M/S. BRIGADE ENTERPRISES LTD V. THE ADDITIONAL COMMISSIONER INCOME TAX

ITA/528/2015

AI Insights

The case involves Brigade Enterprises Ltd., a public limited company engaged in construction, which appealed against the order of the Income Tax Appellate Tribunal (ITAT) concerning the assessment year 2010-11. The primary contention was the ITAT's decision to tax notional rent for a building that was under construction during the relevant period, and the treatment of a regularization fee as a penalty rather than a business loss. The High Court examined whether the Tribunal was correct in its application of the law regarding the taxation of notional rent and the classification of the regularization fee. The court found that the Tribunal erred in taxing notional rent for a building that was not legally completed until the occupancy certificate was issued, which occurred after the assessment year in question.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 754681 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 08-12-2020
• Assessment Year: misc
• Other Referred Cases: SHARAN HOSPITALITY (P) LTD. Vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 9(3)
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: S
• Keywords: Annual letting value; Building Under Construction; Business loss; Income from house property; Notional rent; Occupancy certificate
• Section: 143(2); 22; 28; 23; 260-A

Judgement Text

"1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 8TH DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.528 OF 2015 BETWEEN: M/S. BRIGADE ENTERPRISES LTD. 29TH & 30TH FLOOR, WORLD TRADE CENTRE NO.26/1, DR. RAJKUMAR ROAD BENGALURU-560055 (REP. BY ITS CHAIRMAN & MANAGING DIRECTOR, SRI. M.R. JAISHANKAR AGED ABOUT 60 YEARS S/O RAMACHANDRA SETTY). .... APPELLANT (BY SRI. S. SHARATH, ADV., FOR SRI. CHYTHANYA K.K. ADV.,) AND: THE ADDITIONAL COMMISSIONER INCOME TAX, RANGE-11 NO.14/3-A, 5TH FLOOR R.P. BHAVAN, NRUPATHUNGA ROAD BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADVOCATE) - - - 2 THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 08.07.2015 PASSED IN ITA NO.1275/BANG/2014, FOR THE ASSESSMENT YEAR 2010-11, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.1275/BANG/2014 DATED 08-07-2015 FOR THE ASSESSMENT YEAR 2010-11. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT Mr.Sharath S., learned counsel for the assessee. Mr.K.V.Aravind, learned counsel for the revenue. 2. This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2010-11. The appeal was admitted by a Bench of this Court vide order dated 15.02.2015 on the following substantial questions of law: \"1. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in determining the Annual 3 value of Rs.15,00,000/- for an under- construction building on notional basis under sections 22 and 23 of IT Act? 2. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in treating the fee paid towards the regularization of additional construction as against the sanctioned plan as penalty? 3. Whether, in the facts and in the circumstances of the case, the Tribunal is right in law in failing to appreciate that regularization fee is allowable as business loss in computing the profits and gains under section 28 of IT Act?\" 3. Facts leading to filing of this appeal briefly stated are that the assessee is a public limited company registered under the Companies Act. The assessee is a builder engaged in the business of construction and sale of residential and commercial buildings. The assessee filed its original return of income on 15.10.2010 and submitted a revised return on 31.03.2012 in which an 4 income of Rs.6,27,87,633/- for Assessment Year 2010- 11 was declared. The case of the assessee was selected for scrutiny and a notice dated 25.08.2011 under Section 143(2) of the Act was issued. The assessee, in response to the aforesaid notice, submitted all the details. The Assessing Authority, by an order dated 26.02.2013, inter alia held that the assessee had rented out a part of the building to M/s. Brigade Foundation and even though no rental income has been admitted but the building has been completed in part and therefore, the assessee, in the interest of justice brought to tax 50% of the annual letting value admitted for the subsequent Assessment Year i.e. 2011-12 in 2010-11 itself and determined the net income of Rs.10,50,000/- and the same was brought to tax as income from house property. The Assessing Officer raised a demand of Rs.9,73,14,776/-. 5 4. The assessee thereafter filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 09.06.2014, partly allowed the appeal preferred by the assessee. The assessee thereupon approached the Tribunal (hereinafter referred to as 'the Tribunal' for short) by filing an appeal. The Tribunal, by an order dated 16.10.2014, partly allowed the appeal of the assessee in respect of Assessment Year 2010-11. However, the order of the Assessing Officer as well as the Commissioner of Income Tax (Appeals) insofar as it pertains to determination of annual letting value at Rs.15,00,000/- for the purpose of computing the income from house property, was maintained. In the aforesaid factual background, the assessee has approached this Court. 