M/S. TRENDSMITH (INDIA), MUMBAI V. THE ACIT CIR 16(2),

ITA 6363/MUM/2007

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4753 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Next Hearing Date: 30-08-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 15-10-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMIT KUMAR
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, J, MUMBAI BEFORE SHRI R V EASWAR, PRESIDENT AND SHRI R K PANDA, ACCOUNTANT MEMBER I T A NO: 6363/MUM/2007 (ASSESSMENT YEAR: 2003-04) TRENDSMITH (INDIA), MUMBAI APPELLANT (PAN: AACFT6665L) VS ASSISTANT COMMISSIONER OF INCOME TAX RESPONDENT CIRCLE 16(2), MUMBAI APPELLANT BY: SHRI SUBHASH S SHETTY RESPONDENT BY: SHRI SUMIT KUMAR O R D E R R V EASWAR, PRESIDENT: THIS IS AN APPEAL BY THE ASSESSEE RELATING TO THE ASSESSMENT YEAR 2003-04. THE ASSESSEE IS A FIRM. THE APPEAL ARISES OUT OF THE ASSESSMENT ORDER DATED 30 TH MARCH 2006 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. 2. THE FIRST GROUND IS THAT THE RENTAL INCOME RECEI VED BY THE ASSESSEE FROM THE PROPERTY OF WHICH IT WAS NOT THE OWNER SHOULD BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY AND NOT AS INCOME FROM OTHER SOURCES. THE BRIEF FACTS ARE T HAT THE ASSESSEE OWNED THE GROUND FLOOR AND MEZZANINE FLOOR IN GALA NO.67 SITUATED AT KUNDAMAL HOUSE, HUGHES ROAD, MUMBAI. IN THE SAM E PREMISES, APARTMENTS NOS 1A AND 1B IN THE FIRST FLO OR WERE OWNED BY A COMPANY BY NAME PRANKSTERS INN PVT. LTD. (PIPL ). THE FIRST FLOOR APARTMENTS, WHICH WERE RESIDENTIAL IN NATURE, WERE TAKEN BY ITA NO: 6363/MUM/2007 2 THE ASSESSEE ON LEASE FROM PIPL UNDER AN INDENTURE DATED 03.04.2001 WHICH WAS CONFIRMED BY A SUBSEQUENT DEED DATED 27.08.2002. THE ASSESSEE HAD TO PAY ` 6,00,000/- PER ANNUM AS LEASE RENT TO PIPL. THE ASSESSEE LET OUT THE GROU ND FLOOR AND MEZZANINE FLOOR OF WHICH IT WAS THE OWNER AND THE T WO FIRST FLOOR RESIDENTIAL APARTMENTS WHICH WERE TAKEN BY IT ON LE ASE. ALL OF THEM WERE LET OUT TO M/S TRENDSMITH INDIA PVT. LTD. (TIP L) UNDER LEAVE AND LICENSE AGREEMENT DATED 20.04.2001. FOR THE YE AR UNDER APPEAL THE AGGREGATE RENT RECEIVED WAS ` 54,00,000/-. THE ENTIRE RENTAL INCOME OF ` 54,00,000/- WAS DECLARED BY THE ASSESSEE UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THE ASSESSI NG OFFICER BIFURCATED THE RENTAL INCOME UNDER TWO HEADS OF INC OME. SO FAR AS THE GROUND FLOOR AND MEZZANINE FLOOR ARE CONCERNED, SINCE THE ASSESSEE WAS THE OWNER THEREOF, THE ASSESSING OFFIC ER AGREED THAT THE RENTAL INCOME SHOULD BE ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HOWEVER, AS REGARDS THE FIRST FLO OR RESIDENTIAL APARTMENTS WHICH WERE TAKEN ON LEASE BY THE ASSESSE E AND LET OUT, THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE TH E ASSESSEE WAS NOT THE OWNER THEREOF THE RENTAL INCOME FROM THESE PROPERTIES SHOULD BE BROUGHT TO TAX UNDER THE HEAD INCOME FRO M OTHER SOURCES. THE QUESTION THEN AROSE AS TO HOW THE RE NTAL INCOME SHOULD BE BIFURCATED AND ASSIGNED TO EACH OF THE AB OVE TWO HEADS BECAUSE THE LEAVE AND LICENSE AGREEMENT WITH TIPL W AS FOR A CONSOLIDATED RENT OF ` 54,00,000/- PER ANNUM WITHOUT ANY BIFURCATION. THE ASSESSING OFFICER BIFURCATED THE INCOME AS FOLLOWS:- ITA NO: 6363/MUM/2007 3 RENT INCOME