W. T. A. NO. I I00/LB OF 1996, DECIDED ON 30TH APRIL, 1999. VS W. T. A. NO. I I00/LB OF 1996, DECIDED ON 30TH APRIL, 1999.
1999 P T D (Trib.) 2875
[Income-tax Appellate Tribunal Pakistan]
Before Mahmood Ahmad Malik, Accountant Member and Khawaja Farooq Saeed, Judicial Member
W. T. A. NO. I I00/LB of 1996, decided on 30/04/1999.
(a) Wealth Tax Act (XV of 1963)--
----S.2(5)(ii)---Assets---Letting out and leasing out ---Connotation-- Contention was that the term "letting out" would not include "lease of property" and that since the property in question had been given on 99 years' lease, it was outside the purview of "assets" and, therefore, not liable to tax---Validity---Term "assets" as per S. 2(5) (ii) of the Wealth Tax Act, 1963 includes immovable property, held, inter alia, for the purpose of letting out or business of letting out of property---Term "let out" would include the "leasing out" of the property.
1993 PTD (Trib.) 1378 and 1988 PTD (Trib.) 585 ref.
(b) Wealth Tax Act (XV of 1963)--
----Ss.2(5)(ii) & 4(5)---Assets---Net wealth to include certain assets-- Assessee leased out property for a term of 99 years---Lease was revocable under certain circumstances---Lessee was not allowed to use the premises for any purpose other than specified---Asset -was assessed in the hands of assessee by the Assessing Officer ---Validity---Asset was rightly charged to tax as the lease was not irrevocable.
1993 PTD (Trib.) 1378 rel.
(c) Wealth Tax Act (XV of 1963)---
----Ss.2(5)(ii) & 4(5)---Capital Value Tax ---Assessee/lessor leased out property for a term of 99 years---Lease was revocable under specified circumstance---Property was included in net wealth of assessee/lessor-- Contention was that the law recognised a long transfer of right to use in the nature of transfer of ownership on the ground that Capital Value Tax was charged in the hands of lessee where right to use was transferred for more than twenty years---Validity---Law governing Capital Value Tax did not say that ownership will pass on to the person who acquired right to use an asset for more than twenty years---Law of Capital Value Tax only provided for levy of a tax in such a situation and it did not infer any right of ownership.
(d) Wealth Tax Act (XV of 1963)---
----Ss.2(m) & 2(16)--Wealth Tax Rules, 1963, R.8(3)---Net wealth---Debt owed---Advance rent---Annual letting value of the property was not accepted and was estimated without approval of the Inspecting Additional Commissioner---Portion of advance rent utilized towards the construction of building was considered as admissible liability and a part of advance rent was not allowed as liability on the ground that construction of building was completed before the advance rent was received--Validity---Order was set aside by Tribunal with observations that assessment order suffered two defects; firstly,- annual letting value had been estimated without prior approval of Inspecting Additional Commissioner as required under proviso to R. 8(3), Wealth Tax Rules, 1.963 and assessee was not provided reasonable opportunity to explain his -point of view regarding claim of liabilities-- Assessing Officer was directed that a de novo order be passed and valuation was -made as per facts and circumstances and in accordance with the provisions of law. [p. 2884JD
1993 PTD (Trib.) 1378; 1994 PTD (Trib.) 779 and 1988 PTD (Trib.) 585 ref.
Muhammad lqbal Khawaja for Appellant.
Muhammad Asif Hashmi, D.R. for Respondent.
Date of hearing: 29th January, 1999.
ORDER
MAHMOOD AHMAD MALIK (ACCOUNTANT MEMBER), The appellant is a company limited by guarantee. The present appeal has been filed regarding valuation for wealth tax purposes of multi-storeyed commercial building owned by the assessee. The building is situated at Khayaban-e-Awan-e-lqbal, Lahore. The appellant is aggrieved against the order of the learned CIT(A) whereby rejection of annual rent received from the banks ,has been upheld. Similarly, the appellant has challenged the order of the learned CIT(A) whereby disallowance of liabilities payable to banks on account of advance rent received has been upheld. The appellant has also challenged the learned CIT(A)'s order in upholding the order of the W.T.O. regarding rejection of annual lease amount received from the Members of the Stock Exchange. As an alternative ground of appeal the estimation of G.A.L.V. and the consequential valuation of properties made by the W.T.O. as upheld by the learned CIT(A) have been contested to be excessive and uncalled for.
