2018 (5) TMI 250 - AT - Income Tax

Computation of income from house property - assessee submitted that the land does not belong to the assessee and the superstructure belongs to the assessee. The assessee received a composite rent for land and building - whether AO is not justified in taking the rent which relates to land on which the superstructure was standing? - whether assessee can reduce the rent paid for the land, which was taken on lease for the purpose of constructing superstructure while computing income from house property? - Held that - As per Section 22 of the Act, the annual value of the property consists of any building or land appurtenant thereto of which the assessee is the owner. Wherever a right was acquired in respect of any building or part thereof by way of lease for a term not less than 12 years, it has to be construed as transfer. The annual value to be computed is in respect of building and land appurtenant thereto for which the assessee is the owner. In this case, admittedly, the assessee is not the owner of the land. The building was put up by the assessee on the land belonging to other persons. Under the common law, double ownership in respect of building is permissible. In respect of the lease, what was transferred to the assessee is a right to occupation and enjoyment on the land. The other rights relating to ownership continues to remain with the original owner. Therefore, the amount payable / paid as a lease rent for occupation and enjoyment of the land, which belongs to third party, has to be necessarily reduced while computing annual rental value under Sections 22 and 23 of the Act. The market value of the land and cost of construction of the building has to be estimated for the purpose of determining the annual rental value. In case, the assessee is not the owner of the land on which the superstructure was constructed, the market value of the land or the lease rent paid / payable for the land needs to be excluded. This Tribunal is of the considered opinion that for computing the annual rental value of the building, the lease rental paid or payable by the assessee as per lease deed has to be excluded. The rent received or receivable by the assessee for the building has to be reduced from the rent paid or payable by the assessee in respect of land to the land owners. - Decided in favour of assessee

Summary

Issues Involved:
1. Computation of income from house property.
2. Determination of annual rental value.
3. Allowability of lease rent paid for the land.
4. Ownership and transfer of property under relevant sections of the Income-tax Act.

Detailed Analysis:

Issue 1: Computation of Income from House Property
The core issue in both appeals is the computation of income from house property. The appellant has let out two properties: one at Spurtank Road, Chennai, and another at Karuna Enclave, Annanagar, Chennai. The appellant contends that the lease rent paid for the land and service tax should be deducted from the rental income received before computing the taxable income.

Issue 2: Determination of Annual Rental Value
The appellant argues that for determining the annual rental value under Sections 22 and 23 of the Income-tax Act, the lease rent paid for the land should be excluded. The appellant cites Section 24, which allows deductions for repairs and maintenance but does not explicitly cover lease rent for land. The appellant also refers to the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960, for determining the annual rental value, suggesting that the market value of the land and the cost of construction should be considered.

Issue 3: Allowability of Lease Rent Paid for the Land
The appellant claims that the lease rent paid for the land should be deducted while computing the income from house property. The appellant argues that the rent received for the land is diverted by overriding title to the landlord and should not be included in the taxable income. The appellant also references Section 25B and Section 27 of the Income-tax Act, which define "ownership" and "income from house property," respectively, to support this claim.

Issue 4: Ownership and Transfer of Property
The appellant contends that they are not the owner of the land but only the superstructure. The appellant refers to Section 27(iiib) and Section 269UA(f) of the Income-tax Act, which define ownership and transfer of property. The appellant argues that since the lease agreements are for less than 12 years, there is no transfer of property, and the lease rent paid should be excluded from the taxable income.

Tribunal's Findings:
The Tribunal examined the relevant sections of the Income-tax Act and the Tamil Nadu Buildings (Lease and Rent Control) Act, 1960. It concluded that the lease rent paid for the land should be excluded while computing the annual rental value. The Tribunal noted that the appellant is not the owner of the land, and the lease rent paid for the land is a legitimate deduction. The Tribunal directed the Assessing Officer to recompute the rent received or receivable by the appellant after excluding the lease amount paid or payable to the landlord.

Conclusion:
The Tribunal allowed the appeals filed by the appellant, setting aside the orders of the lower authorities. The Assessing Officer was directed to recompute the income from house property by excluding the lease rent paid for the land. The judgment emphasizes the importance of correctly determining the annual rental value and the allowable deductions under the Income-tax Act.