* IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on: 25.10.2018
+ W.P.(C) 10572/2018 & CM Nos.41219-20/2018
AMBIENCE DEVELOPERS &
INFRASTRUCTURE PVT.LTD. ..... Petitioner
Through : Dr. Rakesh Gupta, Mr. Somil Agarwal, Mr.
Rohit Kumar Gupta and Ms. Monika Ghai,
Advs.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through : Mr. Zoheb Hossain, Sr. Standing Counsel
with Mr. Deepak Anand, Jr. Standing
Counsel for Revenue.
+ W.P.(C) 10627/2018 & CM Nos.41373-74/2018
AMBIENCE HOTELS & RESORTS PVT.LTD. ..... Petitioner
Through : Dr. Rakesh Gupta, Mr. Somil Agarwal, Mr.
Rohit Kumar Gupta and Ms. Monika Ghai,
Advs.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through : Mr. Zoheb Hossain, Sr. Standing Counsel
with Mr. Deepak Anand, Jr. Standing
Counsel for Revenue.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
S. RAVINDRA BHAT, J.
1. These two writ petitions one by M/s Ambience Developers and Infrastructure
Pvt. Ltd. (hereafter as "ADI") being W.P.(C)No.10572/2018 and the other by M/s
Ambience Hotels and Resorts Pvt. Ltd. (hereafter as "AHR") being
W.P.(C)No.10627/2018 challenge two common orders of the Income Tax Appellate
Tribunal (hereafter as "ITAT"). The ITAT rejected- by the first impugned order
(dated 07.07.2017, hereafter "the main order" or "main judgment") the appeals filed
before it; by the second impugned order (dated 13.08.2018) ITAT rejected the
W.P.(C)Nos.10572/2018 & 10627/2018 Page 1 of 15
applications filed by the ADI and AHR under Section 254(2) of the Income Tax Act
(hereafter as "the Act").
2. The brief facts are that the original assessment was completed in the cases of
both the petitioners i.e. ADI and AHR, on 31.12.2009 at `24,03,030/- and
`5,73,28,357/- respectively under Section 143(3) of the Act. The CIT subsequently
set aside the assessment invoking its powers under Section 263 and directed the AO to
assess their lease income from the rental/lease of shops and other spaces in the hotel
assessees hands after making proper inquires and verifications. During these
proceedings, the AO noticed that the ADI had projected lease and license charges of
`29,18,07,201/- including lease rental of `6,27,84,240/- relating to leasing of retail
spaces in Ambience Hotel, Gurgaon. He further noticed that the space in question
was owned by AHR but the assessee i.e. ADI showed its income from letting out the
shop and spaces in its hand on the basis of the agreement between ADI and AHR.
The consideration for that agreement was `75 crores. The AO therefore, concluded
that since the income of `6,40,78,420/- was a lease rental and had been taxed in the
hands of the owner i.e. ADI, the provisions of Section 22 of the Act were to be
invoked; the rental income was therefore, taxed in the hands of the owner AHR. The
AO did not reduce the amount of `6,27,84,240/- from ADI's income and assessed it in
its hands, on protective basis by making a substantive addition in respect of the
income of AHR. Thus, the AO assessed AHR's total income at `4,41,54,580/- under
Section 143(3) read with Section 263 of the Act. Both ADI and AHR appealed to the
CIT who dismissed their pleas.
3. Aggrieved the said two assessees approached the ITAT. By its order dated
07.07.2017, the ITAT after noticing the contentions made by the two assessees
before it, and considering the agreement of 31.03.2008, entered into between two of
them i.e. ADI and AHR, held as follows:
"14. When we peruse the recitals of the Agreement (supra) reproduced
above particularly clause 4, it goes to unequivocally prove that the second
party to the Agreement (supra) namely, ADIPL is entitled to receive the
rent or the charges from the tenants/occupants during the currency of this
agreement. When ADIPL has got rights and interest in the property in
question by virtue of the Agreement (supra) w.e.f 31.03.2008 then it is
W.P.(C)Nos.10572/2018 & 10627/2018 Page 2 of 15
estopped by its own act and conduct from showing the income from the
rental of the shopsand rental space in its hands for the earlier period prior
to 31.03.2008.
