By TIOL News Service

MUMBAI, FEB 25, 2016: THE issue is - Whether any addition on account of notional rent for allowing subsidiary company to use office space is warranted where no tenacy right is created nor specific area is earmarked by the assessee. NO is the answer.

Facts of the case

A) The assessee company’s activities during the year were to invest, acquire, hold and exchange shares, debentures, mutual funds and bonds. The assessee company also earned income from rental properties. Assessee had claimed business loss and depreciation loss and set off the losses against the income from house property. AO held that despite the fact that the DC Business was transferred to the subsidiary company WTFL, the assessee company had not correlated and provided the breakup of expenses incurred against income taxable under various heads. AO held that the rental income is to be taxed under the head ‘income from house property’ and deduction as per section 24 of the Act is allowable. Similarly, the dividend incomes, interest on income tax refund are to be taxed under the head income from other sources while the profit on sale of assets and profit from sale of investment are in the nature of capital gain taxable under the head capital gain. Only the interest on loan and inter-corporate deposit, miscellaneous income, prior period income and provision for expenses written back are to be taxed under the head "Business Income" which shows that the assessee company is not actively engaged in any business activity. AO held that the assessee company has opted to claim all expenses in relation to various heads of income under the head business only which has resulted into huge and disproportionate claim of expenses under the head business. The assessee company had disallowed a sum towards property expenses and claimed a sum as deduction u/s 24. AO concluded that the assessee company’s claim of expenses under the head business is exorbitant, excessive and unjustifiable. AO allowed a part of expenses disallowed the remaining expenses. The action of the AO was confirmed by the CIT(A).

B) AO noted that assessee had given premises for use to WTFL without charging rent for next few years. The assessee company was asked to explain as to why no rent was charged from WTFL. AO held that the assessee company has let out the premises to subsidiary company without charging any rent, therefore Section 22 of Act gets attracted. The assessee company had not provided the information about the area provided and available to WTFL. AO worked out the deemed rental income under the head income from house property based on the average rental rates on which similar premises were given on rent in the Building ‘Construction House’ and added the same to the total income of the assessee company. The AO has allowed standard deduction of 30% u/s 24. CIT(A) deleted the addition.

C) AO observed that the assessee company has let out the property to M/s W (related party) on nominal rent and M/s W had further let out these premises on exorbitant rent to third parties. AO held that as the assessee company is the owner of the ‘Construction House’ and entitled to receive rent on its own right, income from letting out the same is taxable under the head ‘income from house property’ as provided u/s. 22. AO accordingly held that the property had been sub-let by tenant who is a related party and the assessee company has not charged rent which the property is reasonably expected to let from year to year and the same is treated as annual value for the assessee company and the same is brought to tax. CIT(A) deleted the addition.

Having heard the parties, the ITAT held that,

A) ++ Assessee company is a listed company and the assessee company had to perform certain corporate , regulatory , management and compliance functions under various statutes/regulations like Companies Act, listing regulations under the SEBI Act , stock exchange compliances and the mandatory Corporate Governance provisions etc. for which the services of the staff is retained and for doing other business which is carried on by the assessee company. The assessee company has stated to have invested in the subsidiary company WTFL keeping in view the commercial expediency. Thus, it cannot be said that the assessee company is not engaged in carrying on the business. It has voluntarily disallowed expenses directly relatable to the property income and exempt income u/s 14A. The AO has disallowed the expenses in proportion to various streams of income earned by the assessee company considering the expenses as common expenses. The expenses cannot be disallowed in the manner as was done by the AO unless the AO bring on record cogent material and evidence to substantiate that the expenses claimed by the assessee company are not attributable to the business carried on by the assessee company and the disallowance carried on by the assessee company are not correct. Addition made by the AO and confirmed by the CIT(A) deleted; (para 11)

B) ++ No tenancy rights or lease is created by the assessee company in respect of the office premises owned by it in favour of the said subsidiary company. Section 22 & 23 stipulates that the annual value of any property shall be deemed to be the sum for which the property might reasonably be expected to be let from year to year. Thus section 22 and 23 warrants that the income from house property under the head ‘income from house property’ which shall be the annual letting value from year to year for any part of the property which is let, then sum for which the property might reasonably be expected to be let from year to year in the hands of the owner u/s 22 and 23 shall be brought to tax but in the instant case the assessee company has merely allowed the usage of the area/space to WTFL without earmarking any specific area, hence, the same cannot be charged to tax under the head income from house property as it could not be said that the said premises are let or is available for letting as infact the said premises is occupied by the assessee company for its business usage while at the same time the premises is allowed to be used by the subsidiary company only without granting any benefits of tenancy such as right of possession and enjoyment of the property as tenant. No tenancy rights has been created in favour of the subsidiary company, the addition being notional rent on account of allowing subsidiary company to use its office space added in the manner by the AO cannot be sustained in the hands of the assessee company; (para 19)

C) ++ M/s W has duly paid the tax on the actual rent received under the head ‘income from house property’ for which necessary supporting material was brought on record and the same has been accepted by the Revenue in the case of M/s W and accordingly framed the assessment order u/s 143(3). The rent received by M/s W has been duly subjected to tax and that too under the head ‘Income from house property’ while the assessee company has received nominal rent from M/s W which is offered to tax under the head ‘income from house property’ in the return of income filed with the Revenue. Assessee company has been granted lease for a period of 11 years 11 months, however, it is stipulated in the agreement that the lessee is occupying the same since last several years. Further the right of sub-letting has also been provided to the lessee. The assessee company has expressed its desire to renew the same for further period of 11 years and 11 months in response to the request of the lessee. M/s W subletted the said premises which has been offered to tax under the head ‘income from house property’ which has been accepted by the Revenue. The rental received by M/s W, the lessee is assessed to tax and revenue has got the due taxes and now to again tax the same rental on notional basis in the hands of the assessee company will lead to double taxation of the same income. Order of CIT(A) upheld. (para 26)

(See 2016-TIOL-317-ITAT-MUM)