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2022 (12) TMI 541
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....s.5,40,00,000/- made by the Assessing Officer on account of income from other sources and accepting the claim of assessee that sum of Rs.4,50,00,000/- as income from Business and Profession. The assessee lent its name for a beneficial owner for purchase of property and also have received sum in the form of rent through a colourable leave and license agreement. In this process the assessee has also lent its name to the Home Loan sanctioned to Sh. Rajiv Rattan and claiming it as business expenses. Lending of name for the benefit of other persons cannot be held as Business and Profession of the company. 3. On the facts and circumstances of the case the order of Ld.CIT(A) is perverse." 2. As both the above grounds are inter-connected the same are dealt with commonly hereunder. 3. Briefly stated the facts are that the Assessee a Private Limited Company e-filed its original return of income for the assessment year under consideration on 19.09.2015 declaring loss of Rs.7,07,00,678/- under the head "Income from Business". The assessment was completed on 30.12.2017 u/s 143(3) of the Act assessing rental income under the head "Income from other sources" as against income from business as....
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....sessee company and the funds provided by Shri Rajiv Rattan either through loan or through its subsidiary company or home loan. 6. The AO also observed that the arrangement of leave and license agreement dated 01.10.2014 and payment of rent by Shri Rajiv Rattan is a colourable device to make a facate to grant possession of property for immediate and future use to the beneficial owner and, therefore, the second limb of prohibition of Benami Property Transaction Act i.e., holding of property for the immediate or future benefit, direct or indirect has been satisfied. Therefore, he was of the view that Section 292(9A) of the prohibition of Benami Properties Transaction Act are clearly apply in case of the assessee company as the assessee acted as Benamidar for the beneficial owner of Shri Rajiv Rattan for the property purchased. 7. The Assessing Officer stated, inter-alia, that the transaction is Benami in nature and the assessee company is Benamidar of Shri Rajiv Rattan for the following reasons: i) The loan taken from Bank of India of a sum of Rs. 163 crores was actually sanctioned to Shri Rajiv Ratan and the assessee company's name only features as a co-applicant. ii) There are....
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....rther denied interest and processing charges on home loan as allowable business expenses u/s 37(1) of the Act for the reason that the property was held to be not a commercial property of the assessee and also not used for the purpose of business and the property purchased is benami property of Sh. Rajiv Rattan. Therefore, he was of the view that the expenses are not allowable u/s 37(1) of the Act. 10. On appeal the Ld. CIT(Appeals) on examining the provisions of prohibition of Benami Property Transaction Act, the facts of the asessee's case, the evidences produced before him and the decisions relied on, has passed an exhaustive order dealing with each of the allegations of Assessing Officer and the contentions are briefly given below:- i) Shri Rajiv Rattan is only one of the joint owners of the property as per the registered sale deed and this fact has been disclosed by the assessee company in its books of account. The news clippings cannot be a basis of any allegation of Benami. In substance the assessee company has recorded the purchase to the extent of 95% and the source of the same i.e, the corresponding loan liability is duly recorded and disclosed in the books of account. ....
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....essing Officer on apparently incorrect appreciation of facts, without bringing out any motive for doing so. The onus of proving transactions to be Benami rests solely upon the person alleging it to be a Benami and Assessing Officer has not brought out any evidence on record to show that what is apparent is not the real transaction. The Ld.CIT(A) has also relied on the decisions of Hon'ble Supreme Court in the case of the Mangathai Ammal vs. Rajeswari & Others (Civil Appeal No. 4805 of 2019) and P. Leelavathi vs. V. Shankarnarayana Rao (2019) 6 SCALE 112. xi) The Ld.CIT(A) has further examined main objects of the company and held that the property was rightly reflected as inventory. xii) He further stated that since Shri Rajiv Rattan is also joint purchaser of the property, he is entitled to apply for a home loan and mention of assessee company's name as coapplicant does not affect its legal title. xiii) The Income Tax Act does not prohibit disclosure and recording of partly owned property as inventory and that the business expenditure has been legitimately claimed since the property was let out for the defined business objectives and lease rent earned rightly disclosed as bus....