15. In the given circumstances, the ld. CIT (A) has rightly upheld the
addition of Rs.4,39,48,968/- in the hands of AHRPL under the head income
from house property by returning following findings :
"5.1.5. On perusal of the details on record, I find that the
appellant company, ADIPL even after showing the above lease
income in its hands, had declared loss for the year under
consideration in its return, whereas the appellant company i.e.
AHRL was running into profits. In my considered view, the entire
arrangement was made by the appellant to avoid incidence of tax in
its hands. Reliance is placed in the present case on the judicial
pronouncement of the Hon'ble Apex court in the case of Smt. Tara
Devi Aggarwal, which is clearly applicable in this case. ADIPL, a
loss making company, i.e. the appellant company AHRL, a profit
making company in its return to be assessed in its hands in order to
assist the appellant company to avoid tax payment. Section 60 is
merely a declaratory of a principle which is well settled under the
Income Tax law, namely, the profits on their coming into existence
attract tax at that point and the revenue is not concerned with the
subsequent application of the profits."
16. In view of what has been discussed above, we are of the considered
view that the assessee, ADIPL in this case is not entitled for relief being
beneficial owner on the basis of the judgment of Poddar Cement Pvt. Ltd.
(supra) which is not applicable to the facts and circumstances of the case
rather an agreement (supra) between AHRPL and ADIPL is a camouflage
particularly in the face of the admitted fact that AHRPL being owner of
property in question claimed TDS of Rs.1,09,32,212/- without offering
corresponding income for taxation to evade the payment of tax to the state
exchequer. So, we find no illegality or perversity in the findings returned by
ld. CIT (A) in the impugned order dated 01.10.2013 under challenge vide
ITA No.355/Del/2014. However, when substantive addition qua the same
amount of Rs.6,27,84,240/- has already been made in case of AHRPL, there
is no question confirming the protective addition of Rs.6,27,84,240/- in case
of ADIPL by the ld. CIT (A) because one income cannot be taxed twice. So,
ITA Nos.354/Del/2014 & 355/Del/2015 filed by the assessee are hereby
dismissed. Consequently, ITA No.413/Del/2014 filed by the Revenue is also
dismissed having been become infructuous."
4. The assessees had approached this court but withdrew the appeals on the plea
that they had preferred rectification application and that in the event of their plea not
W.P.(C)Nos.10572/2018 & 10627/2018 Page 3 of 15
being accepted, the liberty be reserved. Accordingly, their appeals were dismissed as
withdrawn.
5. The miscellaneous applications under Section 254(2), filed by the ADI and
AHR were on identical terms. These applications relied upon the judgment in Honda
Siel Ltd. v. Commissioner of Income Tax, 295 ITR 466 (SC) and urged that the
decision cited before the ITAT in its main order of 07.07.2017 had not considered the
written synopsis. The assessee highlighted that the so-called transfer which was the
basis for bringing to tax the rental income, in fact was not a transfer of assets but that
the consideration of `75 crores was paid for obtaining the right to manage and
carrying on business. In this regard, the assessees relied upon Commissioner of
Income Tax v. Rungamatee Tea & Industries, (1993) 199 ITR 282 (Cal); Rayala
Corporation Pvt. Ltd. v. Assistant CIT, (2014) 363 ITR 630 (Mad.) and also on the
decisions for the proposition that the legal character of a bona fide transaction cannot
be ignored. For the latter, principle reliance was placed on Commissioner of Wealth
Tax v. Arvind Narootam, (1988) 173 ITR 479-487 (SC); Banyan and Berry v.
Commissioner of Income Tax, (1996) 222 ITR 831-851 (Guj.) and other decisions. As
to their argument that the income was not assessable in the hands of the legal owner,
the assessees relied upon Dalmia Cement Ltd. v. Commissioner of Income Tax, (1999)
237 ITR 617 (SC) as well as amended Section 2(47) which defines transfer.
Furthermore, other decisions too were cited.
6. The ITAT by the impugned order noticed its decisions as well as rulings of the
Supreme Court in Honda Siel Ltd. (supra) and after extracting operative portions of is
previous decisions, held as follows :
"4. Aforesaid findings returned by the Tribunal after hearing authorized
representatives of the parties are purely factual findings and no apparent
mistake n record has been pointed out. For the argument sake, findings
returned by the Tribunal may be wrong as contended by the ld. AR for the
assessee, but there is no mistake apparent on record in the findings
returned by the Tribunal. Moreover, issue involved is decided on the basis
of facts, evidence collected by the lower Revenue authorities and the case
law relied upon by the assessee was found to be not applicable to the facts
and circumstances of the case.
