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Agya Ram Versus Commissioner Of Income Tax, Delhi

2016 (8) TMI 162 - DELHI HIGH COURT

License fee receipt - business income or house from property - Held that:- The specific clauses of the licence deed, the Court is satisfied that the income earned by the Assessee from the licence fee could not be characterised as rent and, therefore, income from house property. The Court is of the view that the AO and the ITAT were in error in coming to a contrary conclusion. They appear to have overlooked that the Assessee had consistently treated the licence fees collected as business income s .....

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te. Respondent Through: Mr. Rahul Chaudhary, Senior Standing Counsel with Mr. Raghvendra Kishore Singh and Mr. Anup Kumar, Advocates. O R D E R Dr. S. Muralidhar, J.: 1. These four appeals by the Assessee are directed against a common order in ITA Nos. 1867 to 1870/Del/99 for the Assessment Years ( AYs ) 1990-91 to 1993-94. By the order dated 30th October 2006, the Court framed the following questions of law for consideration: 1. Whether the Income Tax Appellate Tribunal was correct in law and o .....

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he Income Tax Act, 1961 despite the fact the aforesaid income had regularly been assessed under the head income from business? 3. Whether in the circumstances of the case, and on the proper interpretation of the licence deeds, the Tribunal was correct in law in holding that the licence fee received by the appellant from licencing part of the premises is to be assessed under the head "Income from house property" and not under the head "Income from business" despite that the as .....

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derived income from job work of repairs of batteries and was receiving licence fee from various persons for rendering services. 3. Since AY 1982-83 the Assessee gave on licence 91% of the factory premises and was receiving licence fees. According to Mr. Manjani, learned counsel for the Assessee, around that time the Assessee developed cataract in his eyes which rendered him nearly blind. As a result he ceased to carry on any business activity. The earning of licence fees was the only source of i .....

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agreement or lease or prejudice creating any interest in the premises in favour of the Licensee which is not at all the intention of the parties here to but on the contrary merely a temporary arrangement to allow the licensee to use the aforesaid portion of the premises for Running Plastics Industry, Under the Control and Supervision of the Licensor for which purpose the Licensor shall always retain legal possession of the entire premises with him. ....... 4. That neither this Licencee nor any .....

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will also be responsible to keep the premises in a sanitary clean condition and shall pay the cost of making good any damage thereto or to the adjacent premises caused by the negligence or mis-use of the premises by the Licensee or his agents, employees servants, workers etc and shall indemnify the Licensor against any loss and damage to the premises caused by fire or otherwise. 6. That the Licensee shall not be entitled to make any encroachment and shall confine himself his running of the indu .....

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premises shall be fixed by the Licensor from time to time. 14. That this temporary licence is being given for the use of the above portion of the back side to the Licencee constructed by the Licensor in the rear-courtyard of the main factory building No. B-93 Okhla Industrial Area, Phase-II, New Delhi-110 020, without any sanction/authorisation from any competent authority. The walls of the portion described in the foregoing are brick built with steel frame under the roof of described in the pre .....

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was shown as business income. This return was picked up for scrutiny and an assessment order passed under Section 143(3) of the Income Tax Act, 1961 ( Act ) accepting the treatment of the licence fee by the Assessee as business income. He further pointed out that from AY 1983-84 till AY 1989-90 the Assessee in his returns consistently disclosed the licence fee as business income. The returns for all these years i.e. AYs 1982-83 till 1989-90 were processed under Section 143(1)(a) of the Act. The .....

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come 143(1)(a) 1988-89 2,45,675 28,187 28,187 Business Income 143(1)(a) 1989-90 3,28,356 48,511 48,511 Business Income 143(1)(a) 6. For AY 1990-91, the Assessee filed a return on 30th October 1990 declaring an income ₹ 59,124. The return was filed along with copies of the statement of income, trading account, profit and loss account and balance sheet. The income was processed under Section 143(1)(a) of the Act by an intimation dated 30th March 1991. Reasons for reopening of assessments 7. .....

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income as business income in the guise of licence fee so in resulting your having sham rental income under the Head "Business and Professional" as against the head "Income from House Property". Higher deduction was claimed and income has escaped assessment". Order of the AO 8. In the ensuing assessment proceedings, by an assessment order dated 20th March 1997, the AO completed the assessment under Section 143(3) read with Section 148 of the Act determining the total inco .....

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red into with each of them had been placed on record. He noted that all the receipts issued by the said persons were for use of part of the property at B-93 Okhla Industrial Area, Phase-II, New Delhi of which the Assessee was the owner. The AO also noted the statement made by the Assessee to the Inspector to the effect that he has received rent which is called licence payment . The AO relied upon the above statement to state that the licence fee was nothing but rent for use of the part of the pr .....

