TMI Blog2012 (5) TMI 207X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and not mere a license holder as contended. - the assessee is having property as a sub tenant and his tenancy rights were surrendered to the buyer. Therefore, provisions of section 55(2) are applicable. - Decided against the assessee. - IT Appeal No. 1879 (Mum.) of 2009 - - - Dated:- 29-2-2012 - B. RAMAKOTAIAH, V. DURGA RAO, JJ. Farrokh V. Irani for the Appellant. D. Prabhakar Reddy for the Respondent. ORDER B. Ramakotaiah, Accountant Member This is an assessee's appeal against the order of the CIT(A)-16 Mumbai dated 30.12.2008. The main issue in this appeal is whether assessee was holding the rights of premises as a licensee or as a lease holder having tenancy rights, so as to subject it to capital gains tax. The other issue is disallowance of interest. 2. The assessee raised the following grounds: "1. (a) On the facts and circumstances of the case and in law, the learned CIT (Appeals) has erred in confirming the action of the Income Tax Officer in taxing under section 48 r.w.s 55(2) of the I.T. Act a sum of Rs. 1,75,00,000/- received by the appellant for surrendering the possessory rights of premises situated at Mathuradas Mills Estate by incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 55(2)(a) of IT Act 1961 does not apply as it does not have any tenancy rights in the property. The Assessing Officer after examining the agreement between M/s Nanu Metal (Brass) Works and the assessee came to the conclusion that the assessee has sub-tenancy rights and therefore, the amount was taxable under the provisions of the Act, wherein the cost of acquisition has to be taken as Nil vide section 55(2)(a). The matter was carried to the CIT(A) who considering the objections of the assessee and legal provisions held that the assessee has tenancy rights, therefore, the amount received from M/s Nanu Metal (Brass) Works was taxable under the provisions of the capital gains. The assessee is contesting the above issue in ground no 1. 4. In the course of appellate proceedings, the assessee filed conveyance deed dated 24/3/2005 between the vendors and the said Maneck Davar as part of paper book from 1 to 21 and prayed for admission of the additional evidence as third party evidence. In the course of arguments the learned Counsel referred to the additional evidence to bring to our notice that the conveyance deed specifically mentions that the assessee has only possessory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights there would not be tax on the capital gain as the cost of acquisition was Nil. It is also submitted that similar view was taken by the Hon'ble Kolkata High Court in the case of CIT v. General Industries Society Ltd . [2003] 262 ITD 1/129 Taxman 628 (Cal.) and further by the Delhi Bench of the ITAT in the case of Asstt. CIT v. Girish Chander Sharma [2006] 5 SOT 372 (Delhi). It was submitted that since the assessee is having only possessory rights as licensee and does not have any cost of acquisition, the decision of the Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 apply and the amount of Rs. 1.75 crores received cannot be taxed as capital gain. 6. He also further placed on record the decision of the Bombay High Court in the case of Sardar Pruthisingh v. Kanchanlal Purushottamdas Desai AIR 2001 Bom 255 to submit about the distinction between the leave and license and relying thereon submitted that the assessee is having only a license rights and not as a lease and further referred to the observations that the intention of the parties are to be examined, as observed by the Hon'ble Apex Court in the case of Associated Hotels of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd specifically modified to assign further rights to associate concerns of the assessee by the supplementary agreement dated 10.4.1981, had continuous possession of the property. The property which was in possession by this agreement was 11,600 sq. feet carpet area in the demised premises. The assessee also was in possession of vacant piece of land admeasuring 4572 sq. feet vide the agreement with M/s Shantilal L. Thar Co which was also similarly worded and entered into with M/s Shantilal L. Thar Co. on 18th day of April, 1970. There is also a similar revision of agreement on 10.4.1981, as in the case of M/s Nanu Metal (Brass) Works, for extending the rights to provide for associates/allied concerns of assessee. The picture is more clear, if we examine the conveyance deed where these factors are mentioned in the recitals from Page 4 onwards: "And whereas subsequent to the purchase/acquisition of the said larger property, the said Trust, inter alia , created tenancies in respect of part of the said larger property, with which the Vendors are concerned under this Deed of Conveyance, as under: - ( a ) Tenancy in favour of one M/s Nanu's Metal (Brass) Works (hereinafter ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isition of the said rented property, the said Thar Co. dealt with the same as under: - ( a ) Granted licence in favour of the said Amersey Industries in respect of the said rented property, at and for the monthly licence fee of Rs. 1,145/-reserved and on the terms and conditions agreed upon by and between them; AND WHEREAS subsequent to the acquisition of the rented property and pursuant to the express permission being granted by the said Thar Co., the said Amersey Industries constructed a structure having ground and one upper floor thereon, which said structure is more particularly described in the Fifth Schedule hereunder written and shown by words "Ground + UPP. FLR" on the said plan already annexed hereto and