2018 (10) TMI 1514 - HC - Income Tax

Rectification of mistake - Diversion of income under a revocable transfer or arrangement - accrual of income - CIT(A) and ITAT confirmed the additions invoking section 60 - transfer of income without the transfer of the asset - Held that - It is evident that the agreement is not indefinite; it confers a right to receive rentals, for which a consideration of ₹ 75 crores was paid. The agreement could be rescinded, after 3 years, by giving back the deposit; the arrangement could not exceed 10 years in all. Clause 4 stated, significantly, that AHR s tenants were deemed to be that of ADI. In this case, the express terms of the agreement clearly showed that the arrangement was finite and also revocable (by one year s notice and refund of deposit). Pertinently, the judgments that the petitioner now relies on, apart from Dalmia 1999 (4) TMI 4 - SUPREME COURT (i.e Rungamatee Tea & Industries 1991 (7) TMI 9 - CALCUTTA HIGH COURT , Poddar Cement 1997 (5) TMI 2 - SUPREME COURT , Arvind Narottam 1988 (8) TMI 2 - SUPREME COURT ) were all cited and considered by the CIT (A) after the AO s order, on remand in the earlier round. This court is also of the opinion that like in Dalmia, the facts in Rungamatee, clearly showed that the transaction by which the assets were handed over possession were not just for their management, but preparatory to their sale. The purchaser took possession of the assets from the owner and managed them till conveyance, the subsequent year. This court is of opinion that the main judgment of the ITAT took note of the authority in Poddar Cement (supra). The ITAT also had before it, the reasoning of the CIT (A) who had noticed all the judgments cited by the assessees which found place in the written note submitted to the ITAT in their appeal. Therefore, it cannot be said that the tribunal ignored or overlooked material facts or law. Furthermore- perhaps crucially, the lower authorities concurrently found that ADI, despite reporting the lease income in its hands, declared loss for the year under consideration in its return whereas AHR declared profits. In these circumstances, their view was that the arrangement was made to avoid incidence of tax in AHR s hands. No infirmity in the impugned orders of the ITAT,

Issues Involved:
1. Validity of the ITAT's rejection of the appeals filed by the petitioners.
2. Applicability of Section 22 and Section 60 of the Income Tax Act.
3. Interpretation of the agreement between ADI and AHR.
4. Assessment of rental income in the hands of ADI or AHR.
5. Consideration of legal precedents and rectification under Section 254(2).

Detailed Analysis:

1. Validity of the ITAT's Rejection of the Appeals:
The ITAT rejected the appeals filed by ADI and AHR, upholding the assessment orders that taxed the rental income in the hands of AHR. The ITAT found that the agreement between ADI and AHR did not transfer ownership of the property but merely allowed ADI to manage and receive rental income. The ITAT concluded that the income should be taxed in the hands of AHR, the legal owner of the property.

2. Applicability of Section 22 and Section 60 of the Income Tax Act:
The assessment was based on Section 22, which taxes rental income in the hands of the property owner. The CIT invoked Section 263 to reassess the income, directing the AO to tax the rental income in AHR's hands. The ITAT and the lower authorities found that the agreement between ADI and AHR was a camouflage to avoid tax, as ADI declared a loss while AHR declared profits. Section 60, which deals with the transfer of income without transferring the asset, was also considered. The authorities held that the income should be taxed in the hands of AHR, as the ownership of the property was not transferred.

3. Interpretation of the Agreement Between ADI and AHR:
The agreement dated 31.03.2008 allowed ADI to manage and receive rental income from certain retail spaces in AHR's hotel in exchange for an interest-free refundable deposit of ?75 crores. The agreement was finite and revocable, with a maximum duration of 10 years. The ITAT held that the agreement did not transfer ownership of the property but only the right to receive rental income, which should be taxed in AHR's hands.

4. Assessment of Rental Income in the Hands of ADI or AHR:
The AO assessed the rental income in AHR's hands under Section 22, as AHR was the legal owner of the property. The ITAT upheld this assessment, rejecting the argument that the income should be taxed in ADI's hands based on the agreement. The ITAT found that the arrangement was made to avoid tax in AHR's hands, as ADI declared a loss while AHR declared profits.

5. Consideration of Legal Precedents and Rectification Under Section 254(2):
The assessees filed rectification applications under Section 254(2), citing the Supreme Court's judgment in Honda Siel Ltd. and other precedents. The ITAT dismissed these applications, finding no apparent mistake in its original order. The ITAT held that the agreement between ADI and AHR was a camouflage to avoid tax and that the income should be taxed in AHR's hands. The court found no infirmity in the ITAT's orders, holding that the tribunal had considered all relevant facts and legal precedents.

Conclusion:
The High Court dismissed the writ petitions, upholding the ITAT's orders. The court found that the agreement between ADI and AHR did not transfer ownership of the property and that the rental income should be taxed in AHR's hands. The court also found that the ITAT had considered all relevant facts and legal precedents, and there was no mistake warranting rectification under Section 254(2).

← Previous Next →