I.T.O. WARD 17(2)(1), MUMBAI V. RAHUL ASSOCIATES, MUMBAI

ITA 2165/MUM/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62458 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 17-05-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 16-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: A L SHARMA
• Keywords: Business income; Maximum Marginal Rate

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI D BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R S SYAL,AM & SHRI VIJAY PAL RAO, JM ITA NO. 2165/MUM/2011 (ASSESSMENT YEAR 2006-07 ) THE INCOME TAX OFFICER WARD 17(2)(1), MUMBAI VS RAHUL ASSOCIATES 194 NARENDRA STATION ROAD WADALA MUMBAI 31 (APPELLANT ) (RESPONDENT) PAN NO. AAAFR1460M ASSESSEE BY SH A L SHARMA REVENUE BY SH C G K NAIR DT.OF HEARING 17 TH MAY 2012 DT OF PRONOUNCEMENT 25 TH , MAY 2012 ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 24.12.2010 OF THE CIT(A) FOR THE AY 2006-07. 2 THE ONLY GROUND RAISED BY THE REVENUE IN THIS APP EAL IS AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN DIRECTING NOT T TAX A SUM OF ` 13,76,740/- IN THE HANDS OF THE TRUST WITHOUT TAKING INTO ACCOUNT NEWLY INSERTED PROVISION S OF SEC. 161(1A) WHICH IS EFFECTIVE FROM 1.4.1985 AND IGNORING THE FACT THAT T HE TRUST IS HAVING BUSINESS INCOME. 3 THE ASSESSEE HAS FILED ITS RETURN OF INCOME IN TH E STATUS OF SPECIFIC TRUST WHEREIN THE SHARES OF THE BENEFICIARIES ARE DETERMINATE. T HE ASSESSEE TRUST HAS LET OUT THE PREMISES SITUATED AT BALDOTA BHAVAN VIDE LEASE AGRE EMENT DT 29.8.1990 TO CENTRAL WAREHOUSING CORPORATION. DURING THE FINANCIAL, THE ASSESSEE RECEIVED LICENSE FEE OF RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 2 ` . 15,51,812/- FROM CENTRAL WAREHOUSING CORPORATION WHEREAS THE ASSESSEE HAS PAID RENT OF ` 14,244/- TO M/S BALDOTA BROTHERS, THE LANDLORD OF THE PROPERTY. THE ASSESSING OFFICER NOTED THAT THE INCOME OF THE BENEFICIARIES OF THE TRUST IS MORE THAN THE LIMIT FOR TAXATION I.E ABOVE RS. 50,000/-. THEREFORE, THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CLAIM OF THE ASSESSEE TRUST OF NIL INCOME IS NOT ACCEPTABLE IN VIEW OF THE PROVISIONS OF SEC. 167B(2)(I) OF THE I T ACT. 3.1 APART FROM THIS, THE ASSESSING OFFICER TREATED THE NET SURPLUS AS INCOME FROM BUSINESS INSTEAD OF INCOME FROM OTHER SOURCES OFFER ED BY THE ASSESSEE. THE ASSESSING OFFICER HELD THAT THE TRANSACTION IS A CO LOURABLE DEVICE TO AVOID TAX AND BY FOLLOWING THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF MEDOWELL & CO VS CTO REPORTED IN 154 ITR 148, THE ASSESSING OF FICER TREATED THE TRUST AS COVERED U/S 161(1A) OF THE I T ACT AND ACCORDINGLY ASSESSED THE AMOUNT OF ` 13,76,742/- AS BUSINESS INCOME IN THE HAND OF THE ASSESSEE TRUST. 