5. Learned counsel for the assessee submitted that computation of notional rent in respect of a building which was under construction is not permissible in law. 6 It is also pointed out that the assessee had obtained the occupancy certificate on 03.08.2010 from Bruhat Bengaluru Mahanagara Palike (hereinafter referred to as 'the BBMP' for short) and prior to issuance of occupancy certificate, it was not permissible to occupy the building in view of the bye law No.5.7 of building bye laws of the BBMP. It is also pointed out that from paragraph 11 of the order passed by the Assessing Officer, it is evident that the Assessing Officer himself has found that the assessee has denied that he has realized any rent for the period in question. It is urged that the notional income cannot be assessed on a building under construction as the same comes into existence legally only on issuance of occupancy certificate. Therefore, the finding recorded by the authorities under the Act are perverse. 6. It is also submitted that the second substantial question of law involved in this appeal has been 7 answered against the assessee by a Bench of this Court vide order dated 23.11.2020 passed in ITA No.428/2016. In support of aforesaid submission, reliance has been placed on the decision of the High Court of Bombay in 'SHARAN HOSPITALITY (P) LTD. Vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 9(3)' (2020) 268 TAXMAN 443 (BOMBAY). 7. On the other hand, learned counsel for the revenue submitted that all the authorities under the Act have recorded the findings of fact against the assessee and the order passed by the Tribunal does not give rise to any substantial question of law. The findings of fact recorded by the Tribunal is on the basis of the material on record and the same cannot be treated as perverse. It is also pointed out that even the assessee has not disputed the fact that during the Assessment Year, building was handed over to M/s.Brigade Foundation to run the school, on contract basis and the assessee has 8 failed to declare any rental income. Therefore, the Assessing Authority has rightly computed the notional rent on the building in question as the same was completed in part. In this connection, our attention has been invited to paragraphs 29 and 30 of the order passed by the Assessing Authority, paragraph 5.3 of the order passed by the Commissioner of Income Tax (Appeals) as well as paragraph 21 of the order passed by the Tribunal. 8. We have considered the submissions made on both sides and have perused the record. Clause 5.7 of the building bye laws of the BBMP provide that no person shall occupy or allow any other person to occupy any new building or part of a new building for any purpose whatsoever until occupancy certificate to such buildings or part thereof has been granted by an officer authorized to give such a certificate. In other words, a building legally comes into existence only on issuance of 9 an occupancy certificate. From perusal of paragraphs 29 and 30 of the order passed by the Assessing Authority conjointly, it is evident that the assessee has declared the rental income in the subsequent Assessment Year and has not admitted any rental income for the Assessment Year in question. The Commissioner of Income Tax (Appeals), in paragraph 5.1 of its order, has also held that no rental income has been admitted from the school building which was handed over to M/s. Brigade Foundation. However, it has been noted in the return of income filed for the Assessment Year 2011-12. The assessee has admitted the rental income of Rs.30,00,000/- from letting out the school in question. However, the Tribunal has not appreciated the aforesaid aspect of the matter and in a cursory manner, has held that the revenue authorities have rightly brought the income to tax as the assessee has not been able to produce any evidence to the contrary. The findings recorded by the authorities under the Act is based on 10 surmises and conjectures and has to be termed as perverse. 9. In view of preceding analysis, the first substantial question of law is answered in favour of the assessee and against the revenue. The second substantial question of law is answered against the assessee and in favour of the revenue in view of the judgment dated 23.11.2020 passed in ITA No.428/2016 for the present. However, the same shall be subject to decision of special leave petition which is pending before the Supreme Court. 10. In view of preceding analysis, the order of the Tribunal dated 08.07.2015 insofar as it pertains to computation of notional rent in respect of the 11 Assessment Year in question and bringing the same to tax, is hereby quashed. In the result, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE RV "