2004 (12) TMI 283 - AT - Income Tax

Court upholds taxability of rental income transferred to spouse under Section 27(i)

The appeals were partly allowed as the court upheld the taxability of rental income under section 27(i) for the appellant as the owner of the property ... - Issues:1. Addition under section 27(i) for unjustified amount.2. Validity of assessment under section 143(3) and 147.Analysis:1. The appellant objected to the addition under section 27(i) for an amount deemed unjustified. The appellant argued that the assessment under section 143(3) and 147 was wrong and illegal. The CIT(A) dismissed the appeals, upholding the taxability of rental income under section 27(i) by deeming the appellant as the owner of the property transferred to the spouse. The CIT(A) observed that the appellant failed to substantiate the returns filed, leading to the rejection of returns and application of section 27(i) by the Assessing Officer. The CIT(A) referred to legal precedents to support the decision, emphasizing the duty of the assessee to prove the correctness of the return filed. The CIT(A) confirmed the assessment orders for all three years.2. The appellant's counsel argued that the lease transaction did not involve a transfer of property or interest to the spouse or minor son, challenging the applicability of section 27(i). The counsel also contended that the fair market value should not exceed municipal valuation, citing relevant court decisions. The Departmental Representative supported the Revenue authorities' orders. After considering the submissions, relevant provisions of law, and legal precedents, it was concluded that the transaction fell within the definition of 'transfer' under section 2(47) and section 27(i) of the Act. The transaction was deemed for inadequate consideration as the rent charged was significantly lower than the subsequent rent charged to the bank. Therefore, the transaction was held to be within the ambit of section 27(i) of the Act.3. The judgment further clarified that since section 27(i) applies to transactions between spouses, only 50% share related to the wife was covered by the provision and assessable in the assessee's hands. The remaining share related to the minor son was considered outside the scope of section 27(i). The Assessing Officer was directed to tax 50% share of the transaction concerning the wife under section 27(i) of the Act. Additionally, the argument regarding fair market rent based on municipal valuation was rejected, and the annual value of the property was determined based on the rent received, as per the provisions of the Act.In conclusion, the appeals were partly allowed based on the above analysis and findings.