3.2 ON APPEAL, THE CIT(A) HELD THAT THE TRUST CANNO T BE HELD AS AN ASSOCIATION OF A PERSON AS THE CONSTITUENT PERSONS HAVE NOT COME TOGETHER TO EARN INCOME IN QUESTION. THE CIT(A) HAS FURTHER OBSERVED THAT S INCE THE BENEFICIARIES ARE MERELY RECIPIENTS OF INCOME; THEREFORE, THEY HAVE TO BE TA XED AS REPRESENTATIVE OF THE ASSESSEE U/S 161(1) OF THE ACT. WHEN THE INCOME AS ALREADY BEEN TAXED IN THE HANDS OF THE BENEFICIARIES, THEN THERE CANNOT BE AN Y DOUBLE TAXATION OF THE SAME AMOUNT. ACCORDINGLY, BY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. MARSONS BENEFICIARY TRUST AND ORS REPORTED IN 188 ITR 244 AND IN THE CASE OF L.R. PATEL FAMILY TRUST V. INCOME-TAX OFFICER REPORTED IN 262 ITR 520, THE ADDITION WAS DELETED. RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 3 4 BEFORE US, THE LD DR HAS SUBMITTED THAT THE CIT(A ) HAS IGNORED THE PROVISIONS OF SEC 161(1A) WHILE ADJUDICATING THE ISSUE. HE HA S FURTHER SUBMITTED THAT THE ASSESSING OFFICER MADE OUT A CLEAR CASE THAT THE BU SINESS ACTIVITY ON THE PART OF THE ASSESSEE BY TAKING THE PROPERTY IN QUESTION LEASE A ND THEN SUB LET OUT THE SAME ON HIGHER RENT. THEREFORE, AS PER THE PROVISIONS OF S EC. 161(1A), THE INCOME IS ASSESSABLE IN THE HANDS OF THE TRUST AS INCOME FROM BUSINESS A CTIVITY. HE HAS FURTHER CONTENDED THAT THE CIT(A) RELIED UPON THE DECISIONS OF THE HO NBLE JURISDICTIONAL HIGH COURT WHEREAS IN THE CASE OF MARSONS BENEFICIARY TRUST AN D ORS (SUPRA) THE DECISION IS BASED ON THE PROVISIONS OF SEC. 161(1) PRIOR TO ITS AMENDMENT. THEREFORE, THE SAID DECISION IS NOT APPLICABLE IN THE CASE OF THE ASSES SEE IN VIEW OF THE AMENDED PROVISIONS OF SEC. 161(1A). 4.1 AS REGARDS THE DECISION IN THE CASE OF L.R. P ATEL FAMILY TRUST (SUPRA), THE DECISION IS ON THE ISSUE OF CAPITAL GAIN CHARGEABLE TO TAX AS INCOME OF THE TRUST AND NOT AS BUSINESS INCOME. THUS, THE LD DR HAS SUBMITT ED THAT IN THE FACTS OF THE PRESENT CASE, THE DECISION AS RELIED UPON BY THE CIT(A) ARE NOT APPLICABLE. HE HAS FURTHER POINTED OUT THAT THE TRUSTEES OF THE ASSESSEE TRUST ARE ALLOWED TO ACT AS BUILDERS, CONTRACTORS, REALTORS AND DEAL IN PURCHASE AND SALE OF OWNERSHIP FLATS, LANDS AND OTHER IMMOVABLE PROPERTIES AS PER CLAUSE 5 OF THE DEED OF TRUST. THEREFORE, IT IS A CASE OF DOING THE BUSINESS OF TAKING THE PROPERTY O N LEASE AND THEN SUB LETTING THE SAME ON HIGHER RENT BY THE TRUST WHICH IS ALSO THE BUSINESS OF THE TRUSTEE. 