marked as Annexure 'A' (hereinafter referred to as 'the said structure" ); AND WHEREAS in the circumstances aforesaid the said Nanu's Metal and the said Thar Co., claiming to be the tenants in respect of the said demised premised and the said rented property respectively subject to, inter alia, the possessory title/rights of the said Amersey Industries; AND WHEREAS the said Amersey Industries is in use, occupation and possession of the said demised premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocument gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a particular purpose. But for the permission, his occupation would be unlawful. It does not create in his favour any estate or interest in the property. There is, therefore, a clear distinction between the two concepts. The dividing line is clear though sometimes it becomes very thin or even blurred. At one time it was thought that the test of exclusive possession was infallible and if a person was given exclusive possession of a premises, it would conclusively establish that he was a lessee. But there was a change and the recent trend of judicial opinion is reflected in Errington v. Errington [[1952] 1 All E.R. 149], wherein Lord Denning reviewing the case in law on the subject summarizes the result of his discussion thus at p.155: "The result of all these cases is that, although a person who is let into exclusive possession is, prima facie , to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls the real intent." 9.2 In the case of M.N. Clubwala ( supra ) dated 3.2.1965, the Hon'ble Supreme Court examined the distinction between the lease and license and held that whether an agreement creates between the parties, the relationship of landlord and tenancy are merely that of licensor and licensee the decisive consideration is the intention of the parties. This intention has to be ascertained on a consideration of all the relevant provision in the agreement. In the absence of formal document the intention of the parties must be inferred from the circumstances and conduct of the parties. The facts in the above case were that the appellant owned a market consisting stalls which were occupied by the stall holder. The appellant had been granted a license by the Municipal Corporation under which he was required to discharge certain duties like cleaning as well as disinfecting them and of opening and closing the market at specified time. However, stall holders were not allowed to remain in occupation of sales beyond the closing and were required to pay certain rent for each day of occupation. On the question whether the stall holders were lessee or mere licensee it was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt between the parties are not clear and so the surrounding circumstances and the conduct of the parties have also to be borne in mind for ascertaining the relationship between the parties. Again as already stated, the documents relied upon being merely agreements executed unilaterally by the stall holders in favour of the landlords they cannot be said to be formal agreements between the parties. We must, therefore, look at the surrounding circumstances. One of these circumstances is whether actual possession of the stalls can be said to have continued with the landlords or whether it had passed on to the stall holders. Even if it had passed to a person, his right to exclusive possession would not be conclusive evidence of the existence of a tenancy though that would be a consideration of first importance. That is what was held in Errington v. Errington and Woods , 1952-1 K B 290 and Cobb v. Lane , 1952-1 All E R 1199. These decisions reiterate the view which was taken in two earlier decisions. Clore v. Theatrical Properties Ltd and Westby and Co. Ltd 1936-3 All ER 483 ad Smith and Sony v. Assessment Committee for the Parish of Lambeth [1882] 10 QBD 327 at p.330. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to guard the entrance to the market. These duties could not be effectively carried out by the landlord by parting with possession in favour of the stall holders by reason of which the performance by the landlords of their duties and obligations could easily be rendered impossible if the stall holders adopted an unreasonable attitude. If the landlords failed to perform their obligations they would be exposed to penalties under the Act and also stood in danger of having their licenses revoked. Could in such circumstances the landlords have ever intended to part with possession in favour of the stall holders and thus place themselves at the mercy of these people. We are, therefore, of the opinion that the intention of the parties was to bring into existence merely a licence and not a lease and the word "rent" was used loosely for 'fee'." 9.3 In the case of Sardar Pruthisingh ( supra ) dated 8.3.2001 the issue involved was whether the document executed by the parties at the time when the respondent was inducted in the suit premises, is in the agreement of leave and license or a deed of lease? In this the Hon'ble High Court considering the document and other circumstance held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the respondent, in pursuance of which he was put in possession with an option to claim renewal and right to use the premises for business purposes. The establishment of business in the premises creates a goodwill. The uses of the premises for business and development thereof have their own importance. The use of the premises for business and establishment of business therein for a short duration is inconsistent with the normal behaviour of the person taking the premises on leave and licence. The intention of the parties to execute lease cannot be ruled out. All the aforesaid facts, if examined in the light of the terms and conditions set out in the document, arc sufficient to spell out the case of creation of lease. 