Woodland Associates (P.) Ltd. v ITO [ITA No. 5031 (Mum.) of 2011] Mumbai ITAT

Background:

Assessee during the year had credited the sum of Rs. 4,52,000/- on account of rent. The flats had been let out to Ms. Rekha Jalan, Managing Director of the company for a sum of Rs. 26,000/- per month and Ms. Snehal Jalan who is her daughter at a monthly rent of Rs. 12,000/-. Ms. Rekha Jalan held 81.71% shares in the company whereas Ms. Snehal Jalan held 13.33% shares. The assessee had declared income from property as business income and the actual rent received had been shown as annual value. The property had been held as a business asset and as per memorandum of association, it was business of the company to let out properties.

The AO stated that leasing out the property could not be considered as trade or commerce. AO referred to the judgment of Hon’ble Supreme Court in the case of Shambhu Investments (P.) Ltd. v. CIT [2003] 263 ITR 143/129 Taxman 70. He, therefore, assessed the rental income under the head “house property”. As regards the fair rental value, the AO contended that letting out the flats to the persons who were controlling the company was only an arrangement to reduce tax. AO after analyzing the comparative rates observed that the average rent charged in respect of similar flat in the same society was 125 per sq.ft. According to the AO, annual value which is defined as sum for which property may be let out from year to year would be the fair rent available in the market.

CIT(A) held that the property was covered under Maharashtra Rent Control Act, 1999 and, therefore, Annual letable value had to be taken as standard rent and therefore, the AO was not justified in taking the market rent.

Assessee’s contentions:

• The portion let out to Ms. Rekha Jalan who was director, amounted to user of the property and in such cases rental income had to be assessed as business income. Reliance was placed on the judgment of Hon’ble High Court of Andhra Pradesh in the case of CIT v. Vazir Sultan Tobacco Co. Ltd. [1988] 173 ITR 290/[1987] 35 Taxman 464 and on the judgment of Hon’ble High Court of Madras in the case of CIT v. New India Maritime Agencies (P.) Ltd. [2002] 253 ITR 732/124 Taxman 801.
  
• With regard to ALV, the property was covered under Maharashtra Rent Control Act, 1999 and therefore, the standard rent or Municipal Rateable Value (MRV) should be adopted as annual value.

Revenue’s arguments:

• Since property had been let out to director/share holder who was controlling the company, it was only an arrangement to reduce tax and therefore the property could not be taken as covered under Rent Control Act.
• As regards the nature of income, the issue is settled by the judgment of Hon’ble Supreme Court in the case of East India Housing & Land Development Trust Ltd.[1961] 42 ITR 49, in which it has been held that, in case, income falls under a specific head, it has to be assessed under same head.
• Though rental income was assessed as business income till 2003-04, the principle of res judicata was not applicable in case of income tax proceedings.

HELD:

• The buildings owned and occupied by the Director of the assessee company has to be treated as used for business and income derived has to be assessed as business income.The same is supported by the judgment of Hon’ble High Court of Andhra Pradesh in the case of Vazir Sultan Tobacco Co. Ltd. (supra), and the judgment of Hon’ble High Court of Madras in the case of New India Maritime Agencies (P.) Ltd. (supra)
• With regard to ALV of flat let out to daughter, it was held that the provisions of Rent Control Act can be applied only in case of bonafide letting out of properties and not in case of colourable transactions which are only an arrangement to reduce tax liability.
• In this case the company had let out the property to the daughter of the director who controlled the company and is responsible for taking all decisions Instead of letting out the property at market rate which is very high, the director had let out property to her daughter at a very low rent, obviously to reduce tax liabilities.
• Therefore, the provisions of Rent Control Act can not be applied to such arrangements. Accordingly it is held that annual value in relation to part of the property let out to Ms. Snehal Jalan will be the fair rent in the market based on comparable cases.