1994 (2) TMI 113 - AT - Income Tax

Summary

Issues Involved:

1. Classification of income from the lease of the flat.
2. Applicability of section 27(iii) of the Income Tax Act.
3. Ownership status of the flat.
4. Deduction claims for expenses paid to the company.
5. Interpretation of the term "house building scheme".

Issue-wise Detailed Analysis:

1. Classification of income from the lease of the flat:

The primary grievance of the appellant-HUF was that the income received from leasing the flat in Nirmal Towers should not be assessed under the head 'Income from house property' since the flat is not registered in its name. The appellant claimed that the income had historically been assessed as 'income from other sources' following the Delhi High Court decision in Sushil Ansal v. CIT [1986] 160 ITR 308. The Assessing Officer (AO) changed this classification based on the amendment to section 27(iii) of the Income Tax Act, which the appellant argued was not applicable as the company did not have a house building scheme.

2. Applicability of section 27(iii) of the Income Tax Act:

Section 27(iii) was inserted by the Finance Act, 1987, effective from April 1, 1988, and it states that a member of a co-operative society, company, or other association of persons to whom a building or part thereof is allotted or leased under a house building scheme shall be deemed to be the owner of the building or part thereof. The appellant contended that this section was not applicable as SNCPL did not have a house building scheme. However, the AO held that the assessee was the owner of the property known as Nirmal Flats, applying section 27(iii).

3. Ownership status of the flat:

The appellant argued that it was only a licensee and could not be equated with or treated as the owner, as ownership rights are distinct from rights related to licensing, occupancy, mortgage, or tenancy. The CIT(A) upheld the AO's view, noting that the Bombay High Court had concluded that SNCPL was not the owner of the allotted floor area space, and therefore, the assessee was the rightful owner of the flat under section 27(1)(iii) of the Act.

4. Deduction claims for expenses paid to the company:

The appellant claimed deductions for various charges paid to SNCPL as expenses incurred for earning the rental income, applying the provisions of section 57(1)(iii) of the Act. The AO restricted the deduction for repairs to 1/6th of the annual value, as per the provisions of section 24(1)(i), allowing only Rs. 15,803 out of the Rs. 61,185 claimed.

5. Interpretation of the term "house building scheme":

The appellant's counsel argued that section 27(iii) was intended for situations where a company had a house building scheme and had allotted shares to its shareholders, then leased the flats to them. He contended that SNCPL did not have such a scheme, and thus, the rental income received by the assessee should be assessed under 'Income from other sources'. The CIT(A) and the Tribunal, however, concluded that the construction of Nirmal Towers with funds from shareholders, and the leasing of space exclusively to shareholders, indicated that the building was constructed under a house building scheme. Therefore, section 27(iii) was rightly invoked.

Conclusion:

The Tribunal upheld the order of the authorities, concluding that the income from letting out space in Nirmal Towers, leased to the assessee as a member of SNCPL, was assessable under section 27(iii) of the Act. The appeal was dismissed, affirming the classification of the income as 'Income from house property' and the application of section 27(iii).