2. The brief facts of the case are that the space in the above referred property had been rented out to some banks. Space was also provided to the members of Lahore Stock Exchange under 99 years lease arrangement. Return was not filed suo motu. In response to notice under section 14(2) the wealth tax return was filed in which computation of net wealth was arrived at as under:---
| | Rent received | Rs.2,007,460 |
| Value | 12 times | Rs.24,089,520 |
| | Less liability of advance rent | Rs.13,744,276 |
| | Net wealth | Rs.10,345,244 |
The land on which property has been built was allotted in 1985 and the purchase price was paid at Rs.3,585,669. The construction was completed before 30-6-1992. As per copy of rent agreement total space was 6853 sq. ft. on Mozzanine and Ground floor. The average rent of the two floors rented out to various banks was at Rs.21,60 per sq.ft. The agreement with the banks was for a period of three years and the rent was obtained in advance for the entire period. Since the entire rent for a period of three years was received in advance the D.C.W.T. was of the view that the rent agreement had been made at concessional rate. He accordingly applied a rate of Rs.23 per sq. ft. The value of portion rented out to the banks was, thus, worked out at Rs.22,697,136.
3. The, space of 57157 sq. ft. available on different floors was rented out to 129 members of the Stock Exchange. The lease rentals of 99 years was obtained, in advance amounting to Rs.11,260,049. The assessee claimed that the said amount was utilized in construction of the building. As per accounts of the assessee, lease rentals are included in the current income on time proportion basis over the lease period and the unadjusted amount of bank rental is classified under deferred liabilities. Apart from lease rental the assessee is also charging ground rent from members of the Lahore Stock Exchange @ Rs.1 per sq. ft. per quarter. The assessee has shown the A. L. V. as under:---
| ALV | Rs. 230,356 |
| 12 times (230356 x 12) | Rs. 2,764,272 |
| Liabilities for unadjusted advance rental | Rs. 10,966,620 |
| Deficit wealth | Rs.8,202,348 |
It was stated by the Assessing Officer that as compared to average per sq. ft. rent of Rs.21,60 p.m. from banks the average rent from the members worked out to Rs.0.16 only for lease rentals and at Rs.0.33 by including ground rent also. Accordingly the appellant was confronted through a specific notice under section 16(3) for estimation of value @ Rs.15 per sq. ft. p.m. In reply the assessee submitted the following explanation:---
"The reason for charging lower rent from the members is that the premises were leased out to them for an irrevocable term of 99 years as per lease deeds. In the circumstances of the case, there is no reason to estimate at a higher rate the gross annual letting value of property leased out to Members. "
The Assessing Officer held that the explanation put forth by the assessee does not derive any support from the wealth tax law/rules. After discussing this fact in detail the Assessing Officer discarded the explanation and estimated the rent at Rs.15 per sq. ft. for an area of 53157 sq. ft. and accordingly annual value worked out to Rs.98,767,296. Total wealth was thus calculated at Rs.121,464,432.
4. Total liabilities were claimed by the appellant at Rs.13,744,277 which were as under:
| Advance rent from banks | Rs. 2,777,656 |
| Advance rent from Members | Rs. 10,966,620 |
It was pleaded by the learned A.R. before the Assessing Officer that the advance rent was utilized in construction of building. The appellant was confronted through a reported decision of this Tribunal cited as 1993 PTD (Trib.) 1378 and 1994 PTD (Trib.) 779 that unadjusted amount of advance rent is not classifiable as debt-owed. It was further stated by the Assessing Officer that before receipt of advances from the banks the construction of main building stood completed. The learned A.R. in his reply stated that the decision cited by the department was not applicable and the learned A.R. quoted a decision of the Full Bench cited as.1988 PTD (Trib.) 585 whereby it was held that the advance rent utilized in the construction of building amounts to debt owed. On scrutiny of record the D.C.W.T. found that the advance rent received from Members was utilized towards the construction of building but the advance rent was received from banks on 16-12-1991, 15-10-1992 and 31-12-1992 whereas the construction of main building rented out stood completed before 30-6-1992. It was also held that the advance rent received from Prime Bank was utilised towards the construction But the advance rent was received from the other two banks namely M.C.B.L. and U.B.L. after completion of the portion of the building rented out and therefore the advance rent pertaining to these two banks was not considered as admissible liability. After discussing some other details the net wealth of the appellant was worked out as under:---
| Total wealth|Rs. 121,464,432 |
| Less:LiabilitiesRs. 12,626,740 |
| |
| Net wealth|Rs. 108,837,692 |
| Less:Basic exemptionRs. 1,000,000 |
| |
| Taxable wealth|Rs. 107,837,692 |
5. The appellant being aggrieved preferred appeal before the First Appellate Authority. The learned CIT(A) upheld the valuations made by the Assessing Officer. The disallowance of liabilities amounting to Rs.1,117,536 was also considered to be justified and confirmed.
