TaxTMI 
TaxTMI 
2022 (12) TMI 541
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....e case, the Ld.CIT(A) erred in deleting the addition of Rs.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....
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.... 04.02.2015 and there is direct nexus between the payment made by the assessee 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 Rat....
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....ental income shown by the assessee was assessed under the head "Income from other sources". 9. The Assessing Officer further 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 exte....
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....rties to the transaction. x) The Ld.CIT(A) stated that Assessing Officer has failed to bring out any motive for giving the transaction a benami colour. Allegations have been made by Assessing 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 ....
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....erefore, Ld. DR contends that it os clear that the funds belong to Shri Rajiv Rattan and the assessee company is only for the name sake and Shri Rajiv Rattan takes all the decisions relating to the property and even the 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 ....
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....6 of the Assessment Order. g. Rajiv Rattan is paying rent of Rs.90 lakhs per month for the property despite he is not using the property and still paying the rent to the assessee. Para 2.14(ii)(e), page 6 of the Assessment Order. h. The assessee has acted as Benamidar for the 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....
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....essee. d. Further, some portion of consideration was also taken by the assessee as a loan from its holding company. The holding company financed the said money through issuance of Debentures. The sum of money financed by issuance of debentures cannot be said to be Mr. Rattan's money as the company and its shareholder has separate legal entity. Salomon Vs. Salomon (1879) 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 ca....
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.... property being licensed imply 95% of the property; (iii) the period of agreement amended to 10 months; (iv) waiver of security deposit as the licensee also owner of 5% of the property. - Refer pages 109-112 of the paper book. c. The AO alleged the rent agreement is a colourable device without any basis. - There is no observation that the property was given on rent without consideration or at 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 c....
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....e company also cited the judgement in the case of Mrs. Bacha F. Guzdar 271 ITR 1 (Supreme Court) for the proposition that, a shareholder does not have any vested right over the assets of the company and he is only entitled to dividend to the extent of its shareholding. The ld. counsel contended that the immediate shareholder or even the beneficial shareholder has no direct interest in the assets of the company 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....
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....he leave and license agreement dated 01.10.2014 read with its addendum dated 13.11.2014. He further stated that the leave and license agreement is not a colorable device and rent has actually exchanged and enjoyed by the assessee company and that it is a perfect business transaction without any flaws. 21. With regard to assessing the rental income under the head "Income from other sources" the Assessing Officer has 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 b....
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.... Ltd. - (6037/Mum/2016) (ITAT Mumbai) to contend that the rent from the property has to be taxed under the head business or profession as the main objects of the company was to acquire and give property on rent and manage the same. 25. The Ld. Counsel for the assessee further submits that the Assessing Officer disallowed interest and processing charges of home loan obtained by the assessee company from Bank of India alleging 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 ....
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....rned loss of Rs.7,07,00,678/-. 27. On appeal, the Ld. Commissioner of Income Tax (Appeals) vide his order dated 15.07.2019 granted relief to the assessee after considering the facts of the case and submissions of the assessee observing as under: "5.2 I have considered the facts of the case, basis of addition made by the AO and submissions of the appellant. It is observed that in the assessment order passed by the AO, he has relied upon various provisions 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 ....
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....ere the names of brother or sister or lineal ascendant or descendent and the individual appear as joint-owners in any document, and the consideration for such property has been provided or paid out of the known sources of the individual; or (B) A transaction or an arrangement in respect of a property carried out or made in a fictitious name; or (C) A transaction or an arrangement in respect of a property where the owner of the property is not aware of, or, denies knowledge of, such ownership; (D) A transaction or an arrangement in respect 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....
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....ely upon the person alleging the transaction to be a benami transaction, and such onus must be duly discharged on the basis of actual evidence on record, and not on the basis of surmises and conjectures. These parameters are discussed below: I. The source from which the purchase money came: 5.7 The source of purchase consideration is an undisputed fact as reproduced above. As submitted by the appellant and verified by the AO, approximately 70% of the purchase consideration was borrowed by the appellant company from a bank against the hypothecation of the said property (in which the appellant 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 ....
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....purchasing the property, documenting title of ownership in the registered sale deed, execution of lease rent agreement and earning of market lease rent therefrom are all documented by the appellant in its books of accounts. Thus, reiteration of these facts does not prove any motive to give the transaction a benami colour. 5.9 Further, in the assessment order, the AO has stated that the appellant could not justify any reason for jointly purchasing the property with Sh. Rajiv Rattan, and hence treated the property as Benami. In this regard, it is noteworthy that the decision to purchase the property either individually or jointly with someone is 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 ....
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....e AO. Hence, this parameter is also not satisfied. VI. The conduct of the parties concerned in dealing with the property after the sale 5.12 As submitted during the assessment proceedings and accepted by the AO, the property has been leased out by the appellant to Sh. Rajiv Rattan from whom the appellant continues to earn lease rent till date. The AO has not brought out any evidence on record to show that the possession of property rests with anyone apart from the legal owners of the property. As Sh. Rajiv Rattan is a legal owner of part of the property, possession of the property by him under the lease agreement for payment of due consideration of lease rental cannot be treated as a colourable arrangement. 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 do....
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....of the transaction of purchase of said property have been documented in earlier paragraphs, basis which the bona-fides of the transaction have been clearly established. As submitted by the appellant company, its objectives include infrastructure projects, real estate projects, including their construction, letting out etc. Hence, the activity of purchasing the property and letting it out falls within the ambit of business activities for which the appellant company was incorporated. Thus, the property purchased by the appellant company is rightly shown in its books of accounts as inventory, and income thereof is rightly treated as business income. D. The AO has stated that home loans are never granted for commercial properties and therefore, property purchased from 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 resident....
