I.T.AS. NOS. 992 TO 995/LB OF 1988-89, DECIDED ON 13TH AUGUST, 1995. VS I.T.AS. NOS. 992 TO 995/LB OF 1988-89, DECIDED ON 13TH AUGUST, 1995.
1996 P T D (Trib.) 122
[Income-tax Appellate Tribunal Pakistan]
Before Nasim Sikandar, Judicial Member and Khalid Mahmood Accountant
Member
I.T.As. Nos. 992 to 995/LB of 1988-89, decided on 13/08/1995.
(a) Income Tax Ordinance (XXXI of 1979)---
----Ss. 19 & 59(1)---Income from house property---Estimation of annual value and its assessment in the hands of owner---Principle---Where the owners of the property had declared much reduced rate of rent as against the one which the property was admittedly fetching and no rental value was declared by the owners in respect of the space occupied by the lessee company, assessment framed under S.59 (1), Income Tax Ordinance, 1979, held, was both erroneous and prejudicial to the interest of revenue.
The provisions of section 19 of the Income Tax Ordinance provide that the "annual value" of a property is chargeable under the head income from house property. The definition of "annual value" under subsection 2(b) of this section makes it further clear that the value so assigned is notional. However, proviso to this subsection clarifies that such notional value cannot be less than the actual rent payable by the tenants. Since the annual value is relatable only to the building owned by an assessee the value assessable shall comprise the amount which even a sub-lettee or a sub-tenant pays for its occupation. Looking at it from another angle it can be safely said that for the purposes of proviso to section 19(2)(b) recipient of the rent does not matter at all when it comes to determine the actual rent being received in respect of a house property. Section 19 of the Income Tax Ordinance, with regard to assessment of annual value does not maintain a distinction between a tenant and a sub tenant- The value envisaged by this section necessarily being a notional value whatever is received as rent of a building has to be taken into account without regard to the recipient, be it the owner or a middle man, a lessor different from the owner or even a sub-lessor. Use of words "deemed" and "expected" in section 19(2)(b) indicates discretion in the assessing officer while estimating annual value in respect of a house property. Only two restrictions on such discretion are inbuilt in the said subsection and its proviso viz. where the house property is not let on rent the estimated value shall be the sum for which the property might reasonably be expected to be from year to year and when rented out it shall be in no case less than the actual rent being received from the tenants. Use of phrase "from year to year" again implies that the deemed sum expected as rent is not perennial and has to be determined fixed or considered in pace with the changes in market forces which influence rent rate. In this aspect Rent Restriction Laws will have no application, nor these provisions will be defeated or changed by an agreement to the contrary between tenants and Landlords.
Section 19 of the Ordinance gives an Assessing Officer quite a free hand in determining the annual value of a property within the parameteres of the provisions contained therein. He can make his own estimate keeping in view various factors which have a bearing on letting out a particular property. This situation would not arise in the case if revising authority adopted the rent as the "annual value" of the building which was actually being paid by the sub tenants. Nothing could be more, fair. Since its notional value at the same time, he was justified in "deeming" that rent also accrued to the owners from the space occupied by the lessee though actually no rent was paid by them. Also he acted well within his jurisdiction to hold that nature of income, though from same building, was different for the purpose of assessment. In the hands of owners annual value of the property is chargeable under the head income from house property but will be income from business in the hands of the lessee. The owners cannot complain of alleged double assessment if they themselves created an artifice for their convenience or with any other motive. Such like "agreements" in which parties entangle themselves produce results converse to those intended or desired.
In case of fixation of rent, a number of factors are taken unto account. Receipt of non-adjustable advances by owners definitely means settlement of rent at a comparatively lower rate. The revising authority therefore acted extra gracious in not taking into consideration the admitted fact that huge amounts of interest free advances were taken and retained by the owners implying thereby that the property in question could have been rented out still at a higher rate compared to the one which was being received through the lessee.
The assessments framed under section 59(1) of the Ordinance would rightly be considered both erroneous and prejudicial to the interest of revenue inasmuch as owners declared much reduced rate of rent as against the one which the building was admittedly fetching. These assessments would also be prejudicial to the interest of revenue as no rental value was declared by the owners in respect of the space occupied by the lessee company. The annual value of a building certainly includes all the rentable portions of the property though actually no rent is received in respect of such portion.
1969 PTD (Trib.) 144; (1982) 138 ITR 518 re: H.H. Maharaja, Raja Pawer Dewas v. C.I.T.; Duke of Westminster v. Commissioners of Inland Revenue 19 Tax Cases 490; C.I.T. Gujrat v. A. Raman and Company(1968) 67 ITR 131; I.T.R. Chandhry v. C.I.T. Chittagong 1986 PTD 37; (1978) 113 ITR 136; Additional Commissioner of Income-tax, Madras v. Mrs. Leela Govindan (1981) 131 ITR 435; Mrs. Sheila Kaushish v. C.I.T. Delhi (1981) 131 ITR 435; Amlok Ram Khosla v. C.I.T. Delhi 11 (1981) 131 `ITR 589 and 1989 PTD (Trib.) 859; 1992 PTD (Trib.) 161; M. Rahman Income Tax Officer and others v. Narayanganj Company Private Limited (1971) 23 Tax 223; 1985 P3'D (Trib.) 247; Union Council, Ali Whan, Sukkur v. Associated Cement Private Limited 1993 SCMR 468; The President of Pakistan v. Mr. Justice Shaukat Ali PLD 1971 SC 585 and Indra Narayan Roy v. The State AIR 1963 Cal. 64 ref.
(b) Interpretation of documents-
----Any document executed between two parties does not bind a third party.
Muhammad Ali Khan with Ch. Akhtar Saeed, Bar-at-Law, L.A. for Appellant.
Qaiser M. Yahya, DR. for Respondent.
Date of hearing: 14th February, 1995.
ORDER
These four appeals for the assessment years 1984-85 to 1987-88 question the vires of the action taken under section 66-A of the, Income Tax Ordinance. The prayer is that the assessments so farmed be set at naught and the original orders passed under section 59(1) of the Ordinance restored.
2. The assessee appellant is one of the four co-owners of a commercial building known as "Escort House" 26 Davis Road, Lahore raised at an area of 1 kanal 4 marlas. The other three owners of equal share being her father, mother and sister. The building was constructed in the year 1979. Soon after the construction it was leased out to M/s. Escort Private Limited at a rate of Rs.1.50 per sq. ft. plus Re.0.50 for maintenance charges. This private limited company per Revenue version comprises of only four share holders who are also co-owners of the building. The lease agreement witnessing the arrangement was executed on 5-3-1979. According to terms of this agreement the lessee M/s Escort Private Limited would pay rent for the whole building at the aforesaid rate excluding the area in its own use and occupation. It was further agreed that the lessee company could sub-let the remaining building to other tenants. This agreement, statedly, was initially made for a period of five years but subsequently extended for another two years.
3. The lessee company thereafter further rented out the premises to various tenants at different rates and the amounts received from them were duly disclosed to the Revenue and assessed in its hands in the period relevant before us, 1984-85 to 1987-88. The assessee declared her 1/4th share in the total rent received from M/s. Escort Limited at Rs.4,09, 032 as income from property. After making statutory deductions it was accepted under section 59(1) of the Ordinance respectively at Rs.39,134, Rs.39,134 Rs.24,598 and Rs.26,500. On 19-6-1988 she was served with a notice under section 66-A of the Income Tax Ordinance, 1979 informing her the intention of the Revenue to revise the assessments in the years 1984-85 to 1987-88 on the ground that ALV for the purpose of declaration of income from. property had grossly been understated and the lease agreement with M/s. Escort Limited was a collusive arrangement. It was further indicated that the ALV of the building in question could not be less than the amounts received as rent by lessee M/s. Escort Limited in view of the provisions of section 19(2) (b) of the Ordinance. In reply to this notice a number of legal and factual submissions were made. None of these submissions, however, was considered valid and therefore the Revising Authority proceeded to assess the income of the assessee from house property at Rs.1,46,132, Rs.1,62,205, Rs.1,87,607 and Rs.178,655 in the four years involved. The total amount of gross rent estimated included the sums at Rs.1,50,168, Rs.1,87,572 Rs.1,87,572 and Rs.1,87,572 as having accrued to the assessee from the aforesaid lessee company for the space occupied by it. It may be repeated that all the four owners had earlier received and declared Rs.4, 09, 032 each as rent received in the four years in question under the lease agreement whereas M/s. Escort Limited collected gross rent from tenants respectively at Rs.7,63,860, Rs.8,06,818, Rs.9,35,753 and Rs.9,16,770.
4. Parties have been heard. Learned counsel for the assessee contends that the Revising Authority, Additional Commissioner, Service Wing Companies, Lahore erred both in law and fact when he held the lease agreement to be a sham transaction; that the lease agreement being a legal and genuine document could not be taken exception to when both the lessor as well as the lessee faithfully declared the rents received by them and therefore no prejudice to revenue had at all resulted; that per provisions of section 19(1) (b) it is the notional ALV and not the actual rent which is assessable in the hands of the owners; that a tax, payer is at liberty to take all legal measures to minimize the tax burden which must be distinguished from tax evasion; that order passed under section 59(1) of the Ordinance could only be reopened in accordance with the provisions contained in Section 65 of the Ordinance read with para 9 of SAS for the relevant years and that one and the same amount of rent had been assessed twice, once in the hands of the owners and then in the hands of the lessee company M/s. Escort Limited. It is also claimed that the assessee as well as rest of the co-owners received other benefits by entering into lease agreement which included payment for bulk electricity supplies etc; that the owners received and retained interest free advances from the tenants to the tune of Rs.17,00,000 in 1985-86 increased to Rs.19,00,968 in 1987-1988. Finally, that the settled rate with the assessee company M/s. Escort Limited was a fair rent when seen from the angle of the real Estate market at the relevant time and could not be disturbed or taken exception to by the Revenue Authorities as Rent Restriction Law forbids any increase or deviation from the settled rent during the currency of lease agreement. Thus it is argued that the assessment orders framed under section 59(1) of the Ordinance being neither erroneous nor prejudicial to the interest of Revenue could not be revised at all.
5. Barrister Ch. Saeed Akhtar learned Legal Advisor speaking-for the Revenue states that the lease agreement when seen in the perspective of the fact that real owners of the building in question are also the only four share holders in the lessee company establishes the fact beyond doubt that this agreement was a mere facade engineered with the sole object of evading the tax liability. According to him the only question to be decided in this case is whether the Additional Commissioner in the given circumstances could pierce the corporate veil in order to judge the real nature of the arrangement concluded as a lease agreement; that a company in spite of being a legal entity acts through its Directors who are natural persons and they are both owners of the building as well as the "owners" of the lessee company by reason of their holding its 100% equity or the issued capital. According to learned counsel for the Revenue it is the Directors and not the company as such which can be held for a felony and this fact also proves that persons on the wheel, the Director or Managers of the company and not a vehicle is held responsible fog regular Tory violations. To him the Additional Commissioner having found that owners had veiled themselves in the cloak of a corporate entity justifiably lifter it to see their faces. As to the objection of alleged double assessment he argue: that it is not the assessee but the company which could raise this question and that there being no estopple against law the Revenue could always exercise it; legal powers to plug the avenues of tax evasion whenever it comes to its knowledge. Explaining the reason as to why action was taken only in the four years and not in the earlier years it is stated that the earlier assessment years having gone beyond the prescribed time barrier only those in question were revised to bring back what legitimately belonged to the Revenue.
6. Learned counsel for the assessee in support of his aforesaid contentions has relied upon a number of decisions from this Tribunal as well as those of the superior Courts from local and foreign jurisdictions. The cases reported as 1969 PTD (Trib.) 144 and (1982) 138 ITR-518 re; H.H. Maharaja Raja Pawer Dewas v. C.I.T. have been cited in favour' of the submission that revisional jurisdiction of the IAC is subject to the condition that the assessment order is not only erroneous but also prejudicial to the interest of Revenue. Therefore fulfilment of only one condition would not attract the provisions of section 66-A. CBA Circular No.15 of 1967 dated September 4, 1967 had been quoted to say that completed assessments under SAS should not be reopened except where there has been reasonable belief that the tax payer had concealed his income or had committed any fraud. Learned counsel has also pleaded that per clause 9 of the Self-Assessment Schemes 'for the years relevant before us only those cases could be denied the benefit of SAS wherein positive evidence of concealment existed or came into possession of the department. Advancing his arguments further learned counsel contends that firstly, the assessments framed in the case of the assessee were not at all erroneous inasmuch as the assessments were framed under SAS without proper application of mind. According to him no mistake or error can be committed without a conscious commission. To support his submissions that a legal contract between the parties should be given due respect and that every assessee has a right so to dispose of his capital and income as to attract upon him the least amount of tax support is sought from certain observations of Lord Atkin as contained in 19-Tax-Cases-490, Duke of Westminster v. Commissioners of Inland Revenue. The other case cited on the subject is CIT, Gujrat v. A Raman and Company (1968)-67-ITR-11 wherein Supreme Court of India held that "avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited". A reported decision of the High Court of Bangla Desh cited as (1986 PTID 37) Re: E.R. Chaudhry v. CIT Chittagong is also relied to assert that the lease agreement in question being a genuine and legal document could not be disbelieved on the ground that both the owners as well as the lessee company were one and the same person. In that case a Division Bench of the High Court of Bangla Desh found that apparent state of affairs should be taken real unless the contrary is proved. Therefore, he continues, without bringing on record the alleged intended evasion, the authority could not hold the lessee company to be a mere facade acting for owners of the building. The recitals of the lease agreement are supported by (1978) 113 ITR 136 re; Additional Commissioner of Income tax Madras v. Mrs. Leela Govindan wherein it was held, "as it could not be said that the rent fixed under the lease deed was not genuine or had been fixed under the lease deed at a lower figure for some ulterior reason or other, it is open to the revenue to ignore the rent actually received by the assessee who could not claim more than that by reason of the lease deed subject to which alone he purchased the property and contend that the income should be computed on the basis of the annual value of the property which probably had been arrived at by the local authority on (he basis of the rent received by the assessee." On application of Rent Restriction Laws and their impact on the lease agreements between tenants and the owners support is sought from (1981) 131 ITR 435 re: Mrs. Sheila Kaushish v. CIT Delhi, wherein their Lordships of the Supreme Court of India held that under section 23(1) of the Income Tax Act, 1961' (as it stood prior to amendment in 1975) only value of the building would be the standard rent determinable under the provisions of Rent Control Act and not the actual rent received by the land lord from the tenants. Another case on the subject from Supreme Court of India re: Amlok Ram Khosla v. CIT Delhi-II (1981) 131 ITR 589 is relied wherein it was stated that annual value of a house belonging to the assessee had to be determined on the basis of standard rent determinable under the provisions of the Rent Control Act. Two reported decisions of this Tribunal (1989 PTD (Trib.) 859) and 1992 PTD Trib 161 are cited to support the submission that one and the same income was assessed twice, once in the hands of the owners and then the lessee company. Learned counsel has also relied upon the case of M. Rahman, Income Tax Officer and others v. Narayanganj Company Private Limited (1971) 23 Tax 223 wherein the Supreme Court of Pakistan confirmed an order of the High Court wherein it was held that once members of an association have been individually charged to tax it is not open to the Income Tax Authorities to again assess the same income as the income of the association. A Single Bench order cited as (1985 PTD (Trib.) 247) has also been referred to wherein it was held that the ITO before making addition of deemed interest income should have first completed the assessment and then taken requisite action under section 65 of the Ordinance if it was necessary.
7. Learned Legal Advisor for the Revenue on the other hand relies upon 1993 SCMR 468 re: Union Council, Ali Whan, Sukkur v. Associated Cement Private Limited. It is a marvellous piece of legal literature wherein their Lordships have detailed the facts and circumstances when the device of lifting the veil of incorporation can be invoked. The other case cited on the issue is PTD 1971 SC 585 re; The President of Pakistan v. Mr. Justice Shaukat Ali. The third case relied upon by learned Legal Advisor is AIR 1963 Calcutta 64 re: Indra Narayan Roy v. The State wherein it was held that where the control over the funds of a company is vested in the Board of Directors, but in fact it is the Chairman of the Board of Directors who exercises effective control over the funds, in such a case, it is the Chairman and not the Board of Directors who will be in the position of a trustee, and if he deals with the funds in a manner which is beyond his power, he will be guilty of the offence of criminal breach of trust." This case has been relied upon to state that company, an artificial juridical person acts only through natural persons who can be held responsible for arranging the affairs of the company for their ulterior motives.
8. After hearing the respective contention of the parties we have gathered that these are necessarily misdirected. It is not a case where lifting of corporate veil was required nor the impugned order solely rests upon this proposition. According to the revised assessment orders; "the inquiries made in this behalf have revealed that much higher rents have been received in respect of such property than those disclosed to the department for assessment purpose causing thereby heavy loss of revenue. In such case provisions of Section 66 A can be invoked and there is no bar in doing so to revise the loss of revenue." If lifting of corporate veil was the only reason then the contention of the assessee would have been correct that after revising the assessments in the case of the assessee (and rest of the co-owners of the building) the assessments made in respect of the lessee company ought to have been cancelled. The Revising Authority apparently never intended nor expressed lifting of corporate veil. The aforesaid being predominant reason for revising the assessments it cannot be held to be a case of either double assessment or mere lifting of corporate veil. It also needs emphasis that actual amount of rent is material only as a restriction because ALV of a building cannot be less than that amount.
9. It is not a case requiring settlement of question whether there has been an evasion or avoidance of tax either. It is simply a case of estimation of Annual Value and its assessment in the hands of the owners. To be more precise, it is not even an estimation 'which is in question here because admittedly the building is fetching a particular amount of rent, though through an intermediary, which has been assessed in the hands of the owners on the ground that the Annual value of the building could not be less than that which was being actually paid by the tenants. The provisions of Section 19 of the Income Tax Ordinance are relevant here which provide that the. "Annual Value" of a property is chargeable under the head income from property. The definition of "annual value" under subsection 2(b) of this section makes it further clear that the value so assigned is notional. However, proviso to this subsection clarifies that such notional value cannot be less than the actual rent payable by the tenants. Since the annual value is relatable only to the building owned by an assessee the value assessable shall comprise the amount which even a sub-letter of a sub-tenant pays for its occupation. Looking at it from another angle it can be safely said that for the purpose of proviso to section 19(2)(b) recipient of the rent does not matter at all when it comes to determine the actual rent being received in respect of a house property. Section 19 of the Income Tax Ordinance, with regard to assessment of annual value does not maintain a distinction between a tenant and a sub-tenant. The value envisaged by this section necessarily being a notional value whatever is received as rent of a building has to be taken into account without regard to the recipient, be it the owner or a middleman, a lessor different from the owner or even a sub-lessor. Use of words "deemed" and "expected" in section 19(2) (b) indicate discretion in the assessing officer while estimating annual value in respect of a house property. As said above only two restrictions on such discretion are inbuilt in the said subsection and its proviso viz where the house property is not let on rent the estimated value shall' be the sum for which the property might reasonably be expected to let from year to year and when rented out it shall be in no case less than the actual rent being received from the tenants. Use of phrase "from year to year" again implies that the deemed sum expected as rent is not perennial and has to be determined fixed or considered in pace with the changes in market forces which influence rent rate. In this aspect Rent Restriction Laws will have no application, nor these provision will be defeated or changed by an agreement to the contrary between tenants and landlords.