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.... construction/renovation work which is going on after he has taken possession is out of his funds. The ld. DR stated that the property cannot be transferred without the consent of Shri Rajiv Rattan as he owns 5% share in the property. The ld. DR has further stated that the assessee company has share capital of only Rs. 1 lakh and it cannot on its own carry out such huge transactions and therefore it is Shri Rajiv Rattan who is de-facto the owner of the property. 13. On the other hand, the Ld. Counsel for the assessee Shri Ajay Wadhwa referring to loan sanction letter dated 19.06.2014 issued by Bank of India submits that the entire loan was credited to assessee company account. The Ld. Counsel submits that the transaction of purchase by assessee company along with Shri Rajiv Rattan cannot be treated as Benami Transaction as the purchase consideration was entirely paid by the assessee company, the Rajiv Rattan and the assessee are co-applicants of the loan obtained from the bank and the liability to clear the loan vests with the assessee company and not Shri Rajiv Rattan. Ld. Counsel submits that Sh. Rajiv Rattan has taken the property on leave and license for a monthly rent of Rs.9....
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.... beneficial owner Sh. Rajiv Rattan for the subject property. Para 2.15, page 6 of the Assessment Order. i. Leave and License agreement is colourable device. Para 2.14(ii)(d), page 6 and 3.8(ii), page 9: - In lease agreement the assessee has been shown to be absolute owner of the entire property. - Mismatch in the address of Sh. Rajiv Rattan. - The premises was rented for 6 months but the assessee has shown in its return of income for 5 months. - From the date of leave and license agreement, Sh. Rajiv Rattan is not using the property still paying the rent to the assessee company. - On the one hand assessee is getting rent from Sh. Rajiv Rattan and on the other hand it is making construction work in that property. - The assessee has lent its name for a beneficial owner for purchase of property and to the home loan sanctioned to Rajiv Rattan. Lending of name for the benefit of other person cannot be held as business and profession of the company. Para 3.9, page 9 and para 5, page 10 of the Assessment Order. A. Benami transaction is, where neither the consideration is paid nor the benefits of the property is enjoyed by the person in whose name the property is acquired.....
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....79) AC 22 C. The benefits of the property are also being enjoyed by the assessee company, to the extent of its share in the property: a. The property was let out at fair market rentals of Rs.90 lakhs per month. This way, the benefit of the property is being enjoyed by the assessee by earning rentals. If this property was benami of Mr. Rattan, the assessee would have been given it as rent free accommodation. b. The property was given on rent through "leave and license agreement" instead of lease agreement. In leave and license agreement, there is no transfer of interest from owner to the tenant and the owner always has greater rights and advantages. In fact, the licensee does not enjoy the exclusive possession of the property and the owner has a right to enter and use the property any time and the licensee cannot contest the move. The license is neither transferable nor heritable. The assessee would have entered into long term/perpetual lease agreement, if the intention was to transfer the possession of the property to Mr. Rattan. - Further, the agreement was entered into only for a period of 10 months with a renewable clause, if both the parties agree. - The above shows that t....
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....t miniscule rentals. The property was rented on fair market rentals at 90 lakhs per month. - The Ld. AO has failed to show that the terms of agreement are such which shows that the transaction has different intent. Merely because huge sum of money is invested, transaction cannot be sham. Aditya Birla Telecom Ltd. (263 Taxman 539) Bombay High Court, approved by the Hon'ble Supreme Court, Industrial Development Corp. (268 ITR 130) (High Court of Orissa), Entrepreneurs (Calcutta) (P) Ltd. (400 ITR 521) (Calcutta High Court), High Energy Batteries (India) Ltd. (348 ITR 574) (Madras High Court), Teletube Electronics (379 ITR 300) Delhi High Court - Where consideration was actually exchanged and even if the same amounts were paid back to the same party by the assessee on the same day, it cannot be said to be sham. - Seksaria Sons (P) Ltd. (138 ITR 419) - Bombay High Court - Where consideration has actually paid, transaction actually took place, legal formalities complied with - only on the basis of assumption transaction cannot be sham - Bhoruka Engineering Inds. Lt. (356 ITR 25) - Karnataka High Court. 15. The Ld. counsel for the assessee company, Shri Ajay Wadhwa, further supported....
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....any and therefore the property belongs only to the assessee company to the extent of 95%. 17. The ld. counsel for the assessee further stated that there is no bar in transferring 95% of the company's interest to any person, if the company chooses to do so and therefore, the Department is incorrect in saying that Shri Rajiv Rattan having a 5% share in the property can stop the assessee company from sale of its share in the property. There is no embargo as per the agreement and even in law, the said share can be transferred if the assessee company wishes to do so. The ld. counsel for the assessee further stated that the property has been given on leave and license basis and there is no transfer of interest by the owner to the tenant. The leave and license agreement is only for a period of 10 months and extendable only if both the parties agree. In leave and license agreement, the licensee does not enjoy exclusive possession of the property and the owner has the right to enter in the property anytime and that the license is neither transferrable nor heritable. He further stated that the fair market rental of Rs. 90 lakhs per month is at an arm's length and that there has been no alle....
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....s stated that since the entire transaction is a sham, the income received by way of leave and license should be taxed under the head income from other sources and not under the head "Income from business or profession" as claimed by the assessee company. As per Assessing Officer, the property being a benami property, having purchased in joint name, there is a restriction on its sale and therefore it could not be treated as a part of the inventory, it is a residential property and also that home loan are never granted for commercial purposes. Assessing Officer further stated that the assessee has not shown any business income from any property in the past years and has merely lent its name for the beneficial owner i.e., Shri Rajiv Rattan and therefore the income cannot be held as income from business or profession. 22. The Ld. Counsel referring to Memorandum of Association (MOA) of the assessee company which is placed at page 70, the main objects of the assessee company in Clause No. 2(A) of MOA is to "construct, acquire, hold/sell builders, buildings, tenements and such other movable and immovable builders and to rent, let on hire and managed them and to act as real estate agent a....
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....ing that the subject property is not commercial property and also not being used for the purpose of business and, therefore, the interest expense is not allowable u/s 37(1) of the Act. The Ld. Counsel for the assessee submits that the main object of the assessee company permits to own construct and let out property and the assessee company is doing business as per its main objects and, therefore, the correspondence expenses should be allowed to the assessee u/s 37(1) of the Act. 26. Heard rival submissions, perused the orders of the authorities below and the decisions relied upon. The assessee company was incorporated on 16.08.2012 with the primary objects, inter alia, to construct, acquire, hold/sell builders, buildings, tenements and such other movable and immovable builders and to rent, let on hire and manage them and to act as real estate agent and immovable property dealers. Shares of the assessee company are owned by its holding company i.e., M/s Tupelo Properties Private Ltd. along with its nominee shareholder. In a board meeting held on 16.05.2013, it was resolved that the assessee company along with Mr. Rajiv Rattan will purchase a prestigious property situated in Lutyen'....
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....sions of the Prohibition of Benami Transactions Act, 1988 ("Benami Act"). Before proceeding to adjudicate on the issue of Benami Transaction, it is relevant to note that the order has been passed by the AO under the provisions of Income Tax Act, 1961. However, as the AO has made observations on the transaction undertaken by the appellant by making reference to the provisions of the Benami Act, same are dealt with below: 5.3 In the assessment order, the AO has attempted to state that the property purchased by the appellant company was a benami transction, that the appellant company was a benamidar and the beneficial owner was Sh. Rajiv Rattan. In order to do so, the AO has relied upon various news clippings, extracts of which have been reproduced in the assessment order. These news clippings contain snippets of purchase of property on Amrita Shergill Marg by Sh. Rajiv Rattan. In this regard, it is noteworthy that the purchase of property sh. Rajiv Rattan is not inaccurate, as he is one of the joint owners of the property as per the registered sale deed. This fact is disclosed by the appellant company itself in its books of accounts. Further, the AO has also reiterated the source o....