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....tunity of responding to the query or furnishing any evidence. The above claim when verified from the contents of the impugned assessment order, is found to be acceptable in as much as though the AO has discussed in details about various observations, it has not indicated anywhere regarding calling for details, documents or clarification with respect to short accounting of rent for five months only against the impugned observation for six months. Under this premises the leave and license agreement including addendum dated 13.11.2014 being filed by the appellant before me is accepted for adjudication as the same is not falling in the category of new evidence under Rule 46A of the I.T. Rules. As stated above, the appellant company had submitted that the Leave and License Agreement was amended by 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 proces....
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.... property, in case of default of loan. Relationship of Rajiv Rattan is also disclosed and in the documents and books of account. There are no undisclosed transaction, fact or involvement of any party apart from the parties to the transaction. Hence, the second basic premise also fails. Source of purchase consideration is an undisputed fact. 70% of purchase consideration was borrowed by the assessee from bank against hypothecation of the property and remaining was borrowed from holding company and issue of debentures. Even if, the consideration was partly or indirectly paid by Rajiv Rattan, it was disclosed in the books of respective companies and he is party to the transaction. Any payment made by him does not make transaction benami. The property was let out to Sh. Rajiv Rattan for monthly fair rentals and not without consideration. 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.....
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....e event Licensee fails to pay the consideration to the Licensor in terms of the Agreement for a consecutive period three months and the Licensee fails to rectify the same within of 45 days of the notice thereof being served by the Licensor on the Licensee. 7.2.1 Notwithstanding, anything to the contrary the Agreement can be terminated by the Licensee without giving any notice under the following circumstances: (i) The Licensor fails to render necessary co-operation and assistance as may be required from time to time in performance of any of the provisions of the Agreement. (ii) Failure of the Licensor in fulfilling any of its obligations under this Agreement and/or breach of any of the provisions of this Agreement. (iii) If any representation and/or warranty of the Licensor becomes, or is found to have become false, or is false, or is not fulfilled. (iv) 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. ....
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....s with the bank and as and when the loan is repaid, the same shall come back to the assessee company and to Shri Rajiv Rattan signifying their share of 95% and 5% respectively. We would also like to reproduce herewith the relevant portion of the judgment of the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdar (271 ITR 1) (Supreme Court) as under: "There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the articles of association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further 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 s....
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....ame lending for the benefit of other person. The entire sequence of the transaction from acquisition of property to giving on rent at the fair market value is very clear, entered through banking channels; is at arm's length and is backed by duly enforceable agreements. We have already held that this transaction is not Benami as alleged by Assessing Officer. Hence, the rent received cannot be said to be income from other sources. The limited question before us is as to whether the income recorded and offered by the assessee company is income from business since rent constitutes its business activity or it is income from other sources. 37. The Hon'ble Supreme Court in the case of Rayala Corporation Pvt. Ltd. (386 ITR 500) held as under: - "10. Submissions made by the Ld. Counsel appearing for the Revenue is to the effect that the rent should be the main source of income or the purpose for which the company is incorporated should be to earn income from rent, so as to 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, ....
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.... from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects. 7. With this background, we first refer to the judgment of this Court in East India Housing & Land Development Trust Ltd.'s case (supra) which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective 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 th....
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.... be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned." 9. After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case (supra) squarely applies to the facts of the present case. 10. No doubt in Sultan Brothers (P) Ltd.'s case (supra), Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at a conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in....
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....hat was collected. The ITAT has in the impugned order not given any reason for disagreeing with the CIT (A) and has simply confirmed the order of the AO that the licence fee constituted income from house property and not business income. 22. Learned counsel for the Assessee referred to the decision of the Supreme Court in Universal Plast Ltd. v. Commissioner of Income-Tax (1999) 237 ITR 454(SC) where it is held that no precise test can be laid down to ascertain whether income received by an Assessee from licensing or letting out of asset would fall under the head profits and gains of business or profession since it was a mixed question of law and fact and has to be determined from the point of view of a businessman in that business on the facts and in the circumstances of each case. 23. In Chennai Properties & Investments Ltd. v. Commissioner of Income Tax (2015) 373 ITR 673 (SC), the Court accepted the plea of the Assessee in that case that where the main line of business was letting of property then the income therefrom should not be treated as "income from house property" but "business income". 24. In Associated Hotels of India Ltd. v. R.N. Kapoor AIR ....
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....as it considered in the light of the Memorandum. The answer is in the negative. Though as noted, in earlier assessment years the appellant had shown rental income as "income from house property", however, in this assessment year it has claimed rental income as business income, in view of the object as set out in clause 4 of the memorandum. Though before the Tribunal the Memorandum was relied on to put forward the case that the income was part of the business and payment of compensation was to earn higher income, it was not at all considered. Since in this assessment year the appellant had claimed rental income as business income, and as previously there was no adjudication or decision considering the Memorandum, and as being the owner of the premises, payment of compensation - the expenditure - was wholly and exclusively for commercial expediency. As the judgment in Chennai Properties and Investments Ltd. (supra) had held "that the objects of the company must also be kept in view to interpret the activities. (paragraph 8), the Tribunal was not justified in disallowing the claim of appellant. In the said circumstances the principle of consistency cannot be made applicable. Again, th....