4.2 ON THE OTHER HAND, THE LD AR OF THE ASSESSEE HA S SUBMITTED THAT SINCE 1991, THE INCOME FROM LICENSE FEE RECEIVED BY THE ASSES SEE HAS BEEN ACCEPTED BY THE REVENUE AS INCOME FROM OTHER SOURCE EXCEPT FOR THE AY 2005-06 IN WHICH THE ASSESSING OFFICER HAS TREATED THE LICENSE FEE AS B USINESS INCOME, WHICH HAS BEEN RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 4 REVERSED BY THE CIT(A) BY ACCEPTING THE CLAIM OF TH E ASSESSEE AS INCOME FROM OTHER SOURCES AND THE REVENUE HAS NOT FILED ANY APPEAL AG AINST THE ORDER OF THE CIT(A) FOR THE AY 2005-06. HE HAS FURTHER SUBMITTED THAT THE A SSESSING OFFICER HAS ALSO MADE AN ADDITION FOR THE AY 2004-05 BUT THE CIT(A) HAS DELE TED THE SAID ADDITION AND AGAIN THE REVENUE HAS NOT FILED ANY APPEAL AGAINST THE OR DER FOR THE AY 2004-05. THE LD AR HAS FILED THE COPIES OF THE ORDERS OF THE CIT(A) FO R THE AY 2004-05 AND 2005-06. THE LD AR HAS SUBMITTED THAT WHEN THE INCOME HAS BEEN ACCE PTED AS INCOME FROM OTHER SOURCES, THEN THE PROVISIONS OF SEC. 161(1A) ARE NO T APPLICABLE. HE HAS ALSO RELIED UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF HARIKRISHNA FAMILY TRUST V. COMMISSIONER OF INCOME-TAX REPORTED IN 30 6 ITR 303. THE HAS SUPPORTED THE ORDER OF THE CIT(A). 5 WE HAVE CONSIDERED THE RIVAL CONTENTION AND RELEV ANT MATERIAL ON RECORD. THE SHORT POINT OF CONTROVERSY BEFORE US IS ONLY TH E APPLICABILITY OF SEC 161(1A) OF THE I T ACT IN RESPECT OF THE LICENSE FEE RECEIVED BY THE ASSESSEE TRUST IN SUBLETTING OUT THE PROPERTY IN QUESTION. WE QUOTE SEC 161: 161. (1) EVERY REPRESENTATIVE ASSESSEE, AS REGARDS THE IN COME IN RESPECT OF WHICH HE IS A REPRESENTATIVE ASSESSEE, SHALL BE SUBJECT TO THE SAME DUTIES, RESPONSIBILITIES AND LIABILITIES AS IF THE INCOME WERE INCOME RECEIVED BY OR ACCRUING TO OR IN FAVOUR OF HIM BENEFICIALLY, AND SHALL BE LIABLE TO ASSESSM ENT IN HIS OWN NAME IN RESPECT OF THAT INCOME; BUT ANY SUCH ASSESSMENT SHALL BE DEEME D TO BE MADE UPON HIM IN HIS REPRESENTATIVE CAPACITY ONLY, AND THE TAX SHALL, SUBJECT TO THE OTHER PROVISIONS CONTAINED IN THIS CHAPTER, BE LEVIED UPON AND RECOVE RED FROM HIM IN LIKE MANNER AND TO THE SAME EXTENT AS IT WOULD BE LEVIABLE UPON AND RECOVERABLE FROM THE PERSON REPRESENTED BY HIM. [(1A) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SEC TION (1), WHERE ANY INCOME IN RESPECT OF WHICH THE PERSON MENTIONED IN CLAUSE (IV) OF SUB-SECTION (1) OF SECTION 160 IS LIABLE AS REPRESENTATIVE ASSESSEE CONSISTS OF , OR INCLUDES, PROFITS AND GAINS OF BUSINESS, TAX SHALL BE CHARGED ON THE WHOLE OF THE I NCOME IN RESPECT OF WHICH SUCH PERSON IS SO LIABLE AT THE MAXIMUM MARGINAL RATE : RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 5 PROVIDED THAT THE PROVISIONS OF THIS SUB-SECTION SHALL NOT APPLY WHERE SUCH PROFITS AND GAINS ARE RECEIVABLE UNDER A TRUST DECLARED BY ANY PERSON BY WILL EXCLUSIVELY FOR THE BENEFIT OF ANY RELATIVE DEPENDENT ON HIM FOR S UPPORT AND