10. Section 19 of the Ordinance gives an assessing officer, quite a free hand in determining the annual value of a property within the parametres of the provisions contained therein. He can make his own estimate keeping in view various factors which have a bearing on letting out a particular property. This situation did not arise in this case as the Revising Authority adopted the rent as the "annual value" of the building which was actually being paid by the sub-tenants. Nothing could be more fair. Since it is a notional value at the same time, he was justified in "deeming" that rent also accrued to the owners from the space occupied by the lessee company M/s. Escort Limited though actually no rent was paid by them. Also he acted well within his jurisdiction to hold that nature of income though from same building was different for the purpose of assessment. In the hands of owners annual value of the property is chargeable under the head income from house property but will be income from business in the hands of the lessee company. The owners cannot complain of alleged double assessment since they themselves created an artifice for their convenience or with any other motive. Instances are not lacking in law where such like "agreements" enmesh in the parties resulting in results converse to those intended or desired. In Professor Kahan Freund's words as recorded by LCB Gower in Principles of Modern Law (Second Edition) page 66 "sometimes corporate entity works like a boomerang and hits the man who was trying to use, it."
11. To us rather it appears that the Revising Authority has been quite generous in accepting the actual rent payable by the tenants as the ALV of the building in question. In fact he could have gone one step further and made his own estimate of annual value in view of the admitted interest free advances which the assessee received from tenants directly or through the lessee company. In case of fixation of rent, a. number of factor are taken into account. Receipt of non-adjustable advances by owners definitely means settlement of rent at a comparatively lower rate. The revising authority therefore acted extra gracious in not taking into consideration the admitted fact that huge amounts of interest free advances were taken and retained by the owners implying thereby that the property in question could have been rented out still at a higher rate compared to the one which was being received through the lessee company M/s. Escort Limited.
12. The assessments framed under section 59(1) of the Ordinance were rightly considered both erroneous and prejudicial to the interest or revenue inasmuch as owners declared much reduced rate of rent as against the one which the building was admittedly fetching. These assessments were also prejudicial to the interest of revenue as no rental value was declared by the owners in respect of the space occupied by the lessee company M/s. Escort Limited. The annual value of a building certainly includes all the rentable portions of the property though actually no rent is received in respect of such portions.
13. Since in our view the assessments framed in the four years under review were both prejudicial to the interest of revenue as well as erroneous, the aforesaid reported decisions relied upon by the assessee have no application at all. We are also not impressed by the other submissions made in this connection that assessments framed under section 59(1) having been made without application of mind could not be termed as erroneous because errors are not made by commissions only. These are made by omissions as well. CBR Circular No.15 of 1967 relates to reopening of assessment under section 65 of the Ordinance and therefore is not attracted to the facts before us. Para. 9 of SAS of the relevant years relates only to concealment cases, which come to the notice of the department "during the pendency of the assessments" The other contention of the learned counsel for the assessee that assesses are permitted under law to contrive a device from which some tax burden can be avoided is granted on the face of it. Therefore, the reliance on the observations of Lord Atkin in the above noted case as also other reported decisions cited in this regard need no discussion. However, as said earlier the facts before us are not of a case of simple distribution of income. The assessee alongwith other co -owners admittedly received the assessed amounts of rent though there was an intermediary created for this purpose. Their intention as such is not a moot point since we are concerned only with the annual value of the property, which is to be deemed to have accrued to the assessee irrespective of the mode it passed through. Therefore, to us the question whether any income was evaded or avoided is not directly in issuance we consider it appropriate to rule upon it. As far extending claimed respect to lease agreement, any document executed between two parties does not bind a third party much less to say of the Revising Authority.
14. Repeated reference to- section 5 of the Urban Rent Restriction Ordinance, 1959, which provides for cases in which further increase in fair rent is admissible is also impertinent. The provisions of Rent Restriction Laws regulate relationship between tenants and their landlords and are enforced to protect the interests of tenants. Provisions of such like legislations do not in any way regulate the conduct of parties which are not placed in such relationship nor these in any way restrict the jurisdiction of an assessing officer to estimate annual value of a house property in accordance with provisions contained in section 19 of the Ordinance. The reported decisions cited on the issue, therefore, are hardly of any significance.
15. This being so, we find no infirmity in exercise of jurisdiction and the resultant revision of the assessments framed in the aforesaid years. All the four appeals shall therefore, be dismissed.
A.A./136/T
Appeals dismissed.