5. So far as question of incorporating the word "camouflage" in para
16 of the order dated 07.07.2017 passed by the Tribunal in ITA
W.P.(C)Nos.10572/2018 & 10627/2018 Page 4 of 15
No.355/Del/2017 &354/Del/2017 as pointed out by the ld. AR for the
assessee is concerned, the same has been used in furtherance of the
discussion made in the preceding paras and is in no way intended to cause
harm to the business reputation of the assessee. Considering the aforesaid
facts and legal position, we find no merits in the misc. applications filed by
the assessee, hence the same are hereby dismissed."
7. It is contended on behalf of the petitioner that the Act does not clothe the
taxing authority with any jurisdiction to rewrite the terms of the agreement, which
plainly in this case did not suggest that the parties, were dealing with each other in any
manner other than at arm's length. Furthermore, there is no suggestion of any
collusion between the parties. As independent entities, both the assessees had the right
to organize their businesses in the terms best suited to their model of commerce. It
was highlighted that the judgment of the Supreme Court in CIT v. Poddar Cement
Ltd., 226 ITR 625, had considered the expression "owner" in the context of Section 22
where the assessee did not have the title over a property which was otherwise in his
possession and enjoyment. It was contended that the court took note of the
commercial realities and held that the person entitled to enjoy the income from the
property was liable to tax but not the legal or registered owner. Any arrangement by
which any individual or person comes in possession of the property with right to
enjoyment, ought to be treated as the owner rather than a titular or nominal owner.
8. Dr. Rakesh Gupta, learned counsel also urged the purport of the amendment to
the Act by the Finance Act of 1987, which extended the definition of transfer under
Section 2(47). It was submitted that this proposition was urged but the same was
completely overlooked by the ITAT in its main orders. Given the mandate of the
Supreme Court's ruling in Honda Siel Ltd. (supra), rectification had to be resorted.
9. It was urged that the agreement dated 31-03-2008 between the two assessees
i.e. ADI and AHR, was an entirely bona fide business transaction and plain and
unambiguous in its terms. It created certain rights and obligations which were acted
upon and gave the assessee company an overriding title to the income derived from
leasing of the shops. In this regard, reliance was placed upon Commissioner ofIncome
Tax v. Sitaldas Tirathdas, (1961) 41 ITR 367 (SC); Commissioner of Income Tax v.
Bijali Cotton Mills Pvt. Ltd., (1979) 116 ITR 60 (SC) and Dalmia Cement Ltd. v.
W.P.(C)Nos.10572/2018 & 10627/2018 Page 5 of 15
Commissioner of Income Tax, (1999) 237 ITR 617 (SC). It was submitted that ITAT
completely overlooked in the main order as well as in the subsequent order, made
under Section 254(2), in the present case, the salient principle behind Section
27(iii)(b) of the Act. Given these facts, the legal character of the transactions on
31.03.2008 could not be ignored and characterized as a camouflage without there
being any case set up in that regard by the AO or the Appellate Tribunal.
10. Learned counsel, Dr. Rakesh Gupta, submitted that not dealing with binding
authorities was an error, capable of rectification. It was submitted that the ITAT
pointedly ignored and overlooked several authorities cited by the petitioners. He relied
upon the authority of Honda Siel Ltd. (supra) which held inter alia as follows:
"The purpose behind enactment of section 254 (2) is based on the
fundamental principle that no party appearing before the Tribunal, be it an
assessee or the Department, should suffer on account of any mistake
committed by the Tribunal. This fundamental principle has nothing to do
with the inherent powers of the Tribunal. One of the important reasons for
giving the power of rectification to the Tribunal is to see that no prejudice
is caused to either of the parties appearing before it by its decision based
on a mistake apparent from the record. "Rule of precedent" is an important
aspect of legal certainty in rule of law. That principle is not obliterated
by section 254 (2) of the Income-tax Act, 1961. When prejudice results from
an order attributable to the Tribunal's mistake, error or omission, then it is
the duty of the Tribunal to set it right. Atonement to the wronged party by
the court or Tribunal for the wrong committed by it has nothing to do with
the concept of inherent power to review. In the present case, the Tribunal
was justified in exercising its powers under section 254 (2) when it was
pointed out to the Tribunal that the judgment of the coordinate bench was
placed before the Tribunal when the original order came to be passed but it
had committed a mistake in not considering the material which was already
on record. The Tribunal has acknowledged its mistake, it has accordingly
rectified its order. In our view, the High Court was not justified in
interfering with the said order. For the aforestated reasons, the impugned
judgment of the High Court is set aside and the order passed by the
Tribunal allowing the rectification application filed by the assessee is
restored."
