ITAT, DELHI BENCH ‘B’ WHETHER SUB-LICENSEES CAN BE TREATED TO BE THE OWNERS OF THE PROPERTIES AND CAN BE SUBJECTED TO HOUSE PROPERTY INCOME?

WHETHER SUB-LICENSEES CAN BE TREATED TO BE THE OWNERS OF THE PROPERTIES AND CAN BE SUBJECTED TO HOUSE PROPERTY INCOME?

RATIO DECIDENDI

Sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in section 27(iii) read with section 269UA(f)(ii) of the IT Act





IN THE ITAT, DELHI BENCH ‘B’, NEW DELHI

C. J. International Hotels Ltd.

v.

ACIT

ITA No. 1519/Del.05

July 24, 2008




RELEVANT EXTRACTS





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21.3. First of all we would like to examine the claim of the assessee with reference to the material on record. The main arguments advanced by the assessee to support its claim are as under:

(i) That the assessee is not owner of the premises. It is only licensee in view of the license-deed executed by the NDMC. This argument of the assessee is found to be substantiated from the terms and conditions of the license-deed. On going through the license-deed dated 14 7-1982,-it is found that originally through license deed dated 16th April 1981, NDMC as licenser entered into an agreement with M/s Pure Drinks, New Delhi Ltd. for granting license to use the plot of land measuring 4.5 acres at Windsor Place, New Delhi, for construction and commission of Five Star hotel building. Later on, as per the conditions of the licenser, a company under the name of M/s CJ. International Hotels Ltd., was formed and registered under the Companies Act, 1956 and it was agreed between the parties that license agreement be executed with this company in terms of supplemental agreement dated 13th January 1982. Thus, the agreement dated 14-7-1982 came to be executed with the assessee company.

(ii) The license was granted to the licensee for construction of a hotel and in lieu of the premises given under license, license fee per annum was also determined. The relevant portion of the license-deed in this regarded is as under:

“... Whereas the Licensor has offered and the Licencees have agreed to accept the license to use the plot of land measuring 4.29 acres at the crossing at Raisina Road and Janpath at Windsor Place, New Delhi (as shown in Annexure ‘A’) for construction and commission of a 5 star Hotel latest by 31st December 1984 in fall and in all respects for the purpose of housing a hotel of decent standard and other business appurtenant to the furtherance of Tourism in India to be run by the Licensees on license basis on terms and conditions mentioned hereinafter at an annual license fee of Rs. 2.68 crores (Rupees two crores sixty eight lacs only) or 21% (Twenty one per cent) of the annual gross turnover of the hotel business, whichever is mere from the date of handing over the said plot of land to the licensees including former licensees.”

(iii) In the license deed various restrictions were also imposed. As per clause 3, license fee was to be paid by the licensees to the licenser in every financial year. As per clause 5, the licensee was to fornish to the licensor its accounts. Clause 8 empowers the licensor to inspect the books of account and other relevant records. Clause 9 entitled the licenser to revoke or cancel the license. This clause is as under:

“9. In the event of the Licensees failing to make the payment of license fee, interest due thereupon or any other payment due against the licensees for any reason whatsoever of the amount demanded by the licensor in foil or in part, the licensor shall have absolute discretion without further reference to the Licensees to revoke' cancel the license with immediate effect for running the said hotel in terms of this license, to take possession of the licensed premises by recourse to law as provided in the Public Premises (Eviction of Unauthorized occupants) Act. 1971 or any other such law in force, at that time, after revocation of the license and the Licensees shall have do claim on the premises but only seek arbitration under clause 55 of this agreement."

(iv) As per clause 10, the premises were to continue on lease with the licensee. Clause 11 even enabled the licenser to terminate the license; This clause is as under:-

“11. The license will be liable for termination if at any time the licensees commits any breach of the terms, conditions and covenants on their part to be observed and performed under this license deed. But before any action is taken in this behalf the licensor shall communicate in writing to the licensees the breach, if any, of the terms and conditions on their part to the observed and performed under this license deed and it will be open to the licensees to satisfy the licenser that there had in fact been no such alleged breach to the satisfaction of the licensor."

(v) Clause 16 prohibited the licensee from subletting the premises to any other person without the permission of the licensor. This clause is as under:

“16. The Licensees shall not be at liberty in any way to underlet, sublet, encumber, assign or transfer their rights and interest or part with possession of the land and the building thereon or any part thereof or share therein to any person, directly or indirectly without the previous written consent of the Licensor. But the Licensees shall have the right to sub-license the licensed property, as stipulated in clause 34 of this license agreement."



(vi) Under other clauses of the license, several restrictions and conditions were imposed upon the licensee i.e. the assessee. Clause 29 provided that the accommodation or building to be constructed on the licensed space shall at all times vest in the licensor. This clause is as under:

“29. The accommodation/ building to be constructed on the licensed space shall at all times vest in the licensor together with all fittings, fixtures and other installations of the immovable types or of the types removal of is likely to cause damage to the accommodation/ building. A list of such fittings, fixtures and installations shall be drawn up jointly by the representatives of the licensor and the licensees on completion of die said accommodation building and the same shall form part of the license deed.”

(vii) Clause 34 permitted the licensees to sub let the premises. This clause is as under:

“34. The Licensees shall run the 5-star hotel themselves. However, the licensees may allow sub-licensees within the period of license for running car parking, cycle-scooter stand for parking and shopping arcades, bank, offices (within the shopping arcade) etc. The Licensees shall be further responsible for the conduct of various sub-licensees and observance of rules and regulations etc. The licensees shall be further responsible to answer that the sub-licensees shall not get any right over and above the rights and privilege of the licensees.”

(vii) By virtue of clause 50,it is provided that license shall stand ip so facto determined and possession/occupation transferred to the licensor. This clause is as under”

“The license shall stand ip-so- facto determined and possession/ occupation transferred to the licensor without any right to compensation whatsoever to the Licensees in any of the following events:...

(viii) From the clauses of the license-deed referred to above, it is clear that title in the property or ownership of the property in West Tower, was not transferred to the assessee. By virtue of the license deed, the assessee only become a license and not the owner of the premises. The license was granted for a specific purpose to the assessee by the NDMC i.e. for running a 5-star hotel and for that purpose several conditions were imposed, in violation of which the license-deed was liable to be terminated. These conditions set out in the license deed did not transfer the ownership of the premises to the assessee and NDMC remained the owner of the premises by virtue of various clauses of the license deed referred to above.



VII. In view of clauses 4 & 5 of the model sub-license deed, certain services, like, air-conditioning, cleaning & maintenance of common passages, lobbies and entrances, electricity and water supply, sanitary, plumbing etc. were to be provided to the sub-licensees by the assessee, in lieu of which the sub-licensees or occupants, were to pay the service charges. As per clause 7, the sub-licensee was authorized to sub let fee premises although any transfer of the space by the sub-licensee to other persons was subject to the discretion of the company and prior written approval from the company. As per clauses 9 to 22, various other conditions have been imposed. As per clause 31, the allotment was to be for a initial period of 9 years 11 months. It was to be renewed subsequently.

VIII. In view of the above conditions, it is clear that license was granted to the sub-licensees for using die space and enjoying fruits of income therefrom. It is undisputed that the sub-licensees were receiving rent from the occupants and were deducting TDS at the time of such receipts. They were also offering this income to income-tax under the head “Income from house property”.

IX. In view of the above facts and other aspects, it is established that sub-licensees were enjoying the premises by having exclusive control over possession and domain over the property. The interest in the property was acquired by them by virtue of the sub-license deed. They were enjoying the income from the property and the department was assessing such income under the head “Income from house property". Thus, for all intents and purposes and particularly in view of the provisions contained u/s 27(iii) read with section 269 UA, these sub-licenses were to be treated as owners and not the assessee. The departmental authorities have not properly appreciated these facts.