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re was no material available to the AO to come to the conclusion that there was any escapement of income. According to the Assessee, the reopening of the assessment was based merely on a change of opinion. 10. By the time the order dated 12th January 1999 was passed, the assessments for three other AYs i.e. 1991-92 to 1993-94, were reopened by the AO by issuing notices under Section 148 of the Act and appeals for those AYs were also filed by the Assessee before the CIT (A). In the common order d .....

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that the Assessee was exploiting the commercial assets (factory shed) to receive licence fees as the Assessee s business was not going on probably. But income received from such exploitation can only be taken as Business income and not Property income . 11. Further it was noted by the CIT (A) that the AO mainly relied on the statement of Petitioner made to one of the Inspectors. However, the fact remained that "i) the assessee was exploiting the commercial asset (Factory) to get such licenc .....

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also allowed by the CIT (A) in the hands of the Assessee as business expenditure . Order of the ITAT 12. Aggrieved by the above order of the CIT(A), the Revenue went in appeal before the ITAT. By the impugned order, the ITAT allowed the appeals filed by the Revenue and dismissed the cross objections filed by the Assessee on the issue of reopening of assessments under Section 148 of the Act. According to the ITAT, when we examine the totality of facts and circumstances, we feel that the assessee .....

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Act is concerned, the ITAT rejected it on the ground that income had not been charged by the Assessee under the right head and this itself was a good reason to reopen the assessments. Submission of counsel 14. Mr. Manjani, relied on the decision of this Court dated 8th October 2015 in W.P.(C) No. 1874 of 2013 (Turner Broadcasting Systems Asia v. Deputy Director of Income Tax), to urge that the reopening of the assessments under Section 148 of the Act was not valid as there was no material availa .....

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n between a 'licence' and a 'lease'. 15. Countering the above submissions, it was submitted by Mr. Rahul Chaudhary, learned Senior Standing Counsel for the Revenue that after the decision dated 18th May 2016 by this Court in W.P. (C) No. 1393 of 2002 (Indu Lata Rangwala v. Deputy Commissioner of Income Tax) there was no need for the AO to base his reasons to believe that the income had escaped assessment on fresh tangible material since the initial returns for the AY in question .....

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s business income he supported the orders of the AO and the ITAT. Question (i) 16. At the outset it requires to be noticed that the reopening of the assessments for the AYs in question was sought to be done within a period of four years from the end of the AY in which the return was filed. The second feature is that as far as the AYs in question i.e. AY 1990-91 to 199495 is concerned they were processed under Section 143(1)(a) and not under Section 143(3) of the Act. Therefore, for the purposes .....

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ed (2007) 291 ITR 500 (SC) and Deputy Commissioner of Income-tax v. Zuari Estate Development & Investment Co. Ltd. (2015) 373 ITR 661 (SC), this Court summarised the legal position, inter alia, as under: 35.6 Whereas in a case where the initial assessment order is under Section 143 (3), and it is sought to be reopened within four years from the expiry of the relevant assessment year, the AO has to base his 'reasons to believe' that income has escaped assessment on some fresh tangible .....

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der Section 143 (1) of the Act, the AO can form reasons to believe that income has escaped assessment by examining the very return and/or the documents accompanying the return. It is not necessary in such a case for the AO to come across some fresh tangible material to form 'reasons to believe' that income has escaped assessment. 35.8 In the assessment proceedings pursuant to such reopening, it will be open to the Assessee to contest the reopening on the ground that there was either no r .....

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that the Court is called upon to examine whether the reasons recorded by the AO for reopening the assessments for the aforementioned AYs satisfied the requirement of the law. Although the AO may not have required fresh tangible material to form such reasons to believe, he should have, after examining the returns and/or the documents accompanying the returns, set out at least the prima facie reasons for arriving at the reason to believe that income had escaped assessment for the AYs in question. .....

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of lease and that the payment being received was not to be treated as rent . Even though the AO has used the word camouflage there is no material other than the licence deeds and the licence receipts for the AO to come to the conclusion that there was any attempt at camouflaging. The basis for forming the reasons to believe has not even been set out. 19. The Court also finds that the ITAT has not engaged with the detailed reasoning of the CIT (A) on an analysis of the licence deed leading to th .....

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s of such reasons even if such materials may not be fresh ones and already formed part of the record. The reasons to believe should have a link with an objective fact in the form of information or materials on record. 20. Consequently, the Court is satisfied that the reopening of the assessments for the AYs in question by the AO did not satisfy the requirement of the law in terms of Sections 147 and 148 of the Act. Question (i) is accordingly answered in the negative i.e., in favour of the Asses .....

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ome. This stand was continued by the Assessee for all the AYs that followed, including the AYs in question. As already noticed, the CIT(A) elaborately discussed the clauses of the licence deed to come to the conclusion that what was being collected by the Assessee was in fact a licence fee and not rent. The second factor was that the Assessee virtually had no business since 1982-83 and his only source of income by way of business was the licence fee that was collected. The ITAT has in the impugn .....

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ould 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 sho .....

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