11. Learned counsel for the revenue urged that the original assessment, had
accepted at face value cost the transaction based on which ADI declared the rental
income as its own. This led to the Commissioner exercising his power under Section
263. The revisional order was the subject matter of appeal to the ITAT, which noted
W.P.(C)Nos.10572/2018 & 10627/2018 Page 6 of 15
that the hotel (owned by the AHR) needed funds for its project and ADI had spared
funds. Both the companies therefore, entered into an agreement whereby ADI gave
interest free refundable deposit of `75 crores to the hotels. AHR gave to the
developer i.e. ADI the right in some retail spaces in the hotel premises for managing,
leasing and to receive an appropriate revenue. The ITAT clearly held that the AO had
not considered the taxability of the lease amount in the proper hands under the
provision of Section 60 and Section 53A of the Transfer of Property Act and that the
matter required full inquiry and analysis with respect to the agreement and the
underlined transactions. Therefore, without expressing any opinion, the matter was
restored to the file of the AO. This order was sought to be challenged by the
assessees; however, the appeals (ITA Nos.891/2015 and 899/2015) were permitted to
be withdrawn on 28.01.2016.
12. It was argued that in the subsequent round, the AO took notice of the entire
transaction as well as of the judgments which the assessees relied upon including
Commissioner of Wealth Tax v. Arvind Narootam, (1988) 173 ITR 479-487 (SC);
Banyan and Berry v. Commissioner of Income Tax, (1996) 222 ITR 831-851 (Guj.);
CIT vs Dhawan Investment and Trading Company Ltd. (1999) 238 ITR 486 (Cal.);
Commissioner of Income Tax v. Hansraj Gupta, 137 ITR 195 (Delhi) and held that the
amounts were properly taxable in the hands of AHR and not in the hands of ADI.
Learned counsel relied upon the terms of the agreement which were extracted by the
Tribunal in its impugned order and submitted that the refundable deposit was an
interest free deposit, for an initial period of three years, extendable for a total period of
10 years. This meant that the owner enjoyed the benefit of substantial amount of `75
crores in lieu of permitting the annual letting, to be diverted to AHR.
13. It was highlighted that ADI even after showing lease income, declared loss for
the year under consideration whereas AHR showed profits. The AO subsequently
held that the amount was properly taxable in the hands of the owner. The CIT in fact
used the word "tax avoidance". In these circumstances, the finding of the Tribunal
that the agreement was a camouflage, could not be said to be unwarranted. It was
submitted that the Honda Siel Ltd. (supra) had no application to the circumstances of
the case because the ITAT considered all possible arguments as is evident from the
W.P.(C)Nos.10572/2018 & 10627/2018 Page 7 of 15
express reference to Poddar Cement Pvt. Ltd. (supra) in its main judgment of
07.07.2017.
Analysis and Findings
14. A close analysis of the facts reveals that in A.Y. 2008-09, AHR was
constructing a five- star deluxe hotel at Ambience Island, Gurugram; in those
premises, certain retail premises too were created and constructed. The hotel is
adjacent to Ambience Mall, owned by ADI. AHR said that during F. Y. 2007-08, it
needed funds for completing the hotel project; it entered into an agreement with ADI.
