Tribunal overturns tax additions, ruling income diversion before reaching taxpayer.

The Tribunal allowed the appeal, directing the AO to delete additions of Rs. 44 lakhs and Rs. 1.32 lakhs. The Tribunal held that the income was diverted by overriding title before reaching the assessee, based on relevant legal principles and agreement clauses. The additions were deemed unjustified, and the order was issued on 21st October 2015.

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Issues Involved:
1. Addition of Rs. 44 lakhs on account of deemed lease rent.
2. Addition of Rs. 1.32 lakhs being deemed interest earned by the assessee.

Detailed Analysis:

1. Addition of Rs. 44 lakhs on Account of Deemed Lease Rent
The primary issue pertains to the addition of Rs. 44 lakhs as deemed lease rent under the head "Income from House Property." The assessee purchased flats in a building called Samshiba for Rs. 3.75 crores. The Assessing Officer (AO) found that the assessee had not shown any income under "Income from House Property" and issued a show cause notice. The assessee responded, explaining that the flats were purchased subject to a pre-existing Leave & License Agreement between the vendor and a licensee, which entitled the vendor to retain the license fees for a period of 22 months, ending on 30th November 2006. The assessee argued that since the income was never received by her and was paid directly to the vendor, it could not be taxed in her hands.

The AO, however, added Rs. 44 lakhs to the assessee's income, considering it as deemed rent. The CIT(A) upheld this addition, but the Tribunal found that the income was diverted by overriding title to the vendor before it could reach the assessee. Citing the principles laid down in Raja Bejoy Singh Budhuria Vs CIT Bengal and CIT Vs Sitaldas Tirathdas, the Tribunal concluded that the income never reached the assessee and directed the AO to delete the addition of Rs. 44 lakhs.

2. Addition of Rs. 1.32 lakhs Being Deemed Interest Earned by the Assessee
The second issue concerns the addition of Rs. 1.32 lakhs as deemed interest on a security deposit of Rs. 12,00,000/-. The CIT(A) observed that since the assessee is now the owner of the property, interest on the security deposit should be taxed in her hands. However, the Tribunal found this addition to be illogical, given that the assessee could not have earned the rent during the impugned assessment year due to the pre-existing Leave & License Agreement. The Tribunal directed the AO to delete the addition of Rs. 1.32 lakhs, reversing the findings of the CIT(A).

Conclusion
In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the AO to delete both the additions of Rs. 44 lakhs and Rs. 1.32 lakhs. The Tribunal's decision was based on the principle of diversion of income by overriding title, as well as the specific clauses of the agreements involved, which clearly indicated that the income never reached the assessee. The order was pronounced in the open court on 21st October, 2015.

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