9911796707
TMI Blog2007 (8) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... of the V.P. or there was no lease of land and the structure was not owned by the assessee as is the view of the J.M. (3) Whether in the light of construction agreement dated 27-7-1994 and lease deed dated 1-8-1995 could the assessee be said to be owner of property within the meaning of section 22 of the Income-tax Act. (4) Whether on facts and in law was the income from the property in question taxable under the head "Income from house property" as is the view of the V.P. or was the income taxable under any other head of income as was the view expressed by the CIT and which was confirmed by the J.M. (5) Whether on facts and in law did the CIT act validly under section 263, the V.P. opining that he did not and quashing his order and the J.M. expressing a view to the contrary sustaining the order under section 263." 2. All the relevant facts have been discussed threadbare by both the Hon'ble Vice President and the Judicial Member who have passed sepa-rate orders in detail running to about 83 pages in all. There is no need therefore to recapitulate the facts in any great detail except the basic facts that are necessary to focus upon the controversy. The appeal relates to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the lesser as annual charge. The deductions aggregated to Rs. 2,37,09,624 and deducting the same from the rental income of Rs. 5,75,85,518, the balance of Rs. 3,38,75,895 was assessed under the head "Income from house property". 5. The CIT took proceedings under section 263 of the Income-tax Act on the ground that the assessment so framed was erroneous insofar as it was a prejudicial to the interest of revenue. According to him, the assessee could not be considered to be the owner of 23,883 sq.ft. constructed by it, that it had only taken the above area on lease from Vaitalik for a period of five years, that during this period it was permited to exploit the property, that it was in the course of such exploitation that the assessee let out the property for rent and earned income, that such income cannot be assessed under the head "Income from house property" under section 22 of the Act since the assessee was not the owner of the area of 23,883 sq.ft. and that, therefore, it was not entitled to get the allowance for repairs and collection charges and annual charges paid. After considering the detailed reply of the assessee, the CIT came to the conclusion that the assessee cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wner of the property. In the present case, in order to determine the question of ownership of the superstructure measuring 23,883 sq.ft., one has to consider the entire documentation as a whole. All the documents entered into by the parties at different times have to be read together to gather their intention. Firstly, I find that this is a case where DDA had leased out the land to Vaitalik for a particular purpose, namely, to develop facilities for the performing arts, art gallery, lecture rooms, administrative block, etc. Under the terms of the lease, the land cannot be put to any use other than the aforesaid purpose, except with the prior approval of DDA. Obviously, the development of such facilities on the land would require a huge outlay of funds which Vaitalik somehow could not muster. It, therefore, approached the assessee for putting up the funds. It is in this background that an agreement was entered into on 27-7-1994 which is styled as "Contract for construction services". The preamble narrates that Vaitalik got the plans for the construction of the building approved and even commenced the work but due to paucity of funds and lack of infrastructure, the activities came to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representation on its part. 9. The important clauses of the lease agreement dated 2-3-1996 may now be noticed. The preamble recalled the construction agreement dated 27-7-1994 and noted that the lease of the building area of 23,883 sq.ft. to the assessee was to begin from the date of completion of the building and that the building has been completed on 31-7-1995. Clause (1) stated that Vaitalik agreed to lease to the assessee the area of 23,883 sq.ft. to the assessee @ Rs. 9.50 per square feet per month effective from 1-8-1995. Clause (2) authorized the assessee to use the above premises for its own purposes or let it out partly or fully for rent or money. The clause further provided that the lease shall be effected from 1-8-1995 to 31-7-2000 (5 years). Clause (3) acknowledged the receipt of the security deposit by Vaitalik. Clause (4) described the covenants of the lesser. Clause (5) described the covenants of the lessee i.e., the assessee. It provided that the assessee shall hand over vacant possession of the demised premises on the expiry of the lease period, that it should be restored in the same condition in which it was taken, that any damage caused by the lessee to the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys had the right to add, demolish or construct further stories of any structure or make additions or alterations to the building as are found necessary. Under clause 19, it was the duty of the lessee (the assessee) to keep the leased space and the interior structural walls, sewers, drains, etc., in the good tenantable condition in which it was delivered to him and particularly to support and protect the other parts of the building. The assessee shall also incur all minor repairs including leakage of water- taps, fuses, etc., but major structural repairs, such as, leakages on roof, cracks in the walls or plastering, bursting of electric cables or water-pipes or sewerage system shall be attended to promptly by Vaitalik at its own cost. 10. By an agreement dated 24-7-1996, Vaitalik and the assessee agreed that the lease shall be renewable for a further term of five years each on expiry of the current term of five years and any further term of five years and that a fresh lease deed shall be executed at the time of each renewal. 