X. The learned sr. DR has supported the order of the departmental authorities in holding that the assessee be treated as owner of the property. We have already reproduced the argument of the learned DR in the earlier paras of this order. The contention of the learned DR was that section 22, relating to income from house property, is fully applicable in the case of the assessee. The learned counsel for the assessee on the other hand made reference to the provisions of sec. 27(iii) and submitted that interpretation of the provision u/s 27(iii) as done by the departmental authorities is not correct. According to him this provision provides only for deemed ownership when a person acquires any right as against ‘all rights', "in or with respect to any building or part thereof. According to him, "any right in or with respect to a building", as specified in section 27(iiib) is different from "All the rights" which one must possess to become owner under the Transfer of Property Act He further submitted that for proper understanding of the provision, one needs to see its legislative background and the object behind the provision. It was pointed out by him that Chapter XX-C was brought into the I.T. Act w.e.f 1-10-1986 and conferred a pre-emptive right in Central Government to purchase the property. According to him the provisions of Section XX-A, which preceded Chapter XX-C, were made to deal with the under valuation of immovable properties in sale-deeds and agreement to sell and to check tax evasion. According to him, the power extended not only to the case of sale or exchange but also included in its purview, a lese for a term exceeding 12 years. He further argued that were used and the enjoyment of property stood transferred, it was deemed to be a transfer and thus where any rights in or with respect to any building included the enjoyment of the property, whether by becoming a member or acquiring shares in a cooperative society, company or other association of persons or by way of any agreement or arrangement, or what-ever nature, it was treated as transfer. Thus, it was pointed out by the learned counsel that the provisions of Sec. XXA & XXC later on extended to the provisions governing income from house property as well as income under the head "capital gains".

XI. The issue to be decided, is whether the sub-license has the effect of transferring or enabling the enjoyment of the impugned property. The contention of the learned DR
was that because of restriction imposed, premises were not transferred to the sub-licensees, whereas the contention of the assessee is that full rights in relation to
such property for its use and enjoyment stood transferred to sub-license.

XII. On considering the relevant provisions of I.T. Act, it is found that the concept of "real ownership" and not "the legal ownership", has to be taken into account In the
case of Poddar Cement 226 ITR 625, the Hon'ble Supreme Court was concerned with the interpretation of the word "owner" within the meaning of section 22 of
the LT. act in its practical sense. The relevant observation of the Hon'ble Supreme Court at page 642 of the report are as under

"the juristic principle from the view point of each one is to determine the true connotation of the term 'owner' within the meaning of section 22 of the Act in its practical sense, leaving the husk of the legal title beyond the domain of ownership for eh purpose of this statutory provision-The reason is obvious. After all, who is to be taxed or assessed to be taxed more accurately - a person in receipt of money having actual control over the property with no person having better right to defeat his claim of possession or a person in legal parlance who may remain a reminder man, say, at the end or extinction of the period of occupation. One cannot reasonably and logically visualize as to when a person in actual physical control of the property realizing the entire income and usufructs of the property for this own use and not for the use of any other person, having the absolute power of disposal of the income so received, should be held not liable to tax merely because a vestige of legal ownership or a husk of title in the long run may yet clothe another person with the power of a residual ownership when such contingency arises which is not a case even here."

On page 653 the Hon'ble Supreme Court has farther observed as under:

“We are conscious' of the settled position that under the common law, "owner" means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the income-tax Act, namely, "to tax the income", we re of the view, ''owner*' is a person who is entitled to receive income from the property in his own right". Similarly, though the provision of Chapter XXC have not been made applicable to the provisions of section 32, the Hon'ble Supreme Court in the case of Mysore Minerals 239 ITR 775 (SQ adopted the same logic and held "anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded therefore and having the right to use and occupy the property and/ or to enjoy its usufruct in his own right would be the owner of ht buildings though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc "Building owned by the assessee" the expression as occurring in section 32(1) of the Income-tax Act means the person who having acquired possession over the building in his own right uses the same for the purposes of the business or; profession though a legal title has not been conveyed to him consistently with the requirement s of laws such as the Transfer of Property Act and the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others."



In view of the above, it is seen that the restrictions contained in sub-licenses to which reference has been made by the learned DR did not really impinge on the enjoyment of the premises by the sub-licensees. Sub-licensees can part with the possession of the property