2018 (10) TMI 719 - AT - Income Tax

Nature of rental income - income from House Property or Business Income - taxability of receipt on transfer of tenancy as income from other sources - taxability of transfer of revisionary rights as long term capital gain - Application of section 50 on transfer of revisionary rights - Held that - the nature of the income which had been rental earning from the house property will not change just because it has been received by the company formed with the object of carrying out business as builder and developer. From the records, we also noticed that the nature of the receipts was rental income even to the previous owners and was taxable accordingly under the head Income from the house property . - Decided against the assessee. Transfer of tenancy rights - Held that - since the assessee is in the business of builder and developer, therefore, the amount received on transfer of tenancy rights cannot be taxed as Business income . The AO had already allowed the related expenses on account of legal & professional fees and the balance amount of ₹ 2,53,888/- was taxed under the head Income from other sources - Decided against the assessee. Transfer of revisionary rights - Held that - the assessee company has assigned by and Large all its rights over the said two flats to those persons, so much so, that at one place it was mentioned that, This purchaser would be entitled to sale I transfer and assign the said premises subject to a right of first refusal available to the purchaser as separately recorded . - the language used in such deed is nothing but to camouflage the real nature of transaction. Even from the records, it is evident that assessee had sold its right, title and interest in the said property, therefore it was rightly taxed under the head capital gain . - Decided against the assessee.

Issues Involved:
1. Classification of rental income as 'Income from House Property' vs. 'Business Income'.
2. Classification of receipt on transfer of tenancy as 'Income from Other Sources' vs. 'Business Income'.
3. Classification of receipt on transfer of reversionary rights as long-term capital gain vs. capital receipt not liable to tax.
4. Application of Section 50C on transfer of reversionary rights and replacement of sale proceeds.

Detailed Analysis:

Issue 1: Classification of Rental Income
The assessee challenged the confirmation of rental income of ?60,281 as 'Income from House Property' instead of 'Business Income'. The tribunal upheld the decision of the CIT(A), noting that the assessee had acquired a 5/6th lease right of an old building named 'Kapoor Mahal' along with tenants for the remaining lease period. Despite the assessee being a builder and developer, it could not acquire the remaining 1/6th portion, and the tenants continued to occupy the premises. The revenue authorities invoked Section 27(iiib) of the Income Tax Act, treating the assessee as the owner of the leased property since the lease period exceeded 12 years. The tribunal agreed that the nature of the income, which was rental earnings from the house property, would not change simply because it was received by a company formed for business as a builder and developer. The tribunal cited the Supreme Court decisions in Sultan Bros Pvt Ltd and East India Housing & Land Development Trust Ltd to support this conclusion. Consequently, the tribunal dismissed this ground of appeal.

Issue 2: Classification of Receipt on Transfer of Tenancy
The assessee contested the classification of ?7,50,000 received on transfer of tenancy rights as 'Income from Other Sources' instead of 'Business Income'. The tribunal upheld the CIT(A)'s decision, noting that the assessee received ?7.50 lakh for transferring tenancy rights of some flats in 'Kapoor Mahal'. Given that the assessee's business was that of a builder and developer, the tribunal agreed that the fee obtained on transfer of tenancy rights could not be taxed as business income. The AO had already allowed related expenses on legal and professional fees, taxing only the balance amount of ?2,53,888 under 'Income from Other Sources'. The tribunal found no new facts or contrary judgments to rebut the CIT(A)'s findings and dismissed this ground of appeal.

Issue 3 & 4: Classification and Valuation of Receipt on Transfer of Reversionary Rights
The assessee challenged the classification of ?5,00,000 received (?2,50,000 each from two tenants) on transfer of reversionary rights as long-term capital gain and the application of Section 50C, which replaced the sale proceeds with ?43,79,500. The tribunal upheld the CIT(A)'s decision, noting that the assessee had received ?5 lakh from two tenants for converting tenancy rights into ownership rights for their flats. The AO found that the transaction was structured to camouflage the real nature of the transaction, i.e., the sale of assets at a low price to related parties. The stamp valuation authority had valued the flats at ?23,78,500 and ?20,01,000, respectively. The tribunal agreed that the language used in the deed was intended to disguise the true nature of the transaction and that the assessee had effectively sold its rights, title, and interest in the property, which should be taxed as capital gain. The tribunal dismissed the assessee's reliance on various judgments, finding them inapplicable to the facts of the case. Consequently, the tribunal dismissed these grounds of appeal.

General Ground:
The fifth ground was general in nature and required no specific adjudication.

Conclusion:
The tribunal dismissed the appeal filed by the assessee, upholding the CIT(A)'s findings on all grounds, with no order as to cost. The order was pronounced in the open court on 30th August 2018.

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