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Issues: (i) Whether the rental receipts from the premises were assessable as income from house property on the footing that the assessee was an owner or deemed owner, or as income from other sources as a mere lessee; (ii) whether the expenses claimed against such rental income were allowable consequentially.
Issue (i): Whether the rental receipts from the premises were assessable as income from house property on the footing that the assessee was an owner or deemed owner, or as income from other sources as a mere lessee.
Analysis: The lease deed conferred on the assessee certain rights to manage, sub-let, and recover rent, but the lessor remained the owner and retained substantial incidents of ownership. The lease was for 9 years and 11 months at the first instance, which did not satisfy the statutory threshold for deemed ownership under section 27(iiib) read with section 269UA(f) of the Income-tax Act, 1961. The principles governing beneficial ownership under section 22 of the Income-tax Act, 1961 were held inapplicable because the assessee was not realising the income in its own right as owner, nor had the owner divested himself of ownership in substance.
Conclusion: The rental receipts were not assessable under the head 'House property' and were assessable under the head 'Other sources' in favour of the assessee.
Issue (ii): Whether the expenses claimed against such rental income were allowable consequentially.
Analysis: Once the rental income was held assessable under the head 'Other sources', the disallowance made only because the income had been brought under the head 'House property' could not stand. The matter therefore required re-examination under the proper head of income and according to law.
Conclusion: The disallowance was set aside and the Assessing Officer was directed to reconsider the claim for expenses according to law in favour of the assessee.
Final Conclusion: The assessment of the rental receipts under the head 'House property' was unsustainable, and the matter was restored only to the limited extent necessary for recomputation of allowable expenses under the correct head of income.
Ratio Decidendi: A lessee is not chargeable to tax under the head 'House property' unless the statutory requirements of ownership or deemed ownership are satisfied; where those requirements are absent, the rental receipts are assessable under the appropriate residual head and consequential expenditure claims must be examined accordingly.
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