11. The last of the important documents was entered into 31-3-1999 which has also been referred to by the CIT in his order at page 5. This agreement, again be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od so as to enable the assessee to reimburse itself the cost defrayed on the construction and make a profit, if possible, as remunera- tion for the use of its funds, by letting out the area. Once the assessee had reimbursed itself of the cost of construction of Rs. 3,13,56,918 and had also made a surplus over and above the sum the arrangement was terminated, the purpose of both the sides having been satisfactorily achieved. It may be remembered that the assessee derived Rs. 6,03,08,180 as rent from the six tenants during the year ended 31-3-1997 apart from service charges of Rs. 50,27,576. Even after paying its share of rent to Vaitalik as annual charge amounting to Rs. 1,21,92,520 and after entering repairs and collection expenses, the assessee still enjoyed a profit and thus it seems to have been adequately compensated for the outlay of its funds. This in crux was the arrangement that was documented between Vaitalik and the assessee and put to effect. The form the arrangement took was not so explicit and required some unravelling but that is no reason to refuse to look into the real intention of the parties. 13. Having said that, I shall now briefly examine the documentation. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in respect of the area of 23,883 sq.ft. constructed by the assessee. There is further evidence of such an intention in the very same clause when it provides that Vaitalik authorises the assessee to use the premises for its own purpose or to let out the same fully or partly to any other person and recover rent. If the assessee was the owner of the premises there was no question of any authority from Vaitalik to let out the same or exploit the property in any manner it liked. Again, it is said that the letting out will be "as owner thereof but this again is not conclusive because in the last paragraph of the clause the parties reiterate that the lease of the area shall be for a period of five years and six months, renewable for one term at the option of the assessee and further renewals shall be with the mutual consent. There was no question of leasing out the area to the assessee if the assessee was the owner thereof. The further fact that the assessee gave an interest-free security deposit of Rs. 5 lakhs to Vaitalik, that it was specifically provided that in case the assessee let out the area to others it shall maintain the area properly by incurring capital and revenue expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In my opinion, by using the expression, albeit erroneously, that the assessee "agreed to take the land on lease" what was meant to be conveyed was only that Vaitalik permitted the assessee to enter upon the land for the purpose of putting up the construction. 14. The lease deed dated 2-3-1996 also shows that the assessee is only a lessee and not the owner of the area of 23,883 sq.ft. The preamble, as already noted, asserts that Vaitalik has leased the premises to the assessee for a rent and that the lease shall begin from the date of completion of the building. There is a reference to the "contract for construction services" in the preamble and the learned counsel for the assessee explained that it was necessary to circumvent any attempt by the DDA to re-enter the land on the ground of violation of the conditions of the head-lease, but admitted that it was an "awkward attempt" at that. Clause (1) reiterated the intention of the parties, that is, to lease the premises for rent; clause (2) authorised the assessee to use the premises for its own purposes or to let out wholly or partly the same to others; clause (3) affirmed that the lease shall be for a period of 5 years effective fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kong Ltd. (IKEA) on 16-3-1995, on which reliance was placed by the learned counsel for the assessee. The contention was that the MOU shows that the assessee started negotiating for letting out the property even though it was still under construction, which was indicative of the conduct of an owner of the property, not merely a lessee. The preamble, if read further and closely, however points to the contrary. It says that when IKEA approached the assessee for taking on lease a portion of the property (area of 23,883 sq.ft) the assessee "confirmed that they are in the possession of the property and they have all legal rights from M/s. Vaitalik to let out the same and recover rent therefrom". The italics part of the sentence is revealing. If the assessee was the legal owner of the property forming part of the area of 23,883 sq.ft. constructed by it, there was no need to derive the right to let out the same from Vaitalik; the assessee could do so in its own right. The preamble thus shows that the assessee was not the owner. 17. In the course of the arguments, I drew the attention of the learned counsel for the assessee to the lease agreement dated 8-1-1996 between the assessee and UOP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the assessee of the space in the building was as a lessee on the terms and conditions contained in the lease agreement with Vaitalik and the space is being sub-leased by the assessee to UOP Asia Limited. 18. I am, therefore, of the view that the assessee was not the owner of the constructed area of 23,883 sq.ft. and, therefore, the income by way of rent is received by the assessee was not assessable under section 22 of the Income-tax Act under the head "Income from house property". 19. A few further arguments of the learned counsel for the assessee will have to be noticed. He submitted that Vaitalik never claimed the area of 23,883 sq.ft. as its own, nor did the department ever treat Vaitalik as the owner of the above area. If the legal effect of the arrangement between Vaitalik and the assessee is properly understood, the position is that the assessee is not the owner of the above area. If the department has for some reason or the other not given effect to the legal arrangement in the assessments of Vaitalik, that cannot still constitute the assessee as the owner of the area. It may at best be looked upon as a lapse on the part of the department. The conduct of Vaitalik in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Government of immovable properties in certain cases of transfer. "Transfer" is defined in the clause as follows : "(f) "transfer",-- (i)in relation to any immovable property referred to in sub-clause (i) of clause (d ), means transfer of such property by way of sale or exchange or lease for a term of not less than twelve years, and includes allowing the possession of such property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1883 (4 of 1882). Explanation.