2020 (3) TMI 602 - AT - Income Tax

Income from house property - sharing of revenue between the assessee and 6 other co-licensors - sham transaction or not - Treating the Rent and Amenities charges on account of Rent and Amenities received as Rent Income of the appellant - HELD THAT - As before leave and license agreement dated 28/08/2009 entered into by the 7 licensors with M/s DFIRPL, there was a pre-existing agreement dated 20/04/2009 between the assessee and other 6 persons. As per terms of this agreement, certain license was granted to these persons against license fees for valuable consideration of ₹ 2.10 Lacs with respect to 60% of the licensed premises. As per Clause-15 of the agreement, the licensees had a right to assign, sub-license or to grant on leave and license basis, the licensed premised to third parties without prior consent of licensors. Pursuant to said agreement, the assessee as well as other 6 persons, entered into subsequent leave and license agreement with M/s DFIRPL. The terms of the said agreement have duly been recognized in leave and license agreement dated 28/08/2009 and the share of the assessee and other 6 persons find specific mention in this agreement. The aforesaid agreement has been executed by the 7 licensors and licensee and the same is a registered document. Pursuant to the terms of both the agreements, the transactions have been carried out and assessee as well as other 6 persons have offered their respective share of income in their own tax returns. There is nothing illegal in both the agreements. This being the case, the agreement dated 20/04/2009 could not be termed as sham agreement or an artificial structure with a view to evade tax liability. The said argument would be further weakened by the fact that proportionate income has already been offered to tax by the assessee as well as other 6 licensors. The observations of Ld. CIT(A) that the said income should have been offered as Income from House Property by the 6 persons could not be a ground to make impugned additions in the hands of the assessee. It is also fortified by the fact that learned first appellate authority, himself, observed that Ld. AO should have taken corrective measures about income shown as income from house property by the family members. However, the said error, in our considered opinion, could not empower Ld. CIT(A) to confirm the additions in the hands of the assessee.If the tax payer was in a position to carry a transaction in two alternative ways, one of which would result in lower tax liability, the assessee would be at liberty to choose that particular method. In the present case, we find nothing illegality in both the leave and license agreement entered into by the assessee. The terms of the agreement were duly honoured by the respective parties and it could not be said that the earlier agreement was a sham agreement. The rule of consistency would also favor assessee s case since similar apportionment done in AY 2010-11 has been accepted by the revenue. We hold that the clubbing of rental amenities income of 6 persons, in the hands of the assessee, would not be sustainable in the eyes of law. AO is directed to recompute the income by taking assessee s share of rental income and amenities charges under the head Income from House Property. The rental income of ₹ 25.20 Lacs earned by the assessee from 6 persons would also be taxable under the head Income from House Property. The statutory deductions, as available as per law, shall be provided to the assessee. Accordingly, the appeal stands allowed.

Summary

Issues Involved:
1. Treatment of Rent and Amenities Charges as Rent Income.
2. Validity of Lease Agreement with Family Members.
3. Clubbing of Rental Income in the Hands of the Assessee.
4. Taxability of Amenities Charges.
5. Double Taxation Concerns.

Issue-wise Detailed Analysis:

1. Treatment of Rent and Amenities Charges as Rent Income:
The primary issue was whether the Rent and Amenities charges received from M/s Diesel Fashion India Reliance Pvt. Ltd. (DFIRPL) should be treated entirely as Rent Income of the appellant. The assessee argued that the Tripartite Leave & License Agreement executed between the appellant, other co-licensors, and DFIRPL entitled the licensors to only a part of the rent received. The CIT(A) treated the entire amount as Rent Income of the appellant, disregarding the agreement.

2. Validity of Lease Agreement with Family Members:
The assessee had entered into a lease agreement with six family members before the tripartite agreement with DFIRPL. The CIT(A) questioned the validity of this agreement, asserting that the rent from the entire property should be offered for taxation in the hands of the appellant firm only. The lease agreement with family members was considered an artificial structure to divert income.

3. Clubbing of Rental Income in the Hands of the Assessee:
The CIT(A) upheld the findings of the Assessing Officer (AO) that the appellant had diverted a differential amount of rent to family members. The AO concluded that the rental income received by other six family members should be brought to tax in the hands of the appellant, as the family members were not the owners of the property. This resulted in the clubbing of rental income in the hands of the appellant.

4. Taxability of Amenities Charges:
The AO opined that the amenities provided by the assessee would not fall under House Property income but rather as Income from Other Sources. This was because the amenities arose from services provided in addition to the letting of the property. Consequently, the amenities charges were brought to tax under the head Income from Other Sources, which denied the assessee the statutory deduction of 30%.

5. Double Taxation Concerns:
The assessee argued that a part of the rent income from DFIRPL belonged to six other persons and was separately offered to tax by them. Therefore, taxing the entire amount in the hands of the appellant would result in double taxation. The CIT(A) did not accept this argument, stating that the rental income should be taxed in the hands of the owner of the property.

Judgment Summary:

1. Treatment of Rent and Amenities Charges as Rent Income:
The tribunal held that the entire rental and amenities income should not be clubbed in the hands of the appellant. The agreements between the appellant and the six family members were valid and not sham agreements. The income from these agreements was offered to tax by the respective parties, and there was no illegality in these agreements.

2. Validity of Lease Agreement with Family Members:
The tribunal found that the lease agreement with family members was valid and executed for valuable consideration. The agreement allowed the family members to sub-license the property, and the subsequent agreement with DFIRPL recognized the share of income for each party.

3. Clubbing of Rental Income in the Hands of the Assessee:
The tribunal rejected the CIT(A)'s decision to club the rental income in the hands of the appellant. It held that the income offered by the family members should not be taxed again in the hands of the appellant. The rule of consistency favored the assessee, as a similar apportionment was accepted in the previous assessment year.

4. Taxability of Amenities Charges:
The tribunal held that the amenities charges should be treated as Income from House Property, not as Income from Other Sources. The amenities were incidental to the letting of the property, and the agreement for amenities was co-terminus with the leave and license agreement.

5. Double Taxation Concerns:
The tribunal agreed with the assessee's argument that taxing the entire amount in the hands of the appellant would result in double taxation. The income already offered by the family members should not be taxed again in the hands of the appellant.

Conclusion:
The tribunal allowed the appeals for all the assessment years, directing the AO to recompute the income by taking the assessee's share of rental income and amenities charges under the head Income from House Property. The statutory deductions available as per law should also be provided to the assessee.