TaxTMI 
TaxTMI 
2020 (10) TMI 747
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....ffered to tax, as in the past, under the head 'Income from house property', i.e., Chapter IV-C of the Act, comprising sections 22 to 27. The assessee is also charging tenants a sum called 'service charges', toward various services being provided by it to them. The same is, though, as again in the past, returned as business receipt, claiming the cost of those services as a deductible expenditure there-against, resulting in a business loss, denied by the Revenue, assessing the receipt as income from house property instead, entailing disallowance of business expenses. The third stream of income arising to the assessee is by way of 'premium on change of tenancies', being also the account head under which this income is credited/accounted for in accounts. The market being an established one, is a thriving market with good business potential. That apart, the rent, being controlled by legislation, i.e., Maharashtra Rent Control Act, is far below the prevailing market rent, resulting in the tenancy right (of the tenant) being a valuable right. The rent charged, as explained, is a fraction of the going rate, giving us an example for shop measuring 100 sq. ft. & 400 sq. ft. The issues arisin....
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....itled 'Annual value - how determined' and 'Deductions from income from house property' respectively. Section 22 brings to charge the 'annual value' of a property consisting of buildings or lands appurtenant thereto, of which the assessee is the owner, i.e., other than such portion of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax. Section 23 (to the extent relevant) and sec.24 read as under: 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be- (a) the sum for which the property might reasonably be expected to let from year to year; or (b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so r....
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....ry meaning, as also advocated in the afore-referred decisions, that would suffice. There is in fact no claim by the assessee to the contrary, i.e., as to any ambiguity in law, nor does it plead its' case with reference to a different interpretation thereof. Shri Jhaveri, the learned counsel for the assessee, on being queried in the matter, argued that there is no 'change' in law by Finance Act, 2001 (i.e., w.e.f. 01.04.2002, or AY 2002-03 onwards), as the several deductions allowed earlier u/s. 24 are replaced by a composite deduction at the rate of thirty per cent of the 'annual value'. The import of the change per the substituted section, even as explained during hearing, is that the assessee, irrespective of it having incurred, or not so, any expenditure in relation to earning the rental income, is entitled to a statutory deduction from the annual value at a fixed rate thereof, representing a cap on the said deduction. As apparent, the same precludes any loss arising to the assessee under this head of income, except on account of interest on borrowed capital u/s. 24(b), the provision in respect of which remains largely the same. How could that, one wonders, be not regarded as a ....
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....antiation of facts, misplaced. In CIT v. British Paints (India) Ltd. [1991] 188 ITR 44 (SC), the Apex Court discountenanced the plea by the assessee of following a method of valuation of stock consistently for the past several years, and accepted as such. The orders by the Tribunal, as for example in Star Gold Pvt. Ltd. v. Dy. CIT (ITA No. 349/Mum/2015, dated 22.06.2016) and Asha Ashar v. ITO [2016] 46 ITR (Trib) 492 (Mum), would be of little assistance to the assessee. All these cases are based on a finding by the Tribunal as to the relevant sum, as 'society maintenance charges' for example, being included in the rent received by the assessee, which formed the basis for allowance of its deduction u/s. 23. Similarly, in Dy. CIT v. Sir Sobha Singh & Sons (P.) Ltd. [2015] 153 ITD 157 (Del), the Tribunal upheld the deduction of watchman's salary from the composite rent received from the tenant per a separate agreement, covering, besides the same, house-tax, water and electricity charges, all of which were shown to be forming part of the gross rent received, and accordingly directed for exclusion in computing the annual value. How could, one wonders, charges toward user of house prop....
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....usiness) income, where so, is misconceived, both in law and on facts. 4.5 The issue raised per Ground 1 is, thus, subject to the consideration of the assessee's claim qua watchman salary as business expenditure, decided in the affirmative, i.e., in favour of the Revenue-appellant. The assessee's income from house property shall stand, accordingly, increased by Rs. 32,66,243, i.e., net of standard deduction @ 30% on the claim of salary at Rs. 46.66 lacs, disallowed in computing the annual value u/s. 22 r/w s. 23, or as deduction u/s. 24(a). 5. In respect of the second issue qua service charges income, the assessee's claim is that it charges 'service charges' @ Rs. 500 per month per shop, which income has been, as in the past, returned as 'income from business or profession' u/s. 28 at a loss of Rs. 21,89,336 for the year, i.e., after deducting the expenditure incurred toward providing those services, yielding a gross revenue of Rs. 52.80 lacs. The services provided are in pursuance of its' object of development and administration of the market. It has in fact been continuously allowed business loss qua the said activity in regular assessments for the past several years, toward whi....
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....s of its property and that the service charges have to be included as a part of its rental income. The aforesaid finding of the Tribunal is on the basis of the order of this Court in the matter of CIT v. Bhaktavar Construction Pvt. Ltd. (supra). The test to determine whether the service agreement was different from the rent agreement would be whether the service agreement could stand independently of the rent agreement. In this case the service agreement is dependent upon the rent agreement as in the absence of the rent agreement there could be no service agreement. It may also be pointed out that according to the respondent, the services being provided under the service agreement by the respondent assessee are in the nature of staircase of the building, lift, common entrance, main road leading to the building through the compound, drainage facilities, open space in/around the building, air condition facility etc. These are services, which are not separately provided but go along with the occupation of the property. Therefore, the amounts received as service charges are to be considered as a part of the rent received and subjected to tax under the head 'Income from House Proper....
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.... be construed as having been, in appeal, allowed any 'benefit' or 'advantage'. The matter being factual, would have to be necessarily decided on clear findings of fact. Reference to the past history of the case is thus largely irrelevant. What are the different services provided for the current year? What are the direct and indirect costs relatable thereto? The latter, which may have to be allocated on some reasonable basis between the two broad categories afore-said, would not stand to be deducted, along with the direct costs, insofar as they relate to the provision of tenancy or occupancy rights, or the enjoyment of vacant possession by the tenants, for which the assessee gets a flat deduction of 30%. The expenses in relation to the assessee's business, on the other hand, warrant being allowed in full. In this regard, we observe that the expenditure on watchman salary is at Rs. 46.66 lacs, even as 'watch' is only one of the several services being provided, at an aggregate revenue of Rs. 52.80 lacs, which is short of the expenditure incurred, excluding on watchman salary, by Rs. 21.89 lacs. Though the same, despite constituting 88+% of the gross revenue, is allowable in principle,....
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...., accordingly, is restored to the file of the ld. CIT(A) to decide afresh in accordance with law, considering all the relevant aspects, including those stated hereinbefore, issuing definite findings of fact, and after hearing the assessee. He shall, further, do so in a reasonable time/time bound manner, even as he may seek a report from the AO. The assessee shall fully cooperate in the proceedings, providing all the necessary details, explanations, etc. We make it clear that while the onus to prove the incurring of an expenditure and its nexus with it's business, i.e., the stated facts, including qua the business reason for the continuing losses, is on the assessee, the onus to establish any contravention of law, including its manner, or as to non-genuineness, is on the Revenue. It cannot disallow a loss without any sound, tenable reason i.e., in law; it being trite law that tax can only be charged on real, and not notional, income, subject of course to the provisions of law (Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 (SC)). It may appear that we, having been called upon to state if the impugned loss could be disallowed to any extent, have, in so deciding, travelled o....
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.... same stands regarded by the assessee and Revenue as 'capital gains' and 'income from other sources' respectively. The Revenue's case, as clarified per the assessment order, is that inasmuch as the assessee continues to be the owner of the shop (relevant part of the house property), both before and after the transfer of the tenancy by the tenant, the said receipt is not relatable to the assessee's capital asset, which thus remains the same (i.e., unchanged) consequent to the said transfer. Like-wise, it is not relatable to the carrying on of the business of administration and development of the market by it, so as to be regarded as a business receipt, but only arises to it in its' capacity as an owner of the house property. The same, thus, is assessable under the residuary class of income, i.e., income from other sources, u/s. 56. The assessee was, accordingly, denied its' claim for deduction u/s. 54EC on investment of the realization in eligible bonds. The assessee's case, on the other hand, which also found favour with the ld. CIT(A), is that the matter has received consideration by the Tribunal, deciding it in its' favour; in fact, for several years. 8. We have heard the parti....
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....on, basing the same on its' earlier decision in the assessee's case for AY 2009-10. In our view, it was incumbent on the Tribunal to have considered its' decision in Vinod V. Chhapia (supra), either distinguishing it or, where not distinguishable, refer the matter for a decision to its' larger Bench. This is what propriety and the rule of judicial precedence mandated as, faced with two views by it's coordinate benches, it could not follow one in preference to the other. It could not, in any case, do so without stating reasons for the same. It was in fact all the more incumbent on the Tribunal to do so as its' earlier order dated 25.5.2016 was also rendered without noticing an existing decision by its' coordinate Bench, which, if brought to its' notice, may have altered its' decision or, in the least, led to a reference to a larger Bench. It, as afore-stated, does not consider the earlier (dated 21.11.2012) decision by the Tribunal at all. The course adopted could, as is by now well-settled, rather, give rise to an application for rectification u/s. 254(2) (Honda Siel Power Products Ltd. v. CIT [2007] 295 ITR 466 (SC)). Now it may well be argued that the Tribunal was persuaded by ....
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....ts of the case, there is, on the contrary, no discussion, much less any finding qua this issue in the assessment order for AY 2005-06 by the AO, who merely states that the assessee's representative explained that the premium on the transfer of tenancy rights is chargeable to tax as capital gains, and since it had not incurred any cost for the same, the entire receipt is offered as capital gain, liable to deduction u/s. 54EC, quoting the same verbatim (at pg.5/para 4 of the order/PB pgs. 193-198). There is, clearly, no application of mind by the AO. In the admitted facts of the case, there is no transfer of tenancy rights, surely a capital asset, by the assessee-owner, but by the tenant. There is, accordingly, no question of transfer of any rights therein by the assessee, the owner of the rented house property, to the incoming tenant and, resultantly, of any consideration arising to it therefrom, i.e., the incoming tenant. It is the existing tenant who transfers the rights vested in him, as the outgoing tenant, for a consideration. No wonder, the assessee reflects the sum received as 'premium on change of tenancies', both in its' accounts as well as the tax returns. The non-applicat....
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....t case? Applicability of the decision in Vinod V. Chhapia's case 8.3 The decision by the Tribunal in Vinod V. Chhapia (supra) was not brought to our notice by either party during hearing, and which is, we are afraid to say, unfortunate. The same came to our notice only while perusing the record for finalizing this order. Fair hearing implies not only a fair opportunity of hearing to the parties, but, equally, they bringing forth honestly the facts and circumstances of the case as well as the obtaining legal position - the premise being to assist the court to arrive at a correct decision, i.e., as per law, the end to which the entire judicial process is geared. This is more so in tax proceedings which, as also aforestated, are not adversarial proceedings. Be that as it may, we next proceed to consider the decision by the Tribunal in Vinod V. Chhapia (supra), applicability of which in the facts of the instant case cannot be a matter of presumption, i.e., merely because the Revenue had relied on it, and is to be tested. The assessee HUF rented its' house property, a residential flat, to one, 'B', in 1962. The tenancy rights were, on her demise in 1986, inherited by her daughter 'D',....
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....ds of the tenant, who accordingly transfers the same to another, the incoming tenant, for a consideration. The assessee-landlord agrees thereto, partaking a part of the consideration, chargeability to income tax, including the head of income under which it is assessable, was the issue arising for determination. The Tribunal considered all the contentions put forth, including the grant of consent by the assessee-landlord, stated to be a condition precedent for the transfer of tenancy rights by the tenant (in favour of the incoming tenant), which was argued to be the capital asset transferred. The grant of consent, it opined, did not result in the transfer of any capital asset by the assessee; he being the owner sans the tenancy rights, or the rights already divested in favour of the existing tenant. The two fact situations are clearly at par, entailing even same/similar arguments. It is said (refer order by the first appellate authority for AY 2013-14/PB pgs. 96-122) that as per the Rent Control Act, the tenant does not acquire tenancy rights, but only possessory rights. The two, in commercial parlance, connote the same; the specimen agreement dated 19/9/2013 being itself titled 'A....
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.... 549]. To almost the same effect is the order by the Tribunal in Addl. DIT v. TII Team Telecom International (P.) Ltd. [2011] 12 ITR (Trib) 688 (Mum), whereby, an order by the Tribunal contrary to the earlier decision/s by the coordinate bench/es, looses its binding effect. Further, the order, the relevant part of which is reproduced below, does not specify the capital asset transferred by the assessee-owner, and how, inasmuch as clearly capital gains envisages a capital asset and its transfer, both defined in law: '6. We have gone through the findings of ld. CIT(A). We agree with the observations of the ld. CIT(A) that during the course of time the assessee acquired bundle of rights with respect to the impugned shops. These rights include inter alia, rights of possession in tenancy. As per section 2(14) "capital asset" means property of any kind held by an assessee, whether or not connected with his business of profession. A perusal of this definition shows that the legislature has intended to define the term "capital asset" in the widest possible manner. This definition has been curtailed to the extent of exclusions given in section 2(14) itself, which include stock-intrade an....
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....held in the appellate order for AY 2009-10, there would be no need to seek its' consent on a subsequent change in tenancy, which is not the case. In fact, such a course is stated as impermissible in law (refer para 8.3). The said order/s, in light of the foregoing, is not liable to be followed (Sri Agasthyar Trust v. CIT [1999] 236 ITR 23 (SC); Raghubir Singh (Decd) v. Union of India [1989] 178 ITR 548 (SC); Distributors (Baroda) (P.) Ltd. v. UoI [1985] 155 ITR 120 (SC); CIT v. Hi-Tech Arai Ltd. [2010] 321 ITR 477. Discussion 8.5 We have already clarified of the detailed arguments and deliberations by the Tribunal in Vinod V. Chhapia (supra), also noting its' findings (para 8.3). That being the case, the only course available to us is to decide the issue, regarding the said decision as the only judicial precedent; no other decision by the Tribunal - other than those in the assessee's case, discussed hereinbefore, or any higher forum, having been brought to our notice. The 'right of consent' is without doubt a valuable right, a capital asset u/s. 2(14). However, this right has not been parted with by the assessee. It is this right it exercises each time there is a change in tenan....
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.... rights or capital asset by the assessee in favour of the incoming tenant. The incoming tenant substitutes the outgoing tenant, getting all the rights being hitherto enjoyed by the latter, i.e., possessory rights, subject to the payment of a premium/transfer fee to the owner on transfer of tenancy, which is uncertain both in time and frequency and, perhaps, even the premium sum. In other words, the tenancy or other rights being enjoyed by a tenant are not complete, but are subject to certain restriction on their transferability. The payment, though made to the assessee-owner by the incoming tenant, is for and on behalf of outgoing tenant, even as clarified per clause-E of the specimen agreement of transfer of tenancy (dated 19.9.2013). This is perhaps for the reason that the assessee could not legally charge any sum from the incoming tenant, who could be admitted to the tenancy only on the existing tenant relinquishing the same in his favour. The need and, therefore, the stipulation for approval of the owner would also operate to prevent admission of any undesirable person as a tenant and, thus, assuming an unacceptable level of risk in letting the property. Besides, the old tenant....
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....alive to the need to eschew any prejudice being caused to either side. There is, then, also the issue of head of income under which the income arising is taxable. The rent control legislation is toward regulating tenancies, i.e., protecting them, as well as exercising control over rentals. It is therefore open for the assessee to contend that it is, by partaking a part of the transfer consideration on the transfer of their (tenancy) rights by its' tenants, i.e., by way of premium or transfer fee, only compensating itself for the low rent being received by it. It must be borne in mind that it is on account of low rent, coupled with the protection of tenancy, which makes it a valuable asset in the hands of the tenant for the time being, which he realizes on its transfer for a consideration. The assessee, by providing for a share therein for acquiescing to the said transfer, is thus also realizing, albeit indirectly, a consideration for the low rent. This as the tenants are being thus required to pay a lumpsum consideration for acquiring tenancy/possessory rights. Its legal validity apart, this constitutes the economic logic or justification for the charge of premium, which is thus i....
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....assessee, i.e., since the date of its' acquisition by it. Decision 8.7 With these observations, we, for the reasons afore-stated, set aside the matter for fresh adjudication in accordance with law to the file of the ld. CIT(A), after affording the parties before him a reasonable opportunity of hearing, within the time frame, if any, stipulated by law. Inasmuch as we are setting aside the matter, the first appellate authority shall not be bound by our observations, except have regard to them to the extent they are consistent with or otherwise explain the order by the Tribunal in Vinod V. Chhapia (supra), a valid judicial precedent, and relied upon in the assessee's own case. And decide the matter per a speaking order, issuing definite findings of fact and of law, answering the various aspects of the issue as delineated by us. The twin elements of 'capital gain' are 'capital asset' and 'transfer'; the transfer making the capital asset the property of the transferee. The capital asset acquired by the incoming tenant from the assessee is to be specified. The gain arising is to be categorized on the basis of the holding period of the capital asset by the transferor - and not another,....
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....g the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to be interpreted. The interpretation so assigned by us is not only in consonance with the letter and spirit of rule 34(5), but is also a pragmatic approach at a time when a disaster, notified under the Disaster Management Act 2005, is causing unprecedented disruption in the functioning of our justice delivery system. Undoubtedly, in the case of Otters Club v. DIT [2017] 392 ITR 244 (Bom), Hon'ble Bombay High Court did not approve an order being passed by the Tribunal beyond a period of 90 days, but then in the present situation Hon'ble Bombay High Court itself has, vide judgment dated 15th April 2020, held that "while calculating the time for disposal of matters made time-bound by this Court, the period for which the order dated 26th March 2020 continues to operate shall be added and time shall stand extended accordingly". The extraordinary steps taken suo motu by the Hon'ble jurisdictional High Court and Hon'ble Supreme Court also indicate tha....