FROM AREA WORKING FOR RENT RENT (RS .) SHOP / GALA NO.67, ASSESSEES OWN PROPERTY 1169 SQ.FT. 5400000 X 1169 3074 2,053,546 APARTMENT NO.1-A 677 SQ.FT. 5400000 X 677 3074 1,189,265 APARTMENT NO.1-B 1228 SQ.FT. 5400000 X 1228 3074 2,157,189 TOTAL 3074 SQ.FT. 5,400,000 3. IN THE FIRST GROUND THE ASSESSEE HAS QUESTIONED THE ASSESSING OFFICERS DECISION TO TREAT THE RENTAL IN COME REFERABLE TO THE FIRST FLOOR APARTMENTS TAKEN BY THE ASSESSEE ON LEASE AND LET OUT, AS INCOME FROM OTHER SOURCES. WE ARE UNABLE T O FIND FAULT WITH THE ASSESSING OFFICERS DECISION BECAUSE THE ASSESS EE IS NOT THE OWNER OF THE AFORESAID PROPERTIES, WHICH IS A PRIMA RY CONDITION FOR ASSESSMENT OF THE RENTAL INCOME UNDER THE HEAD INC OME FROM HOUSE PROPERTY. ACCORDINGLY THE ASSESSING OFFICER S DECISION TO TREAT THE RENTAL INCOME REFERABLE TO THE FIRST FLOO R APARTMENTS AS INCOME FROM OTHER SOURCES IS CONFIRMED. THE FIRS T GROUND IS DISMISSED. 4. IN THE SECOND AND THIRD GROUNDS THE ASSESSEE HAS CHALLENGED THE BIFURCATION OF THE RENTAL INCOME BET WEEN THE TWO HEADS OF INCOME. ACCORDING TO THE ASSESSEE THE PRE MISES IN THE GROUND FLOOR ALWAYS COMMAND GREATER RENT IN COMPARI SON TO THE PREMISES IN THE FIRST FLOOR AND, THEREFORE, THE BAS IS ADOPTED BY THE ASSESSING OFFICER, NAMELY, TO BIFURCATE THE RENT ON THE BASIS OF THE AREA, IS NOT SOUND. IT IS THE ASSESSEES CASE THAT MORE RENTAL INCOME SHOULD BE ATTRIBUTED TO THE GROUND FLOOR AND MEZZANINE FLOOR PROPERTIES THAN WHAT WAS DONE BY THE ASSESSING OFFI CER ACCORDING TO THE TABLE GIVEN EARLIER. IT MAY BE SEEN FROM TH E AFORESAID TABLE ITA NO: 6363/MUM/2007 4 THAT THE ASSESSING OFFICER ATTRIBUTED RENTAL INCOME OF ` 20,53,546/- TO THE GROUND FLOOR AND MEZZANINE FLOOR ON THE BASI S OF THE AREA, WHEREAS IN RESPECT OF THE FIRST FLOOR APARTMENTS HE HAS BROUGHT THE BALANCE OF ` 33,46,454/- TO TAX AS INCOME FROM OTHER SOURCES. THE BONE OF CONTENTION IS THE EXPENSES THAT ARE ALL OWABLE IN RESPECT OF THE RENTAL INCOME. IN THE CASE OF INCOM E ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPERTY, THE ASSESSEE WOULD BE ELIGIBLE TO OBTAIN DEDUCTION FOR MUNICIPAL TAX AS W ELL AS A STANDARD DEDUCTION OF 30% OF THE RENTAL INCOME BY VIRTUE OF SECTION 24(A) OF THE ACT. IN THE CASE OF INCOME ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES, NO SUCH DEDUCTION IS AVAILABLE . IN FACT IN THE ASSESSMENT ORDER THE ASSESSEE HAS BEEN ALLOWED DEDU CTION OF ONLY ` 15,000/- AS PROFESSIONAL FEES AGAINST THE RENTAL IN COME ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES. IF A L ESSER INCOME IS ATTRIBUTED TO THE FIRST FLOOR PREMISES, THE ASSESSE E WILL GET A HIGHER DEDUCTION UNDER SECTION 24(A) AGAINST THE BALANCE O F INCOME WHICH IS ASSESSED UNDER THE HEAD INCOME FROM HOUSE PROPE RTY. THIS APPEARS TO BE THE BONE OF CONTENTION. 5. THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSE SSEE IS THAT THE BIFURCATION OF THE RENTAL INCOME BETWEEN THE TW O HEADS OF INCOME ON THE BASIS OF THE AREA IS NOT SOUND AND IT IS MORE APPROPRIATE TO COMPARE THE MARKET RENT FOR SIMILAR GROUND FLOOR SHOPS SITUATED IN THE AREA AND ATTRIBUTE A HIGHER P ORTION OF THE RENTAL INCOME OF ` 54,00,000/- TO THE GROUND FLOOR AND MEZZANINE FLOOR PREMISES. HE POINTS OUT THAT THE FIRST FLOOR PREMI SES ARE ACTUALLY RESIDENTIAL PREMISES NOT SUITED FOR COMMERCIAL USE AND, THEREFORE, ITA NO: 6363/MUM/2007 5 CANNOT COMMAND THE SAME RENTAL INCOME AS COMMERCIAL PROPERTIES. HE SAYS THAT THEY WERE ALSO AGREED TO BE TAKEN BY T IPL ONLY BECAUSE IT WAS CONVENIENT TO TIPL TO TAKE THE ENTIR E PROPERTY ON RENT AND RUN THEIR BUSINESS FROM THE SAME PREMISES. ON THE OTHER HAND, THE CONTENTION OF THE DEPARTMENT IS THAT THE POTENTIAL OR THE LACK OF IT OF THE FIRST FLOOR APARTMENTS TO FETCH R ENT SIMILAR TO THE RENT FETCHED BY COMMERCIAL PROPERTIES CANNOT BE AN INFAL LIBLE CRITERION AND, THEREFORE, IT WAS PREFERABLE TO HAVE THE RENTA L INCOME APPORTIONED ON THE BASIS OF THE AREA. HAVING CONSI DERED THE MATTER CAREFULLY, WE ARE UNABLE TO SAY THAT THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS WITHOUT ANY FORCE. IT IS NOT DISPUTED THAT THE FIRST FLOOR PREMISES CONSISTED OF TWO RESIDENTI AL APARTMENTS. IT IS COMMON KNOWLEDGE THAT COMMERCIAL PREMISES FETCH MOR E RENT THAN RESIDENTIAL PREMISES. THE RESIDENTIAL PREMISES MIG HT HAVE BEEN SUITABLY MODIFIED BY TIPL TO ENABLE COMMERCIAL USE BUT STILL, STRUCTURALLY, RESIDENTIAL BUILDINGS HAVE MORE INCON VENIENCES FOR RUNNING A BUSINESS THEREFROM DESPITE MODIFICATIONS AND PROBABLY CANNOT COMMAND THE SAME RENTAL INCOME AS PREMISES D ESIGNED FOR COMMERCIAL USE. THERE IS NO DISPUTE THAT THE GROUN D AND MEZZANINE FLOORS ARE DESIGNED FOR COMMERCIAL USE. IT THEREFORE STANDS TO REASON, IN OUR HUMBLE OPINION, THAT A SOM EWHAT HIGHER RENTAL INCOME HAS TO BE APPORTIONED TO THE GROUND A ND MEZZANINE FLOORS. WE THUS AGREE WITH THE CONTENTION OF THE L EARNED COUNSEL FOR THE ASSESSEE IN PRINCIPLE. HOWEVER, HOW MUCH RENTA L INCOME IS TO BE ATTRIBUTED TO THE GROUND AND FIRST FLOOR PREMISE S IS FOR THE ASSESSING OFFICER TO DECIDE ON A CONSIDERATION OF A LL THE FACTS AND ITA NO: 6363/MUM/2007 6 CIRCUMSTANCES OF THE CASE INCLUDING THE MARKET RENT IN THE AREA FOR COMMERCIAL PREMISES. HE SHALL GATHER ALL THESE FAC TS AND TAKE A FRESH DECISION AS TO THE QUANTUM OF RENTAL INCOME T O BE ATTRIBUTED TO THE GROUND AND MEZZANINE FLOORS IN ACCORDANCE WITH LAW. NEEDLESS TO ADD THAT THE ASSESSEE SHALL BE GIVEN ADEQUATE OP PORTUNITY TO ESTABLISH ITS CASE AND IF NEED BE TO ADDUCE EVIDENC E IN SUPPORT OF ITS CASE. WITH THESE REMARKS WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER. THE GROUNDS ARE PARTLY ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. NO COSTS. ORDER PRONOUNCED IN THE OPEN COURT ON 9TH SEPTE MBER 10. SD/- SD/- (R K PANDA) (R V EASWAR) ACCOUNTANT MEMBER PRESIDENT MUMBAI, DATED 9TH SEPTEMBER 2010 SALDANHA COPY TO: 1. TRENDSMITH (INDIA) 6, EDWARD BLDG., NEXT TO SARASWAT BANK LAMINGTON ROAD, MUMBAI 400 007 2. ACIT, CIRCLE 16(2) 3. CIT-16 4. CIT(A)-XVI 5. DR J BENCH TRUE COPY BY ORDER ASSTT.REGISTRAR,ITAT, MUMBAI ITA NO: 6363/MUM/2007 7 DATE INITIALS 1. DRAFT DICTATED ON 06.09.10 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 07.09.10 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER PRESIDENT 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM 5. APPROVED DRAFT COMES TO THE SR. PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. FILE SENT TO THE BENCH CLERK SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER