In the absence of renewal clause in the lease agreement, subsequent agreement cannot be merged to construe deemed ownership – Bom HC


CIT v Pelican Investments (P.) Ltd. [ITA No: 3424 of 2010 dtd 21 August 2012] Bombay High Court

Background:

The assessee by an agreement dated 7th November, 1984 with Hotel Leelaventure Limited (HLL) was granted a licence to occupy a shopping arcade for a period of 11 years. The assessee was required to pay to HLL, compensation for the said licence commencing from the date of occupation certificate, at the rate of Rs. 150/- per sq. mtr. per month during the period of the licence. Thereafter, the assessee and HLL entered into a fresh agreement dated 24th January, 1999, by which HLL granted the assessee further licence in respect of the same premises for a period of 10 years.

The assessee filed its return of income on 29th October, 2006 for , declaring a total loss of Rs. 48,626/-. The AO made an order under section 143(3). The annual value under section 23(1)(a) was computed at Rs. 60,27,027/-. A deduction under section 24 at 30% amounting to Rs. 18,08,108/- was allowed. The AO, accordingly, assessed a sum of Rs. 42,18,919/- to be income from house property.

Tax authority’s arguments:

  • The assessee is deemed to be the owner of the property licenced to it by HLL as the license was for a period not less than twelve years.
  • Accordingly, the compensation paid to the assessee by the sub-licencees constituted income from house property. Reliance was placed upon sections 22, 27(iiib) and 269UA(d) and (f) of the Act
  • The sum of the duration of the licence under the two agreements ought to be considered for the purpose of section 269UA(f). If that was so, the duration of the licence would be for 21 years. The above provisions would then stand attracted.

Assessee’s contentions:

  • The assessee was not entitled to renew the same upon the expiry of the period of 11 years from the date of the occupation certificate of the shopping arcade.
  • It is also important to note that this agreement was entered into before the above provisions of the Act came into force. Section 27(iiib) and 269UA(f) came into force with effect from 1st April, 1988 and 1st October, 1996, respectively. It cannot, therefore, be said that the agreement was structured by the parties thereto to get over the said provisions.

HELD:

  • Firstly, it was not contended that the agreements were a camouflage to conceal a licence of twenty one years or to circumvent the said provisions of the Act.
  • The first agreement was entered into on 7th November, 1984 before the provisions came into force. Section 27(iiib) and 269UA(f) came into force with effect from 1st April, 1988 and 1st October, 1996, respectively.
  • The tax authorities have not been able to indicate any factors on the basis of the agreements or even otherwise which would indicate that the latter agreement was a continuation of the first agreement.
  • Neither the assessee nor HLL had a right to renew the first agreement. This is the clearest indication that the subsequent agreement was separate and distinct and was entered into on the basis of fresh negotiations.
  • The important terms and conditions of the agreements viz. the duration and the consideration are also different. The duration of the licence under the first agreement was 11 years, whereas it is for a period of 10 years under the subsequent agreement. More important is the fact that the consideration under the second agreement is substantially higher than under the first agreement.
  • Section 269UA(f) does not operate differently merely because the licencee under different agreements is the same. It is always open to a licensor and a licencee to enter into different agreements for different periods.
  • The mere fact that the same licencee continues under consecutive agreements would make no difference. If a licencee enters into a fresh agreement upon the expiry of the earlier agreement, it would be pointless his vacating the premises and immediately reoccupying it. That would be an unnecessary, hollow formality.

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