions drawn by the AO and CIT (A) lacked statutory and judicial support, and thus, the appellant's claim should be accepted as originally filed.

Conclusion:
The Tribunal allowed the appeal in part, ruling in favor of the appellant on the primary issue of treating APPL's business income as the appellant's rental income. Consequently, the other grounds raised without prejudice were dismissed as academic. The Tribunal emphasized the principles of consistency, fairness, and statutory support in its judgment. The appeal was partly allowed, and the order was pronounced in the open court on January 03, 2017.