2016 (9) TMI 159 - AT - Income Tax

Deemed owner u/s.22 - rental income - income from house property - Held that - Applying the tests to the facts of the present case, especially in the light of clause-2 and 7 of the leave and license agreement, we have no hesitation in coming to the conclusion that on the facts of the present case the assessee was only licencee of the premises owned by M/s. East India Hotels Ltd., and the parties intended it to be license and the agreement did not create an interest in the property owned by the licensor and that the licensee did not have exclusive possession of the property. As a licensee it had granted sub-licence to various parties and derived income there from. Once we come to the conclusion that the Assessee is only a licencee, then it can safely be said that the provisions of Sec.22 read with Sec.27(iiib) of the Act are not attracted and hence the income in question cannot be assessed under the head Income from House Property . Similarly even for A.Y.2007-08, the consideration received by the Assessee as licensor from the sub-licensee, comprised of licence fees and service fee and air condition fees. Keeping in mind the objects of the assessee and keeping in mind the facts and circumstances of the present case, it can be safely concluded that the assessee carried on a systematic and regular activity in the nature of business and therefore the income from granting the premises on sub-license was to be assessed under the head income from business. The latest judicial pronouncement in the case of Chennai Properties and Investments Ltd. Vs CIT (2015 (5) TMI 46 - SUPREME COURT) was not available for consideration before the Tribunal when the Tribunal passed its order in the case of another group company based on which the CIT(A) confirmed the action of AO. With the change under law laid down by the Hon ble Supreme Court, we are of the view that the income in question has to be assessed under the head income from house property. In view of the decision of the Hon ble Supreme Court in the case of Chennai Properties and Investments Ltd. (supra), we are of the view that the question whether the Assessee is a deemed owner u/s.22 read with Sec.27(iiib) of the Act, no longer assumes importance. For the reasons given above we allow the appeals of the assessee.

Issues Involved:
1. Classification of income from sub-licensing as 'Income from House Property' or 'Business Income'.
2. Determination of ownership status under Section 27(iiib) and Section 269UA(f) of the Income Tax Act.
3. Applicability of the principle of consistency in tax treatment over the years.

Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income earned by the assessee from sub-licensing a shopping space should be classified as 'Income from House Property' or 'Business Income'. The assessee argued that the income should be treated as 'Business Income' since the company was involved in the business of acquiring properties on license and sub-licensing them, providing various services to sub-licensees such as air-conditioning, telephone services, maintenance, security, etc. The assessee relied on its Memorandum of Association and various judicial pronouncements, including the Supreme Court's decision in Universal Plast Ltd. vs. CIT, which emphasized the need to consider the intention and systematic business activities of the assessee.

2. Determination of Ownership Status:
The Assessing Officer (AO) treated the income as 'Income from House Property' based on the provisions of Section 27(iiib) and Section 269UA(f) of the Income Tax Act, asserting that the assessee had an irrevocable right over the shopping space for 50 years, thus making it the deemed owner. The assessee contended that it was not the legal owner but merely a licensee, as per the agreement with East India Hotels Limited, which explicitly stated that the agreement did not create any interest or right in the property. The assessee also distinguished between 'license' and 'lease' under the Transfer of Property Act and the Indian Easements Act, arguing that the agreement was a license and not a lease, thus not making the assessee a deemed owner under the relevant sections.

3. Principle of Consistency:
The assessee argued that the income had been consistently treated as 'Business Income' in previous years and had never been challenged by the revenue authorities. The assessee cited several judicial decisions, including Radhasoami Satsang vs. CIT, to emphasize the importance of maintaining consistency in tax treatment over the years. The CIT(A) had upheld the AO's decision by relying on a previous ITAT decision involving a group concern of the assessee, despite the fact that the High Court had stayed the operation of that ITAT order.

Tribunal's Decision:
The Tribunal examined the clauses of the agreement between the assessee and East India Hotels Limited and concluded that the relationship was that of a licensor and licensee, not a lessor and lessee. The Tribunal applied the tests laid down in judicial pronouncements to distinguish between 'lease' and 'license' and found that the agreement did not create an interest in the property owned by the licensor and that the licensee did not have exclusive possession of the property.

The Tribunal also noted that the assessee was deriving not only license fees but also service fees and other charges, indicating a systematic and regular business activity. The Tribunal referred to the Supreme Court's recent decisions in Chennai Properties and Investments Ltd. vs. CIT and Rayala Corporation Pvt. Ltd. vs. ACIT, which supported the assessee's claim that income from sub-licensing should be treated as 'Business Income'.

Given the systematic business activities and the latest judicial pronouncements, the Tribunal concluded that the income from sub-licensing should be assessed under the head 'Income from Business'. The Tribunal allowed the appeals of the assessee and set aside the orders of the CIT(A) and AO.

Conclusion:
The Tribunal ruled in favor of the assessee, holding that the income from sub-licensing the shopping space should be classified as 'Business Income' and not 'Income from House Property'. The decision was based on the nature of the agreement, the systematic business activities of the assessee, and recent Supreme Court judgments. The principle of consistency was also considered, but the Tribunal primarily relied on the substantive legal analysis and the latest judicial precedents.

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