COMMISSIONER OF INCOME-TAX VS CHAMPA PROPERTIES PVT. LTD
1996 P T D 648
[212 I T R 303]
[Calcutta High Court (India)]
Before Ajit K. Sengupta and Shyamal Kumar Sen, JJ
COMMISSIONER OF INCOME-TAX
versus
CHAMPA PROPERTIES PVT. LTD
Income-tax Reference No.74 of 1988, decided on 26/11/1993.
Income-tax---
----Income---Diversion of income by overriding title---Lease of property-- Negotiation for lease of same property to a third person---Agreement to pay lessees certain sums in consideration of their giving vacant possession---Amount paid to lessees was diverted by overriding title---Indian Income. Tax Act, 1961.
Where by an obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such, income reaches the assessee the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable.
C was the owner of immovable properties including a three-storeyed building. She sold her undivided share in the properties to ten persons. Subsequently, C and the other co-owners formed a company. Before the assessee-company was formed, C by three separate registered deeds of conveyance dated May 6, .1966, leased out each floor of the building for a term of 20 years with effect from August 1, 1966, to three firms. In the lease deeds, it was specifically provided that the term of the lease could be renewed for a further period of 20 years. Subsequently, the assessee: company entered into an agreement on June 15, 1971, with the aforesaid three partnership-firms in terms of which the lessees agreed to allow the lessor to let out the entire property to a tenant (Government of India) with whom negotiations were going on for some time with the lessor. It was agreed that with effect from August 1, 1971, the lessor shall pay to the lessees a sum of Rs.1,000 of the rent received by the lessor from the new tenant in lieu of giving vacant possession of each of the floors. Thereafter, the assessee-company let the entire property (all the three floors of the building) and the appurtenant land to the Government of India. The Income-tax Officer while scrutinising the particulars of the house property income furnished by the assessee for the assessment years 1982-83 and 1983-84, found that the assessee did not include in its computation a sum of Rs.72,000 being the sum paid by the assessee to the three partnership firms (the lessees), i.e., the sum agreed upon to be paid by the assessee out of the income receivable from the Government of India minus the lease rent fixed in the original lease agreements. The Income-tax Officer included the sum of Rs.72,000 in each of the assessment years 1982-83 and 1983-84. The Tribunal deleted the additions. On a reference:
Held, that before the agreement with the Government of India for renting out the entire premises was executed, the assessee entered into three separate agreements with the lessees for obtaining vacant possession of the building in order to fetch higher rental income from the tenant, i.e., the Government of India. The agreement dated June 15, 1971, which the assessee entered into with each of the three lessees had not been found to be sham. The Income-tax Officer was not justified in including Rs.72,000 as the assessee's house property income as the said sum did not form part of the assessee's income by virtue of the agreements entered into by the assessee with each of the three lessees dated June 15, 1971. The Tribunal was correct in taking the view that it was not a case where the assessee could be said to have received the entire rent as its income before it parted with it in favour of the lessees, so as to constitute application of income.
Gaper (A.) v. C.I.T. (1979) 117 ITR 581.(Cal.) and C.I.T. v. Sitaldas Tirathdas (1961) 41 ITR 367 (SC) ref.
JUDGMENT
AJIT K. SENGUPTA, J. ----In this reference under section 256(1) of
the Income Tax Act, 1961, the Tribunal has referred the following question for our opinion:
"Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the agreement dated June 15, 1971, the Tribunal was justified in law in holding that the sum of Rs.72,000 did not form part of the assessee's income?"
