2021 (8) TMI 1030 - AT - Income Tax

Tribunal rules sub-lease income not taxable, ALV based on rent received.

M/s. Rational Art & Press Pvt. Ltd. Versus DCIT Cen Cir 44 Mumbai

The Tribunal decided in favor of the assessee, ruling that the sub-lease income should not be included in the assessee's income. The Annual Lettable Value ... Income from house property - Leasing out the property to its sister concern at a rent lesser than the market rent - AO including the sub-lease income of Fazlani Exports Pvt. Ltd., in respect of sub-lease of Rational House property to M/s. Goldman Sachs on the ground that Fazlani Exports Pvt. Ltd sub-leased aforesaid property at higher rent and treating as Sham Transaction - HELD THAT:- The entire transaction of assessee leasing out the property to its sister concern at a rent lesser than the market rent, cannot be construed as a sham transaction. However, in this recalled proceedings, we have to adjudicate the applicability of the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Akshay Textile Trading & Agencies Pvt Ltd [2007 (10) TMI 251 - BOMBAY HIGH COURT] which was admittedly relied upon by the ld AR as held no case of revenue that transaction was sham – hence annual value of the property is the value received by the owner from the tenant irrespective whether tenant on sub-letting has received higher rent - ITAT was justified in holding that the annual letting value has to be determined on basis of annual rent received by the assessee and not what has been received by its tenants from the ultimate users - Decided in favour of assessee. Issues Involved:1. Inclusion of sub-lease income in the hands of the assessee.2. Determination of Annual Lettable Value (ALV) of the property.3. Applicability of the decision in CIT vs Akshay Textile Trading & Agencies Pvt Ltd.Issue-wise Detailed Analysis:1. Inclusion of Sub-lease Income in the Hands of the Assessee:The primary issue raised by the assessee was the inclusion of sub-lease income of Fazlani Exports Pvt. Ltd. (FEPL) in respect of the sub-lease of Rational House property to M/s. Goldman Sachs. The assessee contended that the learned Assessing Officer (AO) erred in treating the sub-lease income as a sham transaction and including it in the assessee's income.The assessee had leased the property to its sister concern, FEPL, for seven months at a rent of Rs. 3,15,00,000/- while FEPL sub-leased it to Goldman Sachs for Rs. 11,02,50,000/-. For the remaining five months, the assessee directly leased the property to Goldman Sachs for Rs. 5,31,60,000/-. The AO observed that the market rent was significantly higher than the rent received by the assessee from FEPL and treated the transaction as sham, adopting the ALV at Rs. 19,49,10,000/-.2. Determination of Annual Lettable Value (ALV) of the Property:On first appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] approved the AO's action in principle but corrected the computation of ALV to Rs. 16,34,10,000/-. The assessee contested the ALV determination for the first seven months at Rs. 11,02,50,000/-.The Tribunal noted that the facts remained undisputed and referred to the decision of the Mumbai Tribunal in the case of FEPL vs DCIT, where the sub-leasing receipts were assessed as 'income from other sources' in the hands of FEPL. The Tribunal held that since the sub-leasing receipts were taxed in FEPL's hands, they could not be assessed as the assessee's income.3. Applicability of the Decision in CIT vs Akshay Textile Trading & Agencies Pvt Ltd:The Tribunal had to adjudicate the applicability of the decision in CIT vs Akshay Textile Trading & Agencies Pvt Ltd, where the Bombay High Court held that the annual value should be based on the rent received by the owner, not the sub-lease rent received by the tenant.The High Court in Akshay Textile's case emphasized that the proper way to construe a taxing statute is to determine whether a transaction is a device to avoid tax. The Court held that the annual value assessable to tax is the income received from the tenant, not the sub-lease income received by the tenant from another party.Following this precedent, the Tribunal concluded that the entire transaction of leasing the property to FEPL at a lower rent could not be construed as a sham transaction. The Tribunal decided the issue in favor of the assessee, stating that the annual value should be based on the rent received by the assessee from FEPL, not the sub-lease rent received by FEPL from Goldman Sachs.Conclusion:The Tribunal decided Ground No. 2 in favor of the assessee, holding that the sub-lease income should not be included in the assessee's income and the ALV should be determined based on the rent received by the assessee. The previous grounds adjudicated by the Tribunal in its order dated 28.2.2019 remained unchanged. The appeal of the assessee was partly allowed, with the order pronounced on 24/08/2021.