2007 (3) TMI 309 - AT - Income Tax

Summary

Issues Involved:
1. Classification of rental income under the appropriate head of income.
2. Determination of the beneficial or deemed ownership of the property.
3. Allowability of expenses claimed by the assessee against rental income.

Detailed Analysis:

1. Classification of Rental Income:
The primary issue was whether the rental income should be assessed under the head "House property" or "Other sources". The assessee argued that since it was merely a lessee and not the owner of the property, the rental income should be assessed under "Other sources". The Assessing Officer, however, assessed the income under the head "House property" by applying section 27 of the Income-tax Act and took the annual letting value of the property at Rs. 36 lakhs.

2. Determination of Beneficial or Deemed Ownership:
- Beneficial Ownership: The Commissioner of Income-tax (Appeals) concluded that the assessee was a "beneficial owner" of the property based on the lease deed clauses which allowed the assessee to use, alter, and sub-let the property. The CIT(A) relied on Supreme Court decisions in CIT v. Podar Cement (P.) Ltd. and R.B. Jodha Mal Kuthiala v. CIT, which held that a person in possession and control of a property, enjoying its income, could be treated as the owner for tax purposes.

- Deemed Ownership: The CIT(A) also examined the applicability of section 27(iiib) of the Income-tax Act, which deems a person to be the owner if they hold a lease for a term of not less than 12 years. The CIT(A) interpreted the lease period of 9 years and 11 months as "at the first instance", implying it could be extended indefinitely, thus justifying the assessment under "House property".

3. Allowability of Expenses:
The Assessing Officer disallowed the expenses claimed by the assessee against the rental income, allowing only those permissible under the head "House property". The CIT(A) upheld this disallowance.

Tribunal's Findings:

1. Classification of Rental Income:
The Tribunal found that the assessee was not the owner of the property but a lessee with certain rights. The Tribunal held that the rental income should be assessed under the head "Other sources" as the assessee was not the owner of the premises. The Tribunal directed the Assessing Officer to assess the rental income under "Other sources" and not "House property".

2. Determination of Beneficial or Deemed Ownership:
- Beneficial Ownership: The Tribunal distinguished the current case from the Supreme Court rulings cited by the CIT(A). It noted that Prof. Harnam Singh retained ownership rights and the assessee was exercising rights traceable to the lease agreement, not in its own right. Therefore, the assessee could not be treated as the beneficial owner of the property.

- Deemed Ownership: The Tribunal rejected the CIT(A)'s interpretation of the lease period. It held that the lease was explicitly for 9 years and 11 months, and there was no evidence to support an extension to 12 years or more. Thus, the assessee could not be deemed the owner under section 27(iiib).

3. Allowability of Expenses:
Since the rental income was to be assessed under "Other sources", the Tribunal directed the Assessing Officer to re-examine and allow the expenses claimed by the assessee as per law.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing that the rental income be assessed under the head "Other sources" and the expenses be re-examined and allowed accordingly. The Tribunal found no justification for assessing the income under "House property" and rejected the notion that the assessee was either the beneficial or deemed owner of the property.