MAINTENANCE, AND SUCH TRUST IS THE ONLY TRUST SO DECLARED BY HIM. 5.1 SUB.SEC. (1A) OF SEC. 161 R.W.S 160(1)(IV) STIP ULATES ANY INCOME OF THE TRUST CONSISTS OF OR INCLUDES PROFIT AND GAIN OF BUSINESS SHALL BE CHARGED TO TAX AT THE MAXIMUM MARGINAL RATE. 5.2 THUS, IT IS CLEAR THAT THE PROVISIONS OF SEC. 1 61 (1A) ARE APPLICABLE ONLY WHEN THE INCOME OF THE TRUST IS BUSINESS INCOME. THE CIT (A) HAS GIVEN THE FINDING THAT THE ACTIVITY OF SUBLETTING IS A SINGLE ISOLATED ACTIVI TY AND THERE IS NO STRUCTURED, SYSTEMATIC ACTIVITY WITH FREQUENCY; THEREFORE, THE ADDITION I S NOT SUSTAINABLE. THE CONCLUDING PART OF THE IMPUGNED ORDER OF THE COMMISSIONER OF I NCOME TAX(APPEALS) IN PARA 3.3 IS REPRODUCED HEREUNDER: 3.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, REASONING OF THE AOI AND THE SUBMISSIONS OF THE LD AR OF THE APPELLANT. THE FACTS OF THE CASE ARE SQUARELY COVERED BY THE DECISION OF THE BOMBAY HIGH C OURT IN THE ABOVE TWO CASES. THE TRUST CANNOT BE HELD AS AN ASSOCIATION OF PERSONS AS THE CONSTITUENT PERSONS HAVE NOT COME TOGETHER TO EARN THE INCOME UNDER DISPUTE. SINCE THEY ARE MERELY RECIPIENTS OF THE INCO ME THEY HAVE TO BE TAXED AS REPRESENTATIVE OF ASSESSEE U/S 161(1) OF THE I T ACT. IN FACT, THE INDIVIDUAL INCOME HAS BEEN ALREADY TAXED IN THEIR HAN DS AS STATED BY THE APPELLANT, THERE CAN BE NO DOUBLE TAXATION OF THE SA ME AMOUNT. RESPECTFULLY FOLLOWING THE DECISION OF THE BOMBAY H IGH ?COURT IN THE ABOVE TWO CASES, THE ADDITION IS DELETED. THE ASSESSING OFFICER HAS ARGUED THAT THE TRUST HAS TAKEN A PREMISE ON RENT FROM BALDOTA BROTHERS, A RELATED CONCERN OF ` 14,244/- ONLY AND HAS GIVEN ON RENT TO CENTRAL WAREHOUSING CORPORATION FOR ` 15,51,812/-. THIS ACTIVITY, THE ASSESSING OFFICER AHS STATED IS A BUSINESS ACTIVITY AND ALSO A COLOURABLE DEVICE FOR TAX AVOIDANCE. HOWEVER AS IT APPEARS, THE ACTIVIT Y IS A SINGLE ISOLATED ACTIVITY AND THERE IS NO STRUCTURED, SYSTEMATIC ACTIV ITY WITH FREQUENCY. MOREOVER, THE INCOME FROM THIS SOURCE IS GETTING TAXE D AT THE HANDS OF BENEFICIARIES AS ALL OF THEM HAVE TAXABLE INCOME. TH EREFORE, EVEN ON THIS COUNT THE ADDITION CANNOT BE SUSTAINED AND IS DELET ED. RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 6 5.3 WE ALSO FIND THAT APART FROM THIS SINGLE ACTIVI TY, THERE IS NO OTHER ACTIVITY OF TAKING THE PREMISES AND SUBLETTING ON HIGHER RENT. THEREFORE, IT IS NOT BORN-OUT FROM THE RECORD THAT THE ASSESSEE TRUST IS NOT ENGAGED IN THE BUSINESS ACTIVITY OF TAKING AND SUB LETTING THE PROPERTY ON RENT/LEASE. 6 IN THE CASE OF HARIKRISHNA FAMILY TRUST (SUPRA),, THE HONBLE GUJARAT HIGH COURT RECORDED AN IDENTICAL FACTS IN PARA 9 AND HELD IN PARA 12 & 13 AS UNDER: 9 THE BASIC FACTS WHICH ARE NOT DISPUTED, ARE THAT THE ASSESSEE-TRUST IS MERELY A LESSEE OF THE PROPERTY AND HAS SUB-LET THE P ROPERTY AFTER COMPLETING THE PARTLY CONSTRUCTED BUILDING WHICH THE ASSESSEE-T RUST HAD TAKEN ON LEASE. IN THE CIRCUMSTANCES, IN THE ABSENCE OF THE ASSESSE E-TRUST BEING THE OWNER OF THE PROPERTY, THERE CAN BE NO QUESTION OF TAXING THE RENTAL INCOME FROM THE SAID PROPERTY IN THE HANDS OF THE ASSESSEE-TRUST UNDER THE HEAD INCOME FROM HOUSE PROPERTY. TO THE AFORESAID EXTENT, THE FINDINGS RECORDED BY THE ASSESSING OFFICER, THE COMMISSIONER (APPEALS) AND TH E TRIBUNAL DESERVE TO BE ACCEPTED. 12 IN THE CIRCUMSTANCES, WHEN THE SETTLED PRINCIPLE S OF LAW IN RELATION TO THE CONTROVERSY ARE APPLIED TO THE FACTS OF THE CAS E, IT BECOMES APPARENT THAT THE ASSESSEE-TRUST AT NO POINT OF TIME INDULG ED IN ANY SYSTEMATIC ACTIVITY SO AS TO TREAT THE ASSESSEE AS HAVING INDULGED IN BUSINESS OR A VENTURE IN THE NATURE OF BUSINESS. THE DECISION RELIED UPON ON BY T HE REVENUE, NAMELY, S. G. MERCANTILE CORPORATION P. LTD. [1972] 83 ITR 700 (S C) CANNOT BE MADE APPLICABLE TO THE FACTS OF THE CASE CONSIDERING THAT IN THE SAID CASE THE LEASE WAS FOR A PERIOD OF 50 YEARS, THE PROPERTY IN Q UESTION WAS A MARKET WHICH WAS LET OUT TO VARIOUS PERSONS WHO OCCUPIED T HE SHOPS THEREIN, AND LAND IN THE FORM OF STALLS AS WELL AS OPEN PARCELS O F LANDS TO VENDORS BY THE ASSESSEE THEREIN. IN OTHER WORDS, THERE WERE MORE THAN O NE TENANT INDICATING A SYSTEMATIC AND ORGANISED ACTIVITY OF SUB-LETTING T HE PROPERTY. 13 IN THE CIRCUMSTANCES, THE TRIBUNAL WAS NOT JUSTIF IED IN HOLDING THAT THE ASSESSEE WAS DOING BUSINESS. IN THE FACTS OF THE CA SE, THE INCOME IS LIABLE TO BE TAXED AS INCOME FROM OTHER SOURCES AND NOT AS I NCOME FROM HOUSE PROPERTY OR INCOME FROM BUSINESS. 6.1 IT IS CLEAR FROM THE ABOVE FACTS RECORDED IN PA RA 9 OF THE ABOVE DECISION THAT IN THE SAID CASE, THE ASSESSEE TRUST MERELY SUB-LET OUT THE LEASED PROPERTY. ACCORDINGLY, THE INCOME WAS HELD TO BE LIABLE TO TA X AS INCOME FROM OTHER SOURCES AND NOT INCOME FROM HOUSE PROPERTY OR INCOME FROM B USINESS. RAHUL ASSOCIATES ITA NO. 2165/MUM/2011 7 7 IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE DE CISIONS OF THE HONBE GUJARAT HIGH COURT IN THE CASE OF HARIKRISHNA FAMILY TRUST (SUPRA), WE HOLD THAT THE PROVISIONS OF SEC. 161(1A) ARE NOT APPLICABLE IN THE CASE OF THE ASSESSEE. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER OF THE CIT(A), QUA THIS ISSUE. 8 IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMI SSED. ORDER PRONOUNCED ON THIS 25 TH ,DAY OF MAY 2012 SD/ SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 25 TH , MAY 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI