TMI Blog2019 (1) TMI 197X X X X Extracts X X X X X X X X Extracts X X X X ..... of compensation / advance/ revised advance was due to the lessor at the rate of ₹ 4.20 crores per quarter is not tenable. The addition made by AO on selective reading of the proposed lease agreement was not justified. The detailed finding so recorded by CIT(A) are as per material on record which do not require any interference on our part. Furthermore the finding so recorded are supported by our above observation, which has not been controverted by bringing any positive material on record. - Decided against revenue - ITA No.6987/Mum/2016 - - - Dated:- 11-10-2018 - Shri R.C. Sharma, AM And Shri Ram Lal Negi, JM For the Assessee : Shri Vijay Mehta For the Revenue : Ms. S. Padmaja ORDER PER R.C.SHARMA (A.M): This is an appeal filed by the Revenue against the order of CIT(A)- 2, Mumbai dated 26/09/2016 for A.Y.2013-14 in the matter of order passed u/s.143(3) of the IT Act. 2. The following grounds of appeal have been taken by the Revenue:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to delete the entire addition of ₹ 11,68,50,670/- made on account of alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not carried out any business activity. The income credited to the profit and loss account included dividend of ₹ 15,000/-, interest on loan given of ₹ 11,02,56,808/- aggregating to ₹ 11,02,71,808/-. Against these receipts, the assessee had debited expenses under various heads such as other taxes, insurance expenses, audit fee, other expenses etc. and has declared loss from Business of ₹ 7,49,330/-. Subsequently, the case was selected for scrutiny assessment u/s. 143(3). 5. In the assessment so framed u/s.143(3), AO has made addition under the head income from house property amounting to ₹ 11.76 Crores. 6. By the impugned order, CIT(A) deleted the same after observing as under:- 3.3. I have considered the facts, oral contentions and written submissions of the assessee as against the observation / findings of the AO in the assessment order. The only issue is whether any amount accrued to the assessee (proposed lessor) from M/s. Junobo Hotels Pvt. Ltd. (proposed lessee) or not. Hence, for the sake of convenience, all the grounds of appeal are disposed together. The assessee has leased out a property at Juhu Tara Road, Santacruz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id two conditions i.e. prior approvals from Ministry of Environment Forests (MOEF) and Occupancy Certificate (OC) from MCGM. These permissions were to form the basis of Proposed Lease Agreement for this property. The lessee made these permissions approval, both in Original as well as Supplementary Lease Agreement, as conditions precedent . I find that approval from MOEF and OC from MCGM have not been received till 31.03.2013. Thus, I find merit in the argument of the assessee that lease agreement has not fructified into lease . The assessee has clearly provided in clause 5.6. of the Supplementary Lease Agreement, that without obtaining the approval from MOEF and MCGM, the amounts paid by lessee to lessor as compensation / advance / revised advance/ aggregate advance are merely an advance and cannot be treated as compensation for occupying the property for carrying out structural changes. It is submitted by the Authorised Representative that the hotel property is situated near the beach. As its location is in the Coastal Regulation Zone (CRZ) area, it has been extremely difficult to get the approval from MOEF since past four years. The Ld. AR also submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination under this Agreement and the said Agreements shall specifically follow as per the provisions thereof. I find that Para 6 of the supplemental lease agreement clearly shows the nature of payment to the assessee. I find this amount to be in the nature of an 'advance' as it is to be refunded to the lessee on non-fulfillment of the conditions precedent. The AO is of the opinion that having received advance of ₹ 2,10,00,000/- rent is accruing to the assessee company and accordingly the assessed income under House property income returned in at ₹ 11,68,50,670/-. On the other hand, the AR of the assessee argues that the tenant has just paid the advance amount but not occupied the premises for want of clearance from various statutory authorities such as Ministry of Environment 85 Forests and Occupancy Certificate from MCGM and pleads that calculating the rent at accrued basis is not correct and addition should be deleted. I have also gone through the agreement entered between the assessee and the tenant dated 16.01.2012 wherein it is categorically mentioned that lesser shall procure approval from the prescribed Authorities in accordance with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 4,20,00,000/- per quarter). After allowing 30% standard deduction, AO taxed ₹ 11,76,00,000/- as Income from House property. 9. We had carefully gone through the terms and conditions of lease agreement dated 18/02/2011 and also supplementary agreement dated 16/01/2012. We found that the assessee agreed vide proposed leave agreement dated 18.02.2011 to lease out property at Juhu Tara Road, Santacruz (W), Mumbai (comprising of land and building structure thereon) to M/s Junobo Hotels Pvt. Ltd to carry out a business as Hotel in the name and style of Soho House . The said proposed lease agreement was subsequently amended vide agreement dated 16.01.2012. We found that till 31.03.2013, the assessee had received certain advances from the proposed lessee and the same was shown in the balance sheet as Advance from Junobo of ₹ 6,32,59,560/-. During the previous year 2012-13, the assessee had received ₹ 2.10 crores only. The balance amount of ₹ 4.23 crores was received in the previous year 2011-12. However, while framing the assessment, the Assessing Officer did not consider the Proposed Lease Agreement as a whole but considered the terms and cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of Fits-Out Period and what is the Rent Commencement Date . 