The assessee is a private limited company and the assessment years involved are 1982-83 and 1983-84. One Smt. Champabati Devi Chamaria was the owner of four immovable properties including a three-storeyed building situated at 25A, Shakespeare Sarani, Calcutta. The said lady sold her undivided one per cent share of the immovable properties each to ten of her close relatives through registered deeds. Subsequently, Smt Champabati Devi and the other co -owners of this property formed a joint stock company in the name of Messrs Champa Properties (P.) Ltd. namely the present assessee. Smt. Champabati Devi, held 90 per cent shares in the company and the other co-owners held the balance 10 per cent shares. The company was incorporated on September 20, 1966. Before the assessee-company was formed, Smt. Champabati Devi by three separate registered deeds of conveyance dated May 6, 1966, leased out each floor of the building for a term of 20 years with effect from August 1, 1966, to three separate partnership-firms, viz., Benarasilal & Company, Gobinda Prasad & Company and Krishna Kumar & Company, on a monthly lease rent of Rs.100 exclusive of both owners' and occupiers' share of the municipal rates and taxes payable on the said property. In the lease deeds so executed, it was specifically provided that the terms of the lease could be renewed for a further period of 20 years. "But the rent payable during the period of renewal will be such sum as may be determined mutually". The lease rent was, however, refixed at Rs.100 per month from August 1, 1966, with each of the three aforesaid parties but the other terms of the lease agreement dated May 6, 1966 remained unaltered, vide deed of modification dated September 16, 1966. Subsequently, the assessee-company entered into an agreement on June 15, 1971, which the aforesaid three partnership-firms in terms of which the lessees agreed to allow the lessor to let out the entire property to a tenant with whom negotiations were going on for some time with the lessor. It was agreed that with effect from August 1, 1971, the lessor shall pay to the lessees a sum of Rs.1,000 from the rent received by the lessor from the new tenant in lieu of giving vacant possession of each of the floors by the lessees but such arrangement and/or agreement shall not in any way prejudice the mutual obligations of the lessor and the lessee as agreed upon under the original lease agreement dated May 6, 1966. The agreements entered into by each of the lessees are all on similar lines which mention, inter alia, that in case negotiations for letting out the property by the lessor to the prospective tenant did not materialise within eight weeks from the date of the present agreement. i.e., June 15, 1971, "this agreement shall have no effect and shall be deemed to have been cancelled". It was expressly agreed upon, vide paragraph (?) of each of the aforesaid agreements, that "the lessor shall be liable to pay the said sum of Rs.3,000 (rupees three thousand) per month to the lessee only as and when the same is received from the incoming tenant and shall not in any manner be deemed to be the personal liability of the lessor". The assessee-company, thereafter, on and from August 1, 1971, let the entire property (all the three floors of the building) and the appurtenant land to the Government of India, Department of Rehabilitation, Branch Secretariat at Calcutta, on monthly basis for a period of one year but renewable for a further period not exceeding five years at Re.0.85 per sq. ft. Comprised of Re.0.60 per month as occupation rent and Re.0.25 per sq. ft. for service charges for a covered area of about 14,296 sq. ft.
The Income Tax Officer, while scrutinising the particulars of the house property income furnished by the assessee for the assessment years 1982-83 and 1983-84, found that the assessee did not include in its computation a sum of Rs.72,000 being the sum paid by the assessee to the three partnership firms (the lessees), i.e., the sum agreed upon to be paid by the assessee out of the income receivable from the Government of India minus the lease-rent fixed in the original lease agreements dated May 6, 1966, as modified on September 16, 1966. In the assessment year 1983-84, the Income Tax Officer observed thus: ---
"In the details filed, the assessee has shown Rs.44,330.40 only as rent from 25A, Shakespeare Sarani, Calcutta. The assessee-company has, thus not disclosed the income to the extent of Rs.72,000. "
The Income Tax Officer by following the orders for the assessment years 1977-78 to 1980-81 included the said sum of Rs.72,000 in computing the house property income of the assessee for each of the assessment years under appeal.
Against the orders of the Income Tax Officer, the assessee appealed to the Commissioner of Income-tax (Appeals) who by following the appellate order for the assessment year 1981-82 deleted the addition of Rs.72,000 made in each of the, two assessment years under consideration.
Aggrieved by the order of the Commissioner of Income-tax (Appeals), the Department came up in appeal before the Tribunal. On a consideration of the submission of the rival parties and the evidence brought on record, the Tribunal held that there was no merit in the Department's appeals. The Tribunal observed that there is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. The Tribunal also noted that the agreement dated June 15, 1971, which the assessee entered into with each of the three lessees has not been found to be sham or ingenuine by the authorities below. The Tribunal held that the Income Tax Officer was not justified in including Rs.72,000 in the assessee's house property income as the said sum did not form part of the assessee's income by virtue of the agreement dated June 15, 1971, entered into by the assessee with each of the three lessees. The orders of the Commissioner of Income-tax (Appeals) were accordingly upheld.
Counsel appearing for the Revenue submitted that by entering into the agreement in 1971, the lessees of the appellant-company were benefited in earning substantial income for leasing out the entire property to an outside tenant which happened to be a Government Department. It is pointed out that the assessee was the owner of the property and, therefore, to terms of section 23(1) of the Income Tax Act, 1961, it was assessable in respect of the entire property income in accordance with the agreement entered into by the assessee with the Government of India, Department of Rehabilitation, as per the agreement dated July 30, 1971. The said agreement did not refer to the mutual agreement made by the assessee with the three lessees and consequently there was an application of income after the same was earned by the assessee in terms of the said agreement of July, 1971, with the Government of India. It is urged that the lessees surrendered their valuable right in the property, viz., enjoyment and possession of the three floors and thereby there was a surrender of a portion of the lease-rent of the assessee and payment made by the assessee to the lessees in terms of the agreement dated June 15, 1971, was on the capital field and consequently was not allowable in computing the house property income of the assessee. Reliance was placed on the decision of this Court in A. Gasper v. CIT (1979) 117 ITR 581.
