Income from let out of ‘premises only’ is taxable under the head ‘Income from House Property’

Short Overview:

In the absence of any facilities or business infrastructure provided by the assessee-firm to its lessee, rental income from let out of ‘premises only’ was rightly taxed by the department under the head ‘Income from house property’ and not as business income and rental value of second floor to fifth floor of the property used for hotel business determined at Rs. 30.00 lakhs per annum for the relevant year, as against Rs. 49.95 lakhs determined by the AO, and after allowing Rs. 2 lakhs for municipal tax.

Assessee in the present case was a partnership firm and deriving its income by way of letting out the property on rent which was offered to tax under the head business and profession. The assessee was the owner of the building comprising of 5 floors. The assessee had given on rent its ground and 1st floor to V-Mart on a monthly rent of Rs. 3,04,999 only. The assessee at the same time had let out its 4 floors (2nd to 5th floor) to its related party on annual rent of Rs. 1 lakh. Thus, the AO found the difference in the amount of rent charged by the assessee from the unrelated and related party. Accordingly the AO determined the fair rent of the property rented out to the related party for Rs. 49,95,546 only. AO made the addition of Rs. 49,95,546.00 to the total income of the assessee by treating the fair market rent as income under the head house property. CIT(A) partly confirmed the order of the AO.

It is held that, In the absence of any facilities or business infrastructure provided by the assessee-firm to its lessee, rental income from let out of ‘premises only’ was rightly taxed by the department under the head ‘Income from House Property’. The ends of justice shall be met, if the rental value of second floor to fifth floor of the property used for hotel business was determined at Rs. 30.00 lakhs per annum for the relevant year, as against Rs. 49.95 lakhs determined by the AO, and after allowing Rs. 2 lakhs for municipal tax paid by the assessee, and also 30% of the annual value of the property, the income from second floor to fifth floor of the property let out to M/s. Sudarshan Palace, should be assessed at Rs. 19.00 lakhs as against Rs. 32,96,882 assessed by the AO and the grounds of the appeal of the assessee, on this issue, were partly allowed.

Decision: In assessee’s favour.

Followed: ITAT in ITA No. 1171/AHD/2011 in the assessee own case.

IN THE ITAT, AHMEDABAD BENCH

WASEEM AHMED, A.M. & MADHUMITA ROY, J.M.

Jaylaxmi Land Developers v. ITO

ITA No. 2226/AHD/2016

29 March, 2019

Assessee by: Anil R. Shah & Kinjal Shah, A.Rs

Revenue by: Uma Shankar Prasad, Sr. Departmental Representative

ORDER

Waseem Ahmed, A.M.

The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner (Appeals)- 2, Vadodara (Commissioner (Appeals) in short) vide Appeal No. CAB/(A)-2/427/14-15, dt. 29-4-2016 arising in the matter of assessment order passed under section 144 read with section 147 of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) dated 25-3-2013 relevant to assessment year (AY) 2007-08.

2. The assessee has raised the following grounds of appeal :–
3. On Legality’ of the Order :–
4. Your Appellant submits that the Reopening of Assessment under section 148/147 is bad in Law and void and Time Barred and therefore the entire proceedings and order under section 147 be cancelled.
5. Without prejudice, it is submitted that it appears the assessing officer has not recorded Reasons for Reopening since the same are not sent alongwith notice under section 148 of the Act of 13-3-2012.

It is further submitted that as per the Appellant no income has escaped assessment or under assessed and section 147 does not apply to the facts of the case.

1. On Merits :–

Income from Property.

1. It is submitted by your Appellant that the Commissioner (Appeals) has erred in giving hearted relief in computing Income from Property at Rs. 34,01,4007- in p, of income assessed at Rs. 49,95,4467- and Income declared at Rs.

1,00,0007-actually received.

2. The addition made by the assessing officer and partly confirmed by the Commissioner (Appeals) of Income from Property is not as per provisions of Law and not supported by evidence and the Commissioner (Appeals) ought to have accepted Income as income Estimated by Municipal Corporation for Tax purposes and in view of Rent Central Act no increase in Rent can be presumed to have been earned.
3. Your Appellant further submits that Commissioner (Appeals) has erred in not accepting Income claimed as Business Income and upholding it to be as Income from Properly as decided by assessing officer. On facts and provision of Law he should have accepted the claim of your Appellant.

Income added under section 68

1. (a) The Commissioner (Appeals) has also erred both in Law and in fact in confirm j Applicably of section 68 and confirming addition of Rs. 38,23,0007 may by the assessing officer in the capital account of Partner of your Appellant Mr. Vasoolal Melaram.

(b) Your Appellant submits that section 68 does not apply for credit in account of Partner of the Firm as held by various Judicial Authorities.

2. Without prejudice to above, it is submitted by your Appellant that on facts of the case and as per provisions of Law all the Depositors are known persons, identity and creditworthiness is proved and transaction being genuine, Commissioner (Appeals) ought to have deleted the entire addition of Rs. 38,23,0007-.
3. In the alternatively and again without prejudice and if any addition under section 68 is called for the same ought to have been worked out on Peak Credit basis as per accepted principals of accounting and various judicial authorities.

It is therefore submitted that relief claimed above be allowed and the order of the assessing officer be modified accordingly.

Your Appellant reserves right to add, alter, amend to withdraw any or all

Ground of Appeal.

3. At the outset it was noticed that the appeal filed by the assessee was barred by limitation by 57 days. The learned Authrorised Representative for the assessee before us submitted that the delay has occurred in filing the appeal due to the death of the main partner of the firm. The learned Authrorised Representative in support of his contention filed the affidavit of the other partner of the firm along with the death certificate of the deceased person. Accordingly, the learned Authrorised Representative before us prayed to condone the delay which was occurred due to unavoidable circumstances.
4. On the other hand the learned Departmental Representative considering the nature and reasons of the delay, did not object for the condonation of the delay.

In view of the above stated facts, we condone the delay and proceed to hear the grounds of appeal of the assessee on merit.

5. At the outset, the learned Authrorised Representative for the assessee before us submitted that he has been instructed by the assessee not to press ground No. 1 of the appeal.

Therefore we dismiss the same as not pressed.

6. The 2nd issue raised by the assessee is that learned Commissioner (Appeals) erred in partly confirming the order of the assessing officer by sustaining the disallowance of Rs. 34,01,400 on account of Income From House Property.

6.1 Briefly stated facts are that the assessee in the present case is a partnership firm and deriving its income by way of letting out the property on rent which was offered to tax under the head business and profession. The assessee is the owner of the building comprising of 5 floors. The assessee has given on rent its ground and 1st floor to V-Mart on a monthly rent of Rs. 3,04,999 only. The assessee at the same time has let out its 4 floors (2nd to 5th floor) to its related party on annual rent of Rs. 1 lakh. Thus the assessing officer found the difference in the amount of rent charged by the assessee from the unrelated and related party. Accordingly the assessing officer determined the fair rent of the property rented out to the related party for Rs. 49,95,546 only.

6.2 The assessing officer also observed that the similar addition was also made to the total income of the assessee in the immediate preceding assessment year under the head income from house property instead of business income.

Therefore the assessing officer made the addition of Rs. 49,95,546.00 to the total income of the assessee by treating the fair market rent as income under the head house property.

7. Aggrieved assessee preferred an appeal to the learned Commissioner (Appeals) who has reduced the addition made by the assessing officer to Rs. 34,01,400 Only. Accordingly the learned Commissioner (Appeals) partly confirmed the order of the assessing officer.
8. Being aggrieved by the order of the learned Commissioner (Appeals) the assessee is in appeal before us.
9. The learned Authrorised Representative before us at the outset conceded the fact that the aforesaid issue has been decided by the Hon’ble ITAT inITA No. 1171/AHD/2011 against the assessee in its own case.

9.1 However, the learned Authrorised Representative further submitted that the learned Commissioner (Appeals) has enhanced the annual rental value as determined by the ITAT in the immediate preceding assessment year 2006-07 by Rs. 4,01,400 without issuing the notice as mandated under section 251(2) of the Act.

10. On the other hand the learned Departmental Representative vehemently supported the order of the authorities below.
11. We have heard the rival contentions and perused the materials available on record. At the outset we note that the issue stands covered against the assessee in its own case (supra). The relevant extract stands as under :–

“5. We have considered rival submissions regarding first issue of assessing the rental value of the said property under the head “Income from House Property”.

We find that the assessee has not brought any material on record to show that it has provided any common facility like air-condition plant, power back-up, lift, watchmen j etc. to “VCPL” or its partner to whom the upper floors were let out by (the assessee-firm. A bare reading of the lease agreement between the assessee-firm and “VCPL” shows that the rent was charged by the I assessee-firm only for the “premises” as provided in the lease\agreement. Providing of electrical panel and space for generator could not be said to be a separate service or asset and in fact no separate rent is charged for the same. We find that there was no provision of any services to be provided by the assessee to the “VCPL” or to the partner of the assessee-firm in the upper floor. The Commissioner (Appeals) has recorded in his appellate order that the value of the building was shown at Rs. 3.86 crores whereas the value of the furniture and fixtures is of Rs. 87,226 only, which are of insignificant value vis-a-visvalue of the building. In these facts of the case, we are of the view that in the absence of any facilities or business infrastructure provided by the assessee-firm to its lessee, rental income from let out of “premises only” was rightly taxed by the department under the head “Income from House Property” and no interference in the order of the Commissioner (Appeals) on this issue is called for, which is confirmed and the ground of the appeal on this issue is dismiss.”

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“7. We have considered rival submission and perused the orders of the assessing officer and the Commissioner (Appeals). We find that the assessee has charged the rent of Rs. l lakh only for the second floor to fifth floor of the said property for the entire year from one of its partners, who runs a hotel business therein under the name “Sudarshan Palace”.

No valid reasons could be assigned on behalf of the assessee before us for charging such lower rent for second to fifth floor of the property as compared to rent of Rs. 2.69 lakhs from “VCPL” per month for two floors. In reply to a specific query from the Bench, no definite figure of the covered area let out to Sudarshan Palace could be filed before us. The Commissioner (Appeals) has given a finding that it is not the appellant’s case that the property was subjected to Rent Control Act or standard rent was got determined. No conclusive evidence could be led on behalf of the assessee to show that the 2nd floor of the asset was in broken condition and not usable for any commercial purpose. We find that the ground floor to first floor of the property was let out to “VCPL” at Rs. 2.69 lakhs per month, and that, there is a clear disparity in this case between the rent charged from related parties and from an unrelated parties for two portions of the property in question. The case law of relied upon by the learned counsel for the assessee were distinguishable on facts. In these facts, we hold that the rent figure shown by the assessee at Rs. l lakh per annum for second floor to fifth floor of the property let out to Sudarshan Palace is low and has to be substituted for the amount for which the property might reasonably expect to let for the relevant year. This leaves us to the only issue of determination of reasonable amount of rent for which the property might be expected to let from year to year. Considering totality of the facts and circumstances of the case, and the fact that the allowance of deduction at 10% per higher floor from the bottom ground and first floor of the property, was on the lower side, and that upper second floor to fifth floor not having any hall type construction to suit for commercial use for any departmental stores etc., and construction of building consisted of small rooms only and the claim of the assessee that covered area on the higher floors were less as compared to the ground and first floor of the property, and also considering the undisputed fact that the partner of the asses see-firm, who is running a hotel “Sudarshan Palace” business has advanced deposit of Rs. l.63 crores to the assessee firm without charging any interest, we are of the view that the ends of justice shall be met, if the rental value of second floor to fifth floor of the property used for hotel business is determined at Rs. 30.00 lakhs per annum for the relevant year, as against Rs. 49.95 lakhs determined by the assessing officer, and after allowing Rs. 2 lakhs for municipal tax paid by the assessee, and also 30% of the annual value of the property, the income from second floor to fifth floor of the property let out to M/s. Sudarshan Palace, should be assessed at Rs. 19.00 lakhs as against Rs. 32,96,882 assessed by the assessing officer and the grounds of the appeal of the assessee, on this issue, are partly allowed.”

In view of the above, the rental income of the assessee is taxable under the head House Property at the fair market rent and not under the head Business and Profession.

12. The next issue arises for the consideration regarding the enhancement of the rent by the learned Commissioner (Appeals) for Rs. 4,01,400. First of all we note that the assessing officer made the addition of Rs. 49,95,546 which was reduced to Rs. 34,01,400 thus it is not a case of enhancement as alleged by the learned Authrorised Representative for the assessee.
13. Admittedly the learned Commissioner (Appeals) enhanced the rent in parity of the order of the Tribunal in the immediate preceding year. As such in the immediate preceding the year the Tribunal to determine the fair rental value of the property has compared with rent of the V-Mart. In the year under consideration the rent of the property let out to M/s. V- Mart was increased by 13.38% in comparison to the immediate preceding assessment year i.e. 2006-07.

Therefore the rent for the impugned property should also be increased in the same proportion to maintain the consistency. Thus we reject the argument of the learned Authrorised Representative for the assessee that the learned Commissioner (Appeals) enhanced the rent without issuing the notice as mandated under section 251(2) of the Act.

In view of the above, we do not find any reason to interfere in the finding of the learned Commissioner (Appeals). Hence the ground of appeal of the assessee is dismissed.

14. The 3rd issue raised by the assessee is that the learned Commissioner (Appeals) erred in confirming the order of the assessing officer by sustaining the addition of Rs. 38,23,000 as unexplained cash credit under section 68 of the Income Tax Act.
15. The assessee during the year has received a sum of Rs. 38,23,000 from its partner as capital contribution. However the assessing officer found that the assessee has failed to furnish the source of money in the hands of the partner on the basis of documentary evidence. Therefore the assessing officer made the addition to the total income of the assessee for Rs. 38,283,000 only as unexplained cash credit under section 68 of the Act.
16. Aggrieved assessee preferred an appeal to learned Commissioner (Appeals) who has confirmed the order of the assessing officer.
17. Being aggrieved by the order of the learned Commissioner (Appeals), the assessee is in appeal before us.
18. The learned Authrorised Representative before us submitted that there is no ambiguity that the money was contributed by the partner of the firm which was suitably explained to the lower authorities. Thus if any addition is to be made on account of unexplained cash credit, then it can be made in the hands of the partner of the firm.
19. On the other hand the learned Departmental Representative vehemently supported the order of the authorities below.
20. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the fact whether the capital contributed by the partner to the firm is unexplained cash credit under section 68 of the Act in the given facts and circumstances.

20.1 Admittedly the partner of the firm has contributed capital to the partnership firm. The assessee accordingly has duly disclosed in its balance sheet the capital contributed by the partner of the firm.

20.2 This fact can be verified from the balance sheet of the assessee which is available on record. The relevant extract of the balance sheet as on 31-3-2007 is extracted below;

LIABILITIES		AMOUNT
PARTER’S CAPITAL A/C
MAMTABEN TRIBHOVANDAS
Opening Balance	402,088.34
Add: Profit during the year	104,956.67
		507,045.01
SANGITABEN RADHAKISAN
Opening Balance	402,089.27
Add: Profit during the year	104,956.67
		507,045.94
VASOOLAL MELARAM
Opening Balance	21,434,940.65
Add:Profit during the year	104,956.67
Addition during the year	5,300,000.00
Add: Salary to Partner	160,000.00
Less: Withdrawl	26,999,897.32
	4,141,200.50
		22,858,696.82

From the above, there remains no ambiguity that the assessee has shown contribution by the partner of the firm in the year under consideration. Now the question arises about the source of fund in the hands of the partner. Regarding this the law is settled that the partnership firm is not liable to justify the source of fund in the hands of the partner. In this connection we find support and guidance from the judgment of Hon’ble High Court of Gujarat in the case PCIT v. Vaishnodevi Refoils & Solvex reported in (2018) 89 taxmann.com 80 (Gujrat) : 2018 TaxPub(DT) 274 (Guj-HC) wherein it was held as under:–

“In the facts of the present case, when the assessee has furnished the details with regard to the source of the capital introduced in the firm and the concerned partner had confirmed such contribution, the assessee had duly discharged the onus cast upon it. Thereafter, if the assessing officer was not convinced about the creditworthiness of the partner who had made the capital contribution, the inquiry had to be made at the end of the partner and not against the firm. The controversy involved in the present case, therefore, stands squarely covered by the decision of this court in the case of CIT v. Pankaj Dyestuff Industries in Income Tax Reference No. 241 of 1993.”

20.3 The above view was also subsequently confirmed by the Hon’ble Apex Court in the SLP filed before it reported in 96 taxmann.com 469 : 2018 TaxPub(DT) 4509 (SC). In the said case the SLP was dismissed by the Hon’ble Apex Court.

In view of the above, we are of the considered opinion that there cannot be any addition made in the hands of the partnership firm on account of the capital contributed by the partner of the firm to the firm. In case any justification is required for the source of fund in the hands of the partner, then partner in his individual capacity is liable to explain. There is no liability fastened on the assessee (firm) for the explanation about the source of funds in the hands of the partner. Hence we disagree with the order of the learned Commissioner (Appeals) and accordingly direct to the assessing officer to delete the addition made by him.

Thus the ground of appeal of the assessee is allowed.

21. In the result the appeal of the assessee is partly allowed.