12. Page 26 of the Original Lease Agreement defines what is the meaning of Fits-out Period in this Proposed Lease Agreement. The relevant para 8 of Proposed Lease Agreement is reproduced below:- 8.1 The parties hereto agree that both the Lessor and the Lessee undertake to fulfill their respective obligations under the specified conditions Precedent and the stipulated time frame for the obligations of the Lessor so as to commence the Lease rent from the Rent Commencement date as set out in Annexure 3 hereto as per schedule and provisions therein time being the essence or as may be mutually extended. The period referred to herein as the said Fit-Out Period shall start from the date of execution hereof and shall end one day prior to 1st October 2011 OR on the date of fulfillment of the conditions in Table B of the said conditions precedent herein, in so far as the fulfillment of the conditions precedent relate to/are incumbent on the lessor, whichever is later........the Fit-out period shall be deemed to expire on the date of such commencement of business /sales. Simultaneously upon expiry of the said Fit-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement at different places that taking approval of MOEF and OC from MCGM were the sine qua non of the Proposed Lease Agreement. The lessee was to carry out necessary changes in the leased premises pursuant to approval of MOEF to comply with the requirements of MOEF. The lessee was required to intimate the lessor that it has carried out necessary changes as per directions of MOEF approval, and then the lessor was required to procure the OC from MCGM within 60 days. Both these requirements are also conditions precedent, which means these must precede before Proposed Lease Agreement. 17. Furthermore, on page 20 of Original Agreement in the clause (viii) it has been clarified that this Fits-out period will be rent free period. In other words, no rent is payable till rent commencement date, which automatically starts on procurement of OC from MCGM. However, the lessee will be liable to pay all other charges i.e. electricity, water and or any other charges payable to any of the service providers and or the maintenance and up-keep charges which shall become due and payable on the said agreement. 18. We observe that it is very clearly mentioned in various paras of the Original Leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Twenty Thousand only) for every quarter or part thereof with effect from 1st October 2011 and thereafter for every 12 (twelve) months with effect from 1st October of each calendar year, such payments shall be escalated by 5% (five percent) of the last payable amounts for the immediately preceding quarter ending on 30th September of the same calendar year. Subject to provisions of clause 5.3 and 6 hereto, the lessee has agreed to make payments by way of advance/s ......... 5.1.1 Simultaneously upon execution of these presents, a sum of ₹ 2,10,00,000/-. 5.1.2 Thereafter from 01st January 2012 onward till the issue of the said MOEF approval, a sum of ₹ 2,10,00,000/-for every quarter on or before the 5th day of first month of each quarter (hereinafter referred to as the said DUE DATE ) in advance (Each such payment as mentioned in the clauses 5.1.1 and 5.1.2 above specifically shall hereinafter be referred to as the said ADVANCE ) 5.1.3 Thereafter from 1st July 2012 onwards, but provided that the lessor has procured the said MOEF approval, a sum of ₹ 4,20,00, OOO/- for every quarter on pro rata basis, on the said due date/s in advance. Each payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) of the Table B of the said Conditions Precedent, for any of the reasons which is not directly attributable to the Lessee, then the Lessee may suspend the payment of the said Advances / said Revised Advance until the Lessor procures the said OC from the said MCGM. 22. Thus, as per this clause 5.3., if the lessor failed to obtain approval from MOEF and subsequent OC from MCGM, the lessee could suspend payment of Advance. It is relevant to mention here that payment of advance was suspended after 30th June and only ₹ 2.10 crores was received during the year. Likewise, it will be relevant to see para 6 of Supplementary Lease Agreement which reads as under: Para 6 Without prejudice to the rights of the parties hereto under the terms of the said Agreements, it is specifically agreed between the parties hereto that in the event that on 31st December 2012, the Lessor 6.1 has failed to procure the said MOEF approval, and for 6.2 has failed to procure the said OC in accordance with provisions of clause 4.3 above, except if the delay is caused on account of any failure on the part of the lessee to comply with its obligations in condition (Hi) of tab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d later OC from MCGM). This has been clarified in both in Original as well as Supplementary) was [ Clause 8.1. r.w.Table B of Annexure to the Original Proposed Lease Agreement and para 3 r.w. Table B of Annexure 1 to Supplementary Lease Agreement] The legal principle is that if the conditions precedent is not complied with the proposal does not fructify into the contract (herein lease). b) Original Proposed Lease Agreement provides for two distinct periods (a) period prior to meeting of conditions precedent has been treated as Fits-Out period, while (b) date when conditions precedent are complied with has been treated as Rent Commencement Date . Both these terms (Fits-Out period as well as Rent Commencement Date ) have been defined in para 8 and B of the Original Proposed Lease Agreement. Both these terms remain unchanged even in Supplementary Lease Agreement. c) It is clearly agreed upon between the proposed lessor and the lessee that fits-out period would be rent free i.e. period prior to obtaining of approval from MOEF and OC from MCGM will remain rent free period (on page 20 clause (xvii) of H of the Original Proposed Lease Agreement). d) The compensation is ..... 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