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....t of a property where the person providing the consideration is not traceable or is fictitious." 5.4 A perusal of the above definition shows that for a property to be classified as Benami, the first premise is the payment of purchase consideration by "Another Person" i.e. a person other than the person in whose name the property is held. In the appellant's case, the AO's allegation is that part of the purchase consideration was indirectly paid by Sh. Rajiv Rattan, who is indeed the joint owner of the property. Thus, the first basic premise clearly fails. 5.5 A perusal of the remaining clauses of Section 2(9) of the Benami Act show that the second premise to classify a transaction as Benami is the non disclosure of facts or source of consideration or creation of fictitious ownership which shows the real transaction to be different from the apparent transaction. A perusal of the assessment order shows that the AO has reiterated the source of purchase consideration as disclosed by the appellant company in its books of accounts and as produced during assessment proceedings. Thus, the source of purchase consideration as noted by the AO is the same as what has been explained and acco....
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....lant company itself owns 95%) and the remaining consideration was borrowed by the appellant company from its parent company and from issuance of debentures. As rightly pointed out by the appellant in its submissions, the significant risk of default was always borne by the appellant company who was the legal owner of 95% of the said property. Hence, the source of purchase consideration as stated by the AO is already documented by the appellant company. Even if the purchase consideration was partly indirectly paid by Sh. Rajiv Rattan on the pretext that he exercises control over the appellant company's holding company, then it was disclosed in respective books of accounts. Further, a perusal of the title deed clearly shows that Sh. Rajiv Rattan is very much a part to the transaction, as he owns a share in the property. Any payment made by him either directly or indirectly does not make the transaction a benami transaction, as the money has not been provided by an outsider, but by a party to the transaction. It is also noteworthy that Hon'ble Apex Court in the case of P. Leelavathi vs. V. Shankarnarayana Rao (2019) 6 SCALE 112 has held that even if payment is made by an outsider, ....
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....solely a commercial decision, the expediency of which rests solely with the appellant company. Various courts and tribunals have held that the AO does not have jurisdiction to question the commercial expediency of a particular transaction. 5.10 As regards the AO's objections to the payment of rent by Sh. Rajiv Rattan while the property is not occupied by him, is also irrelevant and ignorant of facts. The appellant company has submitted that some construction work was being undertaken at the property, due to which it was not yet occupied by Sh. Rajiv Rattan. In doing so, the AO has ignored the fact that fair market lease rent is being paid by Sh. Rajiv Rattan to the appellant company. The decision of occupying the property rests solely with Sh. Rajiv Rattan. The decision of letting out the property while some construction work is being done is the mutual decision and understanding between the lessor and lessee. 5.11 As regards, the observation of the AO that the leave and license agreement has been enacted between the appellant company and Sh. Rajiv Rattan to claim the expenditure of interest on home loan, which would have otherwise not been allowed if the property would have be....
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....nt. Thus, this parameter is also not satisfied. 5.13 Hence, none of the parameters established by the Hon'ble Apex Court have been satisfied by the observations made by the AO in the assessment order. At this juncture, it is noticeable that the Hon'ble Apex Court has clearly laid down that the onus of proving a transaction to be benami rests solely upon the person alleging it to be a benami transaction. Such onus is to be discharged only by evidence and documents placed on record and not by conjectures or surmises. 5.14 In light of the above requirements, it is evident that neither the parameters for classifying a transaction to be Benami are satisfied, nor has the AO discharged his onus of bringing sufficient evidence on record to substantiate his observations. Hence, the transaction entered into by the appellant company cannot be classified as Benami Transaction and accordingly, it is evident that the transaction of purchase of property and letting it out for business purpose was bonafide and for the purpose of business. Hence, the said transaction cannot be treated as benami in nature. 5.15 The remaining observations made by the AO in the assessment order are hereby dealt ....