--For the purposes of this sub-clause, a lease which provides for the extension of the term thereof by a further term or terms shall be deemed to be a lease for a term of not less than twelve years, if the aggregate of the term for which such lease is to be granted and the further term or terms for which it can be so extended is not less than twelve years; (ii)in relation to any immovable property of the nature referred to in sub-clause (ii) of clause (d), means the doing of anything (whether by way of admitting as a member of or by way of transfer of shares in a co-operative society or company or other association of persons or by way of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease agreement entered into on 2-3-1996 modified the same to provide that the period of lease was for five years and it shall expire on 31-7-2000. No renewals or extensions were provided for. However, by agreement dated 24-7-1996, it was provided that the lease shall be renewable for further terms of five years each on expiry of the first term of five years and any further terms of five years. But on 31-3-1999, a deed of cancellation was entered into under which the lease was terminated with effect from 1-4-1999. The deed of cancellation has been taken into consideration by the CIT before whom it was filed at his instance. I agree with the CIT that though the cancellation deed was an unknown fact for the year ended 31-3-1997 it would be clarificatory to support the view that the rights and obligations of the parties were purely contractual and no rights of ownership were conferred on the assessee vis-a-vis the constructed area of 23,883 sq.ft. Not only this, the other important consequence of the cancellation deed is that the lease factually expired on 31-3-1999 and though originally there was a provision for renewal of the lease under the agreement dated 24-7-1996 taking the aggre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore me. Herein, it is a case of a lease of the area of 23,883 sq.ft. by Vaitalik to the assessee for a rent of Rs. 9.50 per sq.ft. per month. It is this area taken on lease which was let out by the assessee for rent. The assessee was not the owner of the area. The question herein is one of intention of the parties which according to me was only to constitute the assessee as the lessee for a period of five years in respect of the property. In the case before the Supreme Court, the intention of the parties was to constitute the assessee the owner of the flats and possession had been given after payment of the entire purchase consideration. The only legal formality which remained to be completed was that of formal conveyance of the title over the flats in favour of the assessee. It was in these circumstances and where the intention of the parties was never in doubt that the rental income was held assessable as property income. Where the agreement between the parties is not to sell and purchase the property but only to lease it, the ratio of the judgment cannot apply. I, therefore, hold that the judgment is of no assistance to the assessee in the present case. 23. It was then submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erly assessable under the head "Income from house property" under section 22, is tenable and is the only view plausible the Assessing Officer has failed to substantiate his decision to accept the assessee's claim to the contrary. He has failed to show that his decision is a plausible or tenable decision on the very same facts and documentation. The CIT is, therefore, right in initiating proceedings under section 263. There is nothing in the assessment order to indicate that the Assessing Officer had examined the documentation in the case to find out whether the assessee was right in declaring the rental income under section 22 of the Act and in claiming the deductions therefrom on account of repairs and collection charges and share of the annual charge for the lease. It has been contended before me that in the assessment year 1996-97, the Assessing Officer has accepted the income as property income but has later re-opened the assessment to hold that it was assessable as "income from other sources" but the CIT (Appeals) has, by order dated 30-1-2004, allowed the appeal holding that the income was assessable as property income. An appeal to the Tribunal is stated to be pending for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y agree with the view expressed by the learned JM. The appeal will now be placed before the Bench which heard it originally for passing orders in accordance with the opinion of the majority. N.V. Vasudevan, Judicial Member.--In this Appeal there was a difference of opinion between the Members of the Bench and points of reference have been referred to the Hon'ble Vice-President as Third Member under section 255(4) of the Act, who has concurred with the view expressed by the Judicial Member. Accordingly the appeal was posted today for passing order in conformity with the majority opinion. 2. Mr. Salil Agarwal Learned Counsel for the assessee filed written submissions and prayed that the contents thereof be incorporated in the order to be passed giving effect to the view expressed by the majority of member. We are of the view that under section 255(4) a decision has to be rendered in accordance with the opinion of the majority of the members of the Tribunal who have heard the case, including those who first heard it. At this stage the assessee cannot seek to place on record submissions and pray that the same be incorporated in the order giving effect to the view expressed by the maj ..... X X X X Extracts X X X X X X X X Extracts X X X X
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