Under that agreement (dated 31.03.2008), ADI paid ` 75 crores interest free deposit to
the company. This enabled it (ADI) to enjoy the rental income from certain specified
retail spaces of AHR. AHR contended, in the remanded assessment proceedings that
by terms of the agreement ADI became owner of lease rental of said specified retail
spaces and accordingly; it (ADI) declared the said rental in its return of income for
A.Y.2008-09. It was urged by AHR that since it secured interest free deposit of ` 75
crores and ADI was allowed to enjoy the rentals from specified retail spaces, the
income (from those lease rentals) "belonged" to it, i.e. ADI and not to AHRL. The AO
disagreed, and, after noticing Section 22 of the Act (as well as distinguishing the
authorities cited by the assesses, held as follows:
"The deposit of Rs. 75,00,00,000/- is not a justification for not offering the
income of rent from these properties in it$ hand. It is not the sweet will of
the assessee to offer income in his own hand or in the hand is of some other
entity. Income has to be offered and taxed in the person in whose hands it
has to be taxed as per provisions of law. In the present case assessee is the
right full owner of the shops and retail space and as per provisions
ofSection-22 of the Act, reproduced above income from letting out these
shops and retail spaces is to be taxed in the assessee's hand. Under such
circumstances the assessee's claim is not acceptable.
8. The assessee has relied upon various judgments of the Hon'ble Courts.
However, it is respectfully observed that none of the j1.1dgments apply to
the assessee's case as facts and circumstances of those cases are entirely
different from the assessee's case.
9.. The assessee has claimed that by giving · interest free deposit M/s
Ambience Developers and Infrastructure Pvt. Ltd. has become owner of the
lease rental and that the TDS has been made in the name of that company.
W.P.(C)Nos.10572/2018 & 10627/2018 Page 8 of 15
However there is no concept of ownership of income·. The Income belongs
to the person having rightful ownership of the property. Therefore, this
argument of the assessee is also not acceptable.
10. Thus, keeping in view he provisions of law and in view of the judgment
of the Hon'ble Delhi High Court in the case of CIT vs Hans Raj Gupta
(Supra) the rental income of Rs.6,27 ,84,2.40/- from letting out the shops
and retail space of the assesee is charged to tax the assessee's hands.
Assessee's total income is computed accordingly.
11. After considering the facts and circumstances of the case and in view of
the above observations, the income of the assesee is computed as under:
Total Income as per order u/s 250/143(3) Rs.205,615/-
Income from house property (as discussed) Rs.6,27,84, 240/-
Deduction u/s 24 Rs.1,88,35,272/-/-
Rs.4,39,48,968/-
12. Assessee's total income is, accordingly, assessed at Rs.4,41,54,580/-·
Credit for prepaid taxes is allowed. Detailed computation of tax and
interest is given in the enclosed ITS-150 which is part of this order. Issue
notice of demand and necessary forms."
15. The Appellate Commissioner, who heard the assessees' appeals, found that the
contentions on its behalf with respect to applicability of Section 22 and reporting of
rental income in ADI's hands without merit. He relied on Section 60 and held that the
provision envisioned the following, i.e.
i) The payer owns an asset.
ii) The ownership ·of asset not transferred and is in fact retained.
iii) The income from the asset is transferred to any person, under a
settlement, trust, covenant; agreement or arrangement.
iv) The transfer may be revocable or may not be revocable.
v) The transfer may be effected at any time (may be before the
Commissioner of Income Tax Act or otherwise).
16. Thereafter it was held that:
"5.1 This section provides that where an assessee purports to transfer
income arising to such person (but not the source of it) in such a way that
under, the instrument of transfer the income no longer arises to such
person or is received by such person, such an arrangement is to be ignored
for the purpose of this transaction. Though under such arrangement or
transfer made by the person who is assessed to tax, may, in law arise to
another person, it would be treated to be continuing to arise to the
transferor itself. It can hence be interpreted as transfer of income alone
without there being a transfer of the source of that income and it is a mere
W.P.(C)Nos.10572/2018 & 10627/2018 Page 9 of 15
application of profits. If the above conditions are satisfied, the income from
the asset transferred would be taxable in the hands of the transferor.
.... ..................
5. 1.1.2 The present case the appellant company .M/s. Ambience Hotels &
Resorts Ltd. (AHRI, for short shall be referred as such hereafter) operates
a five star Hotel and also is having certain spaces like shops/retail spaces
in the ground floor and part of the first floor, which were leased by the
company to various brands and earned rental income out of them. The
appellant company i.e. AHRL (Ambience Hotels & Resorts Ltd) was in need
of funds to complete a hotel project, entered into an agreement with
another company namely M/s. Ambience Developers & Infrastructure Pvt.