16. The document relied upon in this case, which is a bed-rock of the controversy, If compared with that of the document set out and interpreted by the Apex Court in Associated Hotel India Ltd. v. R.N. Kapoor . and Sohan Lal Naraindas v. Laxmidas Raghunath Gadit , then one can safely reach to the conclusion that the document in question is nothing but a lease deed. If the approach adopted by the Trial Court in interpreting the document is accepted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e observations made by the Apex Court in Satyanarayan Laxminarayan Hegde v. Malllkarjun Bhavanappa Tirumale need to be noticed. Where two views are possible and, the Trial Court has taken one view which is a possible and plausible view, merely because another view is attractive, the High Court should not interfere and would be in error in interpreting with the finding of the Trial Court or interfering under Article 227 of the Constitution over such decision". 9.4 Thus the legal principle that can be deduced from the above cases can be summarized as under: (A) A lease is therefore a transfer of an interest in land. The interest transferred is called the leasehold interest. The lessor parts with his right to enjoy the property during the term of the lease, and it follows from it that the lessee gets that right to the exclusion of the lessor. (B) If a document gives only a right to use the property in a particular way or under certain terms while it remains in possession and control of the owner thereof, it will be a licence. The legal possession, therefore, continues to be with the owner of the property, but the licensee is permitted to make use of the premises for a pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms and conditions of their lease, and provided that for carrying out such work the Licensees shall obtain the permission from the Bombay Municipal Corporation, if necessary, and in that respect the Licensors agree to sign documents and/or plans if found necessary. 7. to 8.** ** ** 9. It is further agreed that the Licensees shall be entitled to use the said premises for themselves and their associates and allied concerns but not exceeding the number such three concerns provided however they shall not be permitted to sublet the said premises. The Licensees will however not assign the right of their occupation to any party, given to them under this agreement without written permission of the Licensors." 10.3 This is also reiterated vide the supplementary agreement as under: "The party of the second part will use and enjoy the said premises licensed under the aforesaid agreement dated 29th April, 1970 which was subsisting upon 1st February, 1973 for themselves and their associated and allied concerns and shall be entitled to carry on warehousing of other business and/or manufacturing therein, provided however that the party of the second pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no need to extract them in this order but suffice to say that we agree with all the reasons given therein to hold it as a leased agreement. 10.6 In the present case the assessee is in continuous possession of the property, was continuously conducting the business from the premises, in fact had right to construct buildings therein for the purpose of business subject to permission from the tenants and the authorities and further he had undertaken to pay increased tax, if any, on the said premises. All these factors including the fact that the assessee undertook not to sublet the premises to others do indicate that the assessee is keeping the premises only as a sub-tenant with tenancy rights. As rightly observed by the Hon'ble Bombay High Court in the case of Sardar Pruthisingh ( supra ), the question of allowing to let out the premises can arise only by a tenant. 10.7 Another factor which also can be viewed, but may not be material for deciding the issue, is that the landlord/vendor has only received a consideration of Rs. 75 lakhs for sale of the trust property, whereas the assessee for surrendering his possessory title/ other rights (as mentioned in the agreement itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nse holder and the amount is correctly brought to tax by the Revenue authorities and therefore, assessee's contentions in Ground No. 1 does not require any consideration. Accordingly Ground No. 1 is rejected. 12. Ground No. 2 pertains to the issue of disallowing the interest of Rs. 15,32,704/- on the amounts borrowed by the assessee. The Assessing Officer while completing the assessment noticed that the assessee has advanced borrowed funds interest free. Therefore, invoking the provisions of section 36(1)(iii) disallowed an amount of Rs. 8,45,352/- out of the claim of Rs. 15,32,704/-. The CIT(A) however, enhanced the amount to the entire amount claimed on the reason that the business of the earlier years has not continued during the year and assessee has not explained why loans were required in this year. 13. It was the submission of the learned Counsel that the assessee continued to be in the business. It was submitted that the assessee was doing the export business in the earlier years whereas this year it was job work done in the same manner but no export activity. In fact business income resulted in loss of Rs. 2,57,817/-, but the business has not stopped and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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