It was, however, contended by learned counsel for the assessee that from a reading of the terms of the agreement dated June 15, 1971, it cannot be construed that the lessees had surrendered the right, title and interest as granted to them by the lessor in the original agreement dated May 6, 1966, as modified by the deed dated September 16, 1966. The deed of September .16, 1966 at page 2 reads "that without prejudice to the right, title and interest of the lessee in the said demised floor under the said lease, the lessee would concur in the grant of and allow the lessor to let out the entirety of the said premises including demised floor to and unto the said incoming tenant with effect from August 11, 1971, and that out of the rent received by the lessor from the said incoming tenant the lessor would pay to the lessee the sum of Rs.3,000 per month towards the lessee's share thereof". Reference was further made to the following observation in paragraph 4 of the agreement:
"Mutual covenants of the agreement shall not in any way suffer the rights and obligations of the parties hereto inter se under the said lease and the lessee shall continue to be responsible for payment of rent and other amounts and for observance of the lessee covenants under the said lease, save as expressly provided herein during the subsistence thereof. "
It is further pointed out that the tenancy agreement with the Government of India was a happening at a much later stage. According to paragraph 8 of the agreement, the lessor and the lessees agreed that the lessor shall authorise the lessee's agent or bank to collect the rent and service charges and the essence of the covenant in paragraph 8 is that in case the lessee so requires, the payment of the lessee's share in the rent and service charges to be received from the incoming tenants as aforesaid may be paid to the lessee directly without the same being first received by the lessor and then paid by the lessor to the lessee. Thus, counsel for the assessee concluded that in view of the terms of the agreement dated June 15, 1971, the rent could not form part of the assessee's income at all and the assessee merely collected the amount receivable by the lessee and the position of the assessee was that of a trustee on behalf of the lessee. Thus, there was a diversion of the income because the same never reached the assessee as its income. It was also pointed out that after the expiry of the lease period the assessee entered into a fresh lease agreement dated July 31, 1986, with the self-same three partnership-firms for a further period of twenty years commencing from the 1st day of August, 1986, on the increased rent of Rs.1,375 per month. In any case on the reading of the terms of the agreement and relying on the principles laid down by the Supreme Court in the case of CIT v. Sitaldas Tirathdas (1961) 41 ITR 367, it cannot be inferred that there was no diversion of income. Our attention was drawn in particular to the passage appearing at page 374 of the reports:
"Where by the obligation income is diverted before it teaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable."
We have heard the rival submissions. We find that the Tribunal was right in finding that the lease-rent payable as per the original agreement dated May 6, 1966, as modified by the deed dated September 16,1966, by each of the three lessees at Rs.1,000 per month has been deducted by the Income-tax Officer in computing the disallowable sum of Rs.72,000 as the Income Tax Officer worked out the disallowance of Rs.72,000 by deducting Rs.1,000 from the sum payable of Rs.3,000 as fixed in the agreement dated June 15, 1971, entered into by the assessee with each of the three partnership firms, i.e., Rs.3,000- Rs.1.000= Rs.2,000 x 3 x 12= Rs.72,000. He considered the extra sum paid of Rs.2,000 to each of the three lessees as an application of income, on the ground that the same was paid after the income was earned by the assessee. In fact, before the agreement with the Government of India for renting out the entire premises was executed, the assessee entered into three separate agreements with the lessees for obtaining vacant possession of the building in order to fetch higher rental income from the tenant, i.e., the Department of Rehabilitation, Branch Secretariat, Government of India. The agreement dated June 15, 1971, which the assessee entered into with each of the three lessees had not been found to be sham or ingenuine by the authorities below. That being so, we hold that the Income-tax Officer was not justified in including Rs.72.000 as the assessee's house property income as, in our opinion, the said sum did not form part of the assessee's income by virtue of the agreements entered into by the assessee with each of the three lessees dated June 15, 1971.
The Tribunal was correct in taking the view that it was not a case where the assessee could be said to have received the entire rent as its income before it parted with it in favour of the lessees so as to constitute application of income. It cannot be said that the interpretation of the agreement dated June 15, 1971, by the Tribunal was erroneous or improper. The Tribunal was, therefore, justified in holding that the said sum of Rs.72,000 did not form part of the assessee's income.
We therefore, answer the question in the affirmative and in favour of the assessee and against the Revenue.
There will be no order as to costs.
SHYAMAL KUMAR SEN, J.--I agree.
M.B.A./1079/FReference answered.