Ltd. (referred hereafter as ADIPL), who was in the business of leasing
retail spaces. AHRL gave unfettered rights to let out and manage its
shops/retail ~pc;1ces and to receive and appropriate to its own account all
receipts and receivables from leasing of the said space to AIDPL against
the payment of Rs. 75 crores, which was given by AIDPL to AHRL as
interest free refundable deposit. Accordingly, the lease rentals of the said
space of AHRL amounting to Rs.6,27,84,240/- was shown as income by
AIDPL in its return of income for the assessment year under consideration
while the same was not shown by AHRL in its return of income under the
said agreement dated 31.03.2008. On the basis of the facts of the case
mentioned above, it is an undisputed fact that the retail spaces/shops owned
by AHRL in the ground floor and-part of the first floor not transferred to
ADIPL, whereas the income from these properties in the form of "lease
rent" was transferred to ADIPL. The facts of this case are directly in
league with the provisions laid down in section 60 of the I.T. Act, 1961.
According to this section, where there is a transfer of "income" without the
"transfer of the asset", the income is to be assessed in the hands of the
transferor company, i.e. AHHL. AHRL has alienated or assigned the source
of income i.e. lease rentals so that the income no longer belongs to it and in
such a way that it would not be liable to be taxed upon the Income arising ·
from such leasing activity of these properties thereafter. However it is
pertinently mentioned here that the said agreement dated 31-03-2008, the
appellant company did not transfer the ownership of the said properties in
favour of ADIPL. The appellant company AHRL has only created a charge
in respect of the lease rent and no doubt ADIPL was given unfettered rights
that empowered it to collect lease rent from the- tenants, and the deed also
provided in clause 4 that the tenant by paying the amount of rent would be
discharging their obligation towards rent. Section 60 is quite clear in its
implication and provides no scope for any ambiguity. It makes it clear
where the asset was not transferred but the income thereof alone was
transferred, such income was assessable in the hands of the transferor i.e.
AHRL who is the owner of the property.
-------------------------- -------------------
W.P.(C)Nos.10572/2018 & 10627/2018 Page 10 of 15
5.1.4Income tax Act provides the assessment of income from the "House
Property" in the hands of the owner, irrespective of the fact whether it is
the owner who actually enjoys the income or someone else. In the present
case for determining the annual let out value of the property, full value of
the rent derived by the appellant company including the portions i.e.
ground floor and part of the first floor are a subject matter of charge.
Computation of property income has to be done by deducting from the
annual let out value (ALV) reduced by the amount of municipal taxes, and
certain amounts, description which are set out in section 24 of the I.T. Act,
1961. It is well settled, that where income falls in a particular head, its
computation has to be made under the same head. An agreement in this
case is only a matter of convenience, and it is an application simpliciter of
income, after it had accrued to AHRL. Therefore; the Assessing Officer has
rightly assessed the income of the appellant u/s 22 because it continued to
be the owner of the property."
17. The narrow question is whether in the facts of this case, the ITAT's decision
rendered in 2017, rejecting the petitioners' arguments- and therefore, its appeal,
suffered from a mistake calling for rectification. Honda Siel (supra) is relied upon to
say that the original order- dismissing the appeal, was erroneous. In Honda it was held
that the power of rectification was conferred upon the ITAT to ensure that "no
prejudice is caused to either of the parties appearing before it by its decision based on
a mistake apparent from the record." The Supreme Court relied on the "Rule of
precedent" and added that "When prejudice results from an order attributable to the
Tribunal's mistake, error or omission, then it is the duty of the Tribunal to set it
right."
18. Since the Appellate Commissioner and the ITAT relied on Section 60 and held
that income had been diverted under a revocable transfer or arrangement, it would be
useful to notice that provision- as well as Section 63, in this regard. They are extracted
as follows:
"60. Transfer of income where there is no transfer of assets- All income
arising to any person by virtue of a transfer whether revocable or not and
whether effected before or after the commencement of this Act shall, where
there is no transfer of the assets from which the income arises, be chargeable
to income-tax as the income of the transferor and shall be included in his total
income."
***************** *********
W.P.(C)Nos.10572/2018 & 10627/2018 Page 11 of 15
Section 63. "Transfer" and "revocable transfer" defined- for the purposes of
Sections 60,61 and 62 of this Section-
(a) a transfer shall be deemed to be revocable if -
(i) it contains any provision for the re-transfer directly or indirectly of the
whole or any part of the income or assets to the transferor, or
(ii) it, in any way, gives the transferor a right to re-assume power directly or
indirectly over the whole or any part of the income or assets;
(b) "transfer" includes any settlement, trust, covenant, agreement or
arrangement."
19. In the present case, the agreement between the two assessees contained, inter
alia, the following stipulations:
"1. That In consideration of above-said deposit of Rs. 75,00,0001- (Rupees
Seventy-Five Crores Only), the First Party doth hereby agrees to gram and
assign in favour of the Second Party all its rights and interest to lease and
manage the Said Space or any part thereof and to receive and appropriate
to its own account all receipts and receivables from the leasing of Said
Space or any part thereof.
2. That the aforesaid sum of Rs.75,00,00,000/ (Rupees Seventy Five Crores
only)has been paid by the Second Party to the First Party (the receipt
whereof the First Party hereby admits and acknowledges) as an interest-
free refundable deposit. The First Party may refund the said interest-free
deposit by giving a one-year notice in writing, at any time after the initial
period of three years. However, the tenure of this agreement shall not
exceed 10 years and First Party shall refund the said refundable security
deposit to the Second Party simultaneously the Second Party shall
surrender its rights for sub-letting and managing the Said Space to the
First Party.
3. That this agreement shall be deemed to be effective from the date of this
Agreement or the date of the Agreement for Taking Possession for Fit
Out(s) entered into with tenants/occupants of the various retail spaces
comprising the said space or any part thereof by the First Party, whichever
is earlier.
4. That the Second Party shall be entitled to receive the month (rent or
other charges/including the arrears of rent/ charges if any from the tenants
or persons in occupation of their respective portion in the Said Space in its
own name and all these tenants/occupants shall be deemed to be the
tenants/ occupants of tire Second Party and the Second Party shall have the
right to receive the rent or charges from them during the currency of this
Agreement and also to deal/negotiate with the said tenants occupants in the
manner the Second Party deem fit and proper."
W.P.(C)Nos.10572/2018 & 10627/2018 Page 12 of 15
20. It is evident that the agreement is not indefinite; it confers a right to receive
rentals, for which a consideration of `75 crores was paid. The agreement could be
rescinded, after 3 years, by giving back the deposit; the arrangement could not exceed
10 years in all. Clause 4 stated, significantly, that AHR's tenants were deemed to be
that of ADI.
21. In Dalmia Cement (supra) the owner of two cement factories situated in
Pakistan, by an agreement in writing dated 24-7-1962 agreed to sell and transfer to
one Maneckji, its properties and assets in Pakistan represented in the two factories.
Subsequent to the agreement, the parties entered into a supplemental agreement on 2-
11-1962. The assessee in its return of income for AY1964-65 on 30-6-1964 recorded
the total income as ` 24 lakhs odd but later revised it downwards to `1.4 lakh; the
same pattern was repeated for AY 1965-66, reflecting a loss of ` 2.45 lakh. The
original return did not include profits from the working of the two Pakistan factories
but only the interest income for the two-year period from 1-10-1962 to 30-9-1964
which however was deleted in the revised return on the ground of non-receipt of the
same.
22. The High Court's judgment, which ruled that income had accrued to the
assessee/appellant, till the date of sale, was overturned by the Supreme Court, which
held as follows:
"12. While at the first blush the reasoning seems to be rather attractive but
on consideration of the issue on a wider perspective the High Court cannot
but be said to be in clear error. For the year 1965-66 when the order of
assessment was made, the profits were ascertained on 30-9-1964 and the
property was itself transferred, as such question of accrual of profit on
account of the transferred assets does not and cannot arise. Be it noted that
completion of sale transaction ought to be attributed its normal meaning
and in this regard contextual facts should also be looked into and
considered in the proper perspective. The sale transaction in fact has taken
place and as such there being any contingency, as was there at the earlier
point of time, does not arise. The event has taken place and the
supplemental agreement dated 2-11-1962 makes the situation clear and
categorical. The parties agreed the relevant date to be 30-9-1962 and not
the completion of sale. Clause 3 of the agreement to which the High Court
made a special reference and interpreted that by reason of the contingent
event which would be subsequent to the accrual of profits, the profit cannot
but be treated to be in the hands of the assessee does not withstand the test
of correctness. The High Court has not laid any importance to the event
W.P.(C)Nos.10572/2018 & 10627/2018 Page 13 of 15
which stands completed by reason of the sale agreement. There is no
question of enabling the assessee to retain the profit in its own hand after
the "sale agreement". The event as noticed above, has taken place and by
reason of the event and in terms of the provisions of the agreement question
of tracing the profit in the hands of the assessee does not and cannot arise.
In any event profits of a business do not accrue from day to day but at the
end of the accounting year. Profits were ascertained on 30-9-1964 when
the property was transferred as such for the year 1965-66 as noted above,
so question of profit accruing to the assessee does not arise. As a matter of
fact the profit stands diverted to the purchaser in terms of and in
accordance with the agreement dated 24-7-1962 read with the
supplemental agreement dated 2-11-1962 and the date of actual transfer of
the factory in question which, in fact, had taken place on 30-9-1964 does
not alter the situation. The income stands diverted by an overriding title as
a matter of fact even before the accrual."
23. It is immediately clear that what weighed with the Supreme Court was the fact
that the parties had expressly agreed that the transfer would be effective from the
anterior date in 1962, and not the actual date of completion of sale. These singular
facts, in the opinion of the court, made all the difference- there was a clear sale; the
parties agreed the effective date to be an anterior one. However, in this case, the
express terms of the agreement clearly showed that the arrangement was finite and
also revocable (by one year's notice and refund of deposit). Pertinently, the judgments
that the petitioner now relies on, apart from Dalmia (i.e Rungamatee Tea &
Industries, Poddar Cement, Arvind Narottam) were all cited and considered by the
CIT (A) after the AO's order, on remand in the earlier round. This court is also of the
opinion that like in Dalmia, the facts in Rungamatee, clearly showed that the
transaction by which the assets were handed over possession were not just for their
management, but preparatory to their sale. The purchaser took possession of the
assets from the owner and managed them till conveyance, the subsequent year; the
Calcutta High Court held in these circumstances, as follows:
"Section 60 of the Act cannot have any application to the facts and
circumstances of this case inasmuch as the income is derived not because
of the transfer of assets but because the management and possession and
the right to carry on the business operations had been given to the assessee
even before the conveyance was executed. The profit arises out of sale
of and manufactured and not from the ownership of the tea garden. The
agreement has been acted upon and the agreement clearly provides that the
agreement would come into effect from April 1, 1973, and, accordingly,
W.P.(C)Nos.10572/2018 & 10627/2018 Page 14 of 15
provision has been made in the agreement itself as to what would happen
during the period before the sale is completed by the execution of the
conveyance. In our view, the transfer of title to the property in this case will
not have any relevance or bearing on the question of assessment of the
income in the hands of the assessee who, under the agreement itself,
obtained the possession and the right to run the tea estate and also to earn
profit therefrom."
24. The decision in Poddar (supra) did not involve interpretation of Section 60 at
all; the question which the court had to address itself to, was whether in the absence of
a conveyance or sale deed, the rental income received by various assessees was
income from property (Section 22 of the Act) or income from other sources (Section
56 of the Act). The Supreme Court ruled that transfer (of the property) did not mean a
stricto sensu conveyance of the title and all underling title, but included possession,
and other associated rights arising from the execution of an agreement to sell.
25. This court is of opinion that the main judgment of the ITAT took note of the
authority in Poddar Cement (supra). The ITAT also had before it, the reasoning of the
CIT (A) who had noticed all the judgments cited by the assessees which found place
in the written note submitted to the ITAT in their appeal. Therefore, it cannot be said
that the tribunal ignored or overlooked material facts or law. Furthermore- perhaps
crucially, the lower authorities concurrently found that ADI, despite reporting the
lease income in its hands, declared loss for the year under consideration in its return
whereas AHR declared profits. In these circumstances, their view was that the
arrangement was made to avoid incidence of tax in AHR's hands.
26. In view of the above discussion, it is held that there is no infirmity in the
impugned orders of the ITAT, dated 07.07.2017 and 13.07.2018. The writ petitions
therefore, have to fail and are dismissed without order on costs.
S. RAVINDRA BHAT, J.
A. K. CHAWLA, J.
OCTOBER 25, 2018
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