6. The learned A.R. reiterated the arguments put forth before the authorities below. He took up the line of arguments to contend that the portion of the building that had been given on 99 years lease to the members of the Lahore Stock Exchange was in fact not liable to be included in the taxable wealth. He contended that as per the definition of "assets" given in section 2(5)(ii), in case of a firm, an association of persons or a body of individuals, a company etc. such immovable property would be included in the ambit of "assets" as inter alia is held for the purposes of letting out, or business of letting out of property. The learned counsel stated that the term "letting out" would nor include lease of property and that since the property in question had been given on 99 years lease, it is outside the purview of assets" and is, therefore, not liable to tax.
7. The learned A.R. also referred to the provisions of capital value tax whereby tax is payable on the capital value of assets by every individual, A.O.P., firm or company which acquires by purchase an asset or right to the use thereof for more than twenty years. He argued that an asset transferred for along lease period of 99 years would not be included in taxable wealth.
8. He further referred to subsection (5) of section 4 which reads as under:
"The value of any assets transferred otherwise than under an irrevocable transfer shall be liable to be included in computing the not wealth of the transferor."
The learned A.R. stated that the Lahore Stock Exchange had irrevocably leased out the rooms to the members and, therefore, the value of such rooms is not liable to be included in computing the net wealth of the Lahore Stock Exchange. Another argument put forth on behalf of the appellant is that value of immovable properties is estimated under Rule 8(3) and the second proviso to this Rule states that any amount by quay of advance or security which is not adjustable against the rent payable by the tenant shall be taken into consideration for determining gross annual rental value. The learned counsel submitted that since the advance lease rent amounting to Rs.11,260,049 had been received from the lessees by the appellant/assessee and this advance was adjustable against annual rent, no estimate of the value of the subject property is called for. The learned counsel further stated that the declared rent had been accepted in the case of the assessee in Income-tax assessment and, therefore, valuation on the basis of estimated A.L.V. was not justified. The learned A.R. also pointed out that the estimated A.L.V. made by the Deputy Commissioner of Wealth Tax was also sustainable because the statutory requirement of approval from I.A,C. as down in the third proviso to Rule 8(3) had not been fulfilled.
9. The leaned A.R. also referred to some case law. The first referred to is 1996 PTD (Trib.) 114 where it was held as under:---
"If there is mere transfer of a right to enjoy an immovable prop but there is no price, premium, money, service or other thing to so rendered as called the rent the transaction shall not be treated lease---such property does not fall within the purview of 'asset' defined in section 2(e)(ii), Wealth Tax Act, 1963. "
The second case relied upon on behalf of the appellant is 1988 PTD (Trib.) 585 wherein it was stated that plain dictionary meaning of the word "let" to grant use of for rent. It was further stated in this decision that a lease immovable property is a transfer of right to enjoy such property but it should be to the exclusion of others.
10. The learned D.R. on his part supported the orders of the authorities below for the reasons recorded therein.
11. We have examined the arguments put forth on behalf of both the parties. The argument of the learned counsel of the assessee that the portion of the building leased out should be excluded from the "assets" of the appellant assessee has not convinced us. The Learned A.R. tried to make a distinction between "giving on rent" and "leasing out" and to over that while in renting out a property, the ownership remains with the landlord in the case of "leasing out" the ownership of the immovable property does not remain with the lessor but it passes onto the lessee who can sell his lease-hold rights. We cannot subscribe to this view. Firstly, because the assessee has itself declared the asset in the wealth tax return through the appellant disputes its valuation. Secondly as per section 3 of the Wealth Tax Act, wealth tax is charged in respect of the net wealth or assets of an assessee, and according to section 2(16) "net wealth" means the amount by which the aggregate value of all assets belonging to the assessee is in excess of aggregate value of all the debts owned by him. The term "assets", as per section 2(5)(ii) includes immovable property held inter alia for the purposes of letting out or business of letting out of property. The term "let out" would include the leasing out of the property. It 'is rather redoxical that while making this observation we find support from the second case cited as 1988 PTD (Trib.) 585 referred to by the learned counsel of the appellant. The argument of the learned A.R. chat according to this case the dictionary meaning of the word "let" is to grant use of for rent is unexceptionable. But the learned Full Bench has also held that the word "let" is equivalent to the meaning of the word "lease". A reproduction of a portion from this decision would elaborate the issue:---
"Now turning to the main argument, it appears to us that the answer to the question involved depends on the interpretation of the word 'business of letting out or to be more precise on the interpretation of the word 'let'. Plain dictionary meaning of the word 'let' is to grant use of for rent. In Parker v. Sowerby, 1W.R. 404, the word 'let' was taken to be equivalent to the word 'lease'. Thus, it could be safely concluded that the power of letting out means the power of giving a property on lease."
If "let" and "lease" are interchangeable words, the property leased out would clearly be within the ambit of the definition of "assets" as referred to above.
12. We are afraid the other Division Bench case cited as 1996 PTD (Trib.) 114 referred to by the learned A.R. also does not help his cause any better. In order to fully appreciate the points of difference, we have no option but to quote a rather lengthy portion from this decision that would include the definition of "lease" as given in section 105 of the Transfer of Property Act, 1982 also:---
"The term 'lease' has not been defined in the Wealth Tax Act and the Income Tax Ordinance, 1979, therefore, we have to find out the definition of term 'lease' in the general law of the land. The relevant law in this behalf is Transfer of Property Act, 1982 section 105 whereof defines the term 'lease' as follows:
1.5 Lease defined. ---A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or ''promised or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferors by the transferee, who accepts the transfer on such terms.
Lessor, lessee, premium and rent defined. The transferor is called the lessor, the transferee is called the lessee, the price is called the premium and the money share, service or other thing to be rendered is called the rent.
(7) A perusal of the above section shows that the lease of immovable property implies transfer of right to enjoy such property for a certain time or in perpetuity in consideration of a price paid or 'promised or of money, service or any other thing of value to be rendered periodically on specified occasions to the transferor by the transferee. Thus, mere occupation of a property by a person, owned by another does not create relationship of landlord and tenant between the parties. A mere user of an immovable property cannot be held to be a tenant until and unless there is an agreement express or implied between the parties creating a relationship of Landlord and tenant. The decisive consideration is the intention of parties and if any agreement has been executed in this behalf it has to be ascertained on a consideration of all the relevant provisions in the agreement and in the absence of a formal document the intention of the parties must be inferred from the circumstances and the conduct of the parties. All the surrounding circumstances and the conduct of the parties have to be borne in mind for ascertaining the real relationship between the parties. "
Furthermore, it was observed by the Honourable Chairman who was the author of this decision as under:
"For this purpose we revert to the definition of lease as contained in section 105 of the Transfer of Property Act according to which the lease, of immovable property is transfer of a right to enjoy such property in consideration of a price paid or promised or of money, service or any other thing of value. Thus, if there is mere transfer of a right to enjoy an immovable property but there is no price, premium, money, service or other thing to be surrendered as called the rent the transaction shall not be treated as lease. The point came for consideration before the Oudha Judicial Commissioner's Court in the case of Sita Ram v. Sarju Prasad AIR 1922 Oudh 201 and it was held as follows:---
It seems to me to be quite clear that the agreement in question does not amount to a lease as defined in section 105 of that Act. One of the essentials of lease is that there should be a consideration to be rendered periodically or on specified occasions to the lessor, and the essential is entirely absent in this agreement.'
(8) I have not been able to lay hand on any judgment in this behalf by any superior Court in Pakistan but the proposition of law is so clear and unambiguous on a bare perusal of section 105 of Transfer of Property Act that it should not detain me anymore in holding that no relationship of landlord and tenant can come into existence without the payment of rent as defined in second part of section 105 itself."
13. Now we have to examine the facts of the present case in the light of the observations given in the above cited paras.
14. Lease deeds were executed by the Lahore Stock Exchange Limited with all the members who were given lease hold-rights in the space provided in the building. The contents of the lease deeds are common in case of all the members. Clause (1) states as under:---
"The lessors are the absolute owners of the building and have full right, absolute power and complete authority to give the same on lease/rental basis in their absolute discretion "
The above clause shows that the absolute ownership remains with the lessor. Clause 5 reads as under:---
"The lessees agree to fully and in all respects carry out the terms of this lease and to hand over vacant possession of the Demised Premises in good and tenantable condition. normal wear and tear excepted, at the termination of this lease. "
The above clause shows that the lessee has to hand over vacant position at the termination of the lease.
15. Clauses (11) and (12) provide that the lessees shall conduct business of only shares, Bonds, F.E.B.C.S. etc. and shall not use the premises for the sale or storage of goods and merchandises etc. Thus the leasing out is not unconditional and the lessee is required to use the building for specific purposes only. Clause 20 provides that in case the lessee is expelled from the membership of Lahore Stock Exchange or if the lessee becomes bankrupt or goes into liquidation the lease shall be revoked and the lessor shall thereafter take over the premises. The lessees are not allowed vide clause 24 to resign, sublet or transfer the demised premises in favour of a third party without the prior written consent of the lessor. The lessors have sole discretion under clause 25 to allow transfer of a member's lease-hold rights to another on the payment of transfer charges as are imposed by the lessor at that time. According to the lease deed the lessor has agreed to lease and the lessees have agreed to take on lease, specified space in the building for a term of 99 years from 1-1-1992 to 31-3-2091 in consideration of lease value and further on the payment of ground rent at the rate of Rs. i per sq. ft. per quarter, Thus, the property has clearly been let out within the meanings of the term given in section 2(5)(ii) of the Wealth Tax Act. The property has been leases out against consideration. It is revokable under certain circumstances. The lessees are not allowed to use the premises for any purpose other than specified. All the conditions spelled our in the I.T.A.T's. order referred to above are fulfilled. The asset was, therefore, rightly charged to tax and the objection on this account raised by the learned A.R. is not valid and is' rejected.
16. However, before concluding the order the other points put forth on behalf of the appellant need to be discussed. The learned A.R. stated that capital value tax is charged in such cases also where the right to use is transferred for more than twenty years. He argued that the law recognises a long transfer of rights to use in the nature of transfer of ownership. This argument is not valid because the law governing C.V.T. does not say that ownership will pass on to the person who acquires right to use an asset for more than twenty years. The law only provides for levy of a tax in such a situation. It does not infer any rights of ownership. As already mentioned above the learned counsel of the appellant also referred to subsection (5) of section 4 of the Wealth Tax Act (reproduced above) which provides that only such assets are liable to be included in the net wealth as are transferred otherwise than under an irrevocable transfer. The A.R. contended that in the case of the appellant the lease was irrevocable and, therefore, the asset would not be included in the net wealth. The contents of the lease agreement have been discussed above which show that ownership rights continue to vest with the lessor and the lease is not irrevocable. Thus the argument of the learned counsel is unfounded.
17. The next point is regarding valuation of the property given on rent to the banks and the space leased out to the members of Lahore Stock Exchange. Declared A.L.V. has not been accepted and estimate of A.L.V. has been made without approval of the I.A.C. The objection of the learned counsel of the assessee in this regard is valid. Further, a portion of the claim of liabilities has been accepted and a part has not been allowed on the ground that construction of the building had been completed before the advance rent was received. A perusal of assessment order, however, shows that proper opportunity of hearing in this regard was not allowed to the assessee. Thus the assessment order suffers from two defects; firstly, A.L.V. has been estimated without prior approval of I.A.C. as required under proviso of Rule 8(3). Secondly, the assessee was not provided reasonable opportunity to explain his point of view regarding claim of liabilities. Accordingly, the assessment order is set aside with the directions that a de novo order be passed and the valuation made as per facts and circumstances and in accordance with the provisions of law in the light of the observation made above.
18. The appeal is disposed of in the manner and to the extent narrated above.
C.M.A./65/Tax(Trib.) Appeal disposed of.