2019 (2) TMI 977 - AT - Income Tax

Tribunal rules lease premium must be recognized as income in year received, dismissing spread-over-time method.

The Tribunal upheld the CIT's decision that the assessment orders for the years 2003-04 and 2004-05 were erroneous and prejudicial to the Revenue. It ... Revision u/s 263 - as per CIT-A assessee adopted a faulty method of revenue recognition - requirement of tax withholding u/s 194-I - assessee was spreading over lease premium at 1/99th on the basis of the lease period of 99 years, and in case of transfer, it was recognizing the same at 1/78th, apart from showing profit at 10% of the amount of Premium on the lease of plots of land - CIT held that entire amount of the lease premium was chargeable to tax in the year of receipt itself and hence the AO committed a serious mistake by accepting the shifting of income from the year of receipt of Premium to several years by means of spreading it over to 99/78 years - Held that:- There is no whisper of the issue of treatment of revenue in the assessment order. Secondly, on a specific query, the Ld. AR could not draw our attention towards any judicial pronouncement accepting the spread over of lease premium over the life of lease in the hue of the terms of the lease agreement as are prevalent in the case of the assessee. Under such circumstances, the assessment order passed by the AO accepting such spread over has necessarily to be held as erroneous, even if the assessee had put forth its explanation about the spreading over of Premium and the AO accepted the same without recording anything in the assessment order. The amount of lease premium accrues to the assessee at the time of its receipt. Such a lease premium does not bear any traits of rent, which in the extant case resembles with annual payment by the lessee at the rate of Re.1/-. Since the amount of lease premium has no characteristics of rent, in our view, such amount cannot be subjected to TDS u/s 194-I of the Act, which, therefore, rules out the application of Circular No.05/2001. It is further noted that the CBDT has recently clarified vide Circular No.35/2016 dated 13.10.2016 that on the amount of lump sum lease premium, which is not adjustable against the periodic rent, as is the case under consideration as well, there is no requirement of tax withholding u/s 194-I of the Act. We therefore jettison the contention raised on behalf of the assessee on this aspect of the matter. To sum up, since the assessee did not offer full amount of lease premium in the year of receipt and the AO accepted such a position, we are satisfied that the Ld.CIT was justified in invoking the provisions of section 263 of the Act and thus holding that the assessment order to be erroneous and also prejudicial to the interest of the Revenue Exemption u/s 11 - entitled to exemption u/s. 10(20) - assessee functions as an extended arm of the State Government of Maharashtra and hence does not come within the ambit of taxation - Held that:- The assessee is a statutory authority and is not a State Government in itself so as to claim any immunity from taxation. In our considered opinion, this issue is no more res integra in view of the latest judgment dated 12-10-2018 rendered by the Hon’ble Supreme Court in ITO Vs. M/s. Urban Improvement Trust [2018 (10) TMI 874 - SUPREME COURT OF INDIA] as held that Urban Improvement Trust constituted under the Rajasthan Urban Improvement Act, performing various municipal functions, is chargeable to tax in respect of its income and further no exemption u/s.10(20) is available to it. Since the Hon’ble Supreme Court has held that Urban Improvement Trust, doing admittedly activities similar to those of the instant assessee, is chargeable to tax and further not entitled to exemption u/s. 10(20) of the Act, the argument of the Ld. AR that assessee should be treated as not at all chargeable to tax as an arm of the State Government, deserves to be and is hereby repelled. Issues Involved:1. Whether the assessment orders for the assessment years 2003-04 and 2004-05 were erroneous and prejudicial to the interest of the Revenue.2. Whether the lease premium should be recognized as income in the year of receipt or spread over the life of the lease.3. Whether the assessee, as a statutory authority, is exempt from taxation as an extended arm of the State Government of Maharashtra.Detailed Analysis:1. Erroneous and Prejudicial Assessment Orders:The appeals by the assessee challenge the orders passed by the CIT-V, Pune, under section 263 of the Income Tax Act, 1961, which deemed the assessment orders for the years 2003-04 and 2004-05 as erroneous and prejudicial to the interest of the Revenue. The CIT held that the assessee's method of revenue recognition was faulty, particularly the spreading of lease premium over 99/78 years instead of recognizing it in the year of receipt. The CIT directed the AO to reassess the income, considering the full lease premium as taxable in the year it was received.2. Lease Premium Recognition:The assessee, a Town Development Authority, leased plots for 99 years and recognized 10% of the lease premium as income in the year of receipt, spreading the remaining over the lease period. The CIT contended that the entire premium should be taxed in the year of receipt, as the assessee had an enforceable right to the full amount at the time of the agreement. The Tribunal upheld this view, stating that the full premium becomes income at the time of receipt, without any obligation to repay, thus rejecting the assessee's method of spreading the income over several years. The Tribunal also dismissed the argument that spreading the income caused no prejudice to the Revenue, emphasizing that each assessment year is independent.3. Exemption from Taxation:The assessee argued that it functioned as an extended arm of the State Government of Maharashtra and should be exempt from taxation. The Tribunal rejected this claim, referencing the Supreme Court's judgment in the case of Urban Improvement Trust, which held that such statutory authorities are chargeable to tax and not exempt under section 10(20) of the Act. Therefore, the assessee, despite performing municipal functions, is not immune from taxation.Conclusion:The Tribunal dismissed the appeals for both assessment years, affirming the CIT's orders that the assessment was erroneous and prejudicial to the Revenue. The Tribunal confirmed that the full lease premium should be recognized as income in the year of receipt and that the assessee is not exempt from taxation as an arm of the State Government. The additional ground raised by the assessee regarding its exemption status was also rejected.