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....rom home loan cannot be treated as inventory. In doing so, the AO has perhaps ignored the fact that the property purchased by the appellant company is a residential property. There is no bar in the Income Tax Act, 1961 that a company cannot purchase residential house property. As rightly pointed out by the appellant, various builders and construction companies build residential houses across India. Thus, the residential house property purchased by the appellant company has rightly been shown as inventory in the books of accounts of the appellant company. E. The AO has also raised objections on the issuance of home loan for purchase of the said property and that the loan sanction letter includes the name of Sh. Rajiv Rattan. In this regard, it is noteworthy that Sh. Rajiv Rattan is also a joint purchaser of the property, and is very well entitled to apply for a home loan. As per page 5 of the assessment order, the AO has himself noted that the loan documents also mention the name of the appellant company as the co-applicant. Thus, the loan documents mention the name of both legal owners of the property. Further, it is common parlance that mention of the appellant company as the co....
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....way of addendum dated 13.11.2014, whereby certain terms of the agreement were modified and it was made effective from 01.11.2014. This fact has been duly examined and verified. Hence, the appellant company had rightly earned lease rent for a period of 5 months in the subject assessment year. 5.17 In the assessment order, the AO has also disallowed interest and processing charges of Rs.11,58,12,598/- claimed as business expenses by the appellant. The reasons for disallowance have been stated as the property not being commercial in nature and not being used for business. As noted above, the property was let out by the appellant as per its defined business objectives and lease rent earned by the appellant is rightly disclosed as business income, these expenses were rightly claimed as business expenditure incurred in order to earn such business income. The issue of property being residential in nature has already been dealt with in earlier paragraphs and is not being reiterated herewith. It is admitted by the AO that these expenses pertain to the property purchased by the appellant. It is also noted that the said property is duly shown as inventory by the appellant in its books of ....
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.... Leave and License does not replace the title. Allegations have been made on assumptions, apparently incorrect interpretation of facts and without bringing out any motive for doing so. Decision to purchase the property either individually or jointly with someone is solely a commercial decision, the expediency of which rests solely with assessee company. Payment of rent by Sh. Rajiv Rattan while property is not occupied by him is irrelevant and ignorant of fact that fair market lease rentals were paid by him. Decision to occupy property rests solely with Sh. Rajiv Rattan. Allegation that the leave and license agreement was enacted to claim interest expense is ignorant of fact that if there was no agreement, Sh. Rajiv Rattan would also not be paying rental income. The AO has not brought out any evidence on record to show that the possession of the property rests with anyone else apart from the legal owners of the property. Onus of proving transaction to be benami rests solely upon the person alleging it to be a benami transaction as held by the Hon'ble Supreme Court in the cases of Mangathai Ammal vs. Rajeswari & Others (Civil Appeal No. 4805 of 2019) and P. Leelavathi vs. V. Shankar....
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....) In the event Licensor sells the Licensed Premises or any part thereof to any third party in violation of the terms of this Agreement. (v) Except for the circumstances mentioned above the Agreement can be terminated by the either party by giving three month's notice. 7.2.2 Consequences of termination: (i) Each party shall immediately pay to the other, full amount of monies as due to the other as per the provisions of this Agreement. (ii) Licensee shall, on the date of termination of this Agreement for any reason whatsoever, be entitled to remove all equipments. articles, items and fit outs in the Licensed Premises that are owned by the Licensee, within a period of 90 days of the termination without any liability to pay any amount towards consideration or any other fee, damages or charges in respect of the use and occupation of the Licensed Premises for the purpose of the aforesaid removal of equipments, articles, items, assets and fit-outs and the Licensor shall not raise any hindrance/objection to the same". 30. A benami transaction is one where the person in whose name the property vests is not the real owner and the consideration for such property is provided by so....
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....her right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole." 32. The above judgment recognizes the concept of a company being a separate legal entity from its shareholders. The shareholders are not the owners of the assets of the company. They are only entitled to dividends declared out of the profits earned by the company as per their percentage of holding in the company. Only on dissolution of the company, after meeting all liabilities, the assets of the company are distributed between the shareholders in their shareholding ratio. Hence, it cannot be said that in the case of the company, the shareholders are the owners of its assets. 33. Besides, section 2(62) of the Companies Act 2013, recognizes the existence of a one person company. There is also distinction between a single shareholder and the company in case of "one person company". The Income Tax Act also in the definition of "person" under section 2(31) recognizes "company" as separate legal entity being a person which is distinct from the "individual" shareholder. 34. To the query of the ld. DR as to the source of repairs/renovations of the property,....
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....o make the rental income to be the income taxable under the head "Profits and Gains of Business or Profession". It is an admitted fact in the instant case that the assessee company has only one business aspect, we do not find any substance in what has been submitted by the Ld. Counsel appearing for the Revenue. 11. The judgment relied upon by the Ld. Counsel appearing for the assessee squarely covers the facts of the case involved in the appeals. The business of the company is to lease its property and to earn rent and, therefore, the income so earned should be treated as its business income. 12. In view of the law laid down by this Court in the case of Chennai Properties & Investment Ltd. (supra) and looking at the facts of these appeals, in our opinion, the High Court was not correct while deciding that the income of the assessee should be treated as Income from House Property." 38. In the case of Chennai Properties & Investments Ltd. Vs. CIT (373 ITR 673) the Hon'ble Apex Court considering the Constitution Bench judgment in the case of Sultan Brothers Pvt. Ltd. vs. CIT (51 ITR 353) held as under: "4. We have heard the Ld. Counsel for the parties on the aforesaid issue. Be....
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....ive of the company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties. 8. Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd. (supra), we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. vs. CIT (1962) 44 ITR 362 (SC). That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown ....
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....ch a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: - "We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature by a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature." 11. We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The asse....
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....e property" but "business income". 24. In Associated Hotels of India Ltd. v. R.N. Kapoor AIR 1959 SC 1262, a distinction was drawn between a licence and a lease. If the document gives only a right to use the property while it remains in the possession and control of the owner thereof it will be a licence. Where the legal possession continues therefore to be with the owner with the licencee making use of the property it could still only be a licence. 25. In Quadarat Ullah v. Municipal Board, Bareilly AIR 1974 SC 396, it was observed "if an interest in immovable property, entitling the transferee to enjoyment, is created, it is a lease; if permission to use land without right to exclusive possession is alone granted, a licence is the legal result." 26. In the facts and circumstances of the present case, in light of the specific clauses of the licence deed, the Court is satisfied that the income earned by the Assessee from the licence fee could not be characterised as rent and, therefore, income from house property. The Court is of the view that the AO and the ITAT were in error in coming to a contrary conclusion. They appear to have overlooked that the Assessee had consistently....
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....the principle of consistency cannot be made applicable. Again, the Assessing Officer and the Tribunal had rejected the claim of the appellant as there was no change in the facts of the case during the relevant assessment year. Though the appellant had claimed that the rental income earned by the appellant assessable under the heard "business" and the compensation of Rs.53,50,000/- paid by it for obtaining possession from lessee/tenant, so as to earn a higher income, as an admissible revenue deduction, in spite of Memorandum permitting the appellant to carry on business by letting out properties, the Assessing Officer and the Tribunal ruled otherwise." 41. The Mumbai Bench of the Tribunal in the case of Nisarg Realtors Pvt. Ltd. (195 ITD 402) held as under: "Therefore, there is no doubt that assessee has object of renting out of the properties as per its object in Memorandum of Association. This is also not in dispute before the lower authorities but the lower authorities have held that character of income is not altered because it is received by a company formed with the object of real estate development etc. Ld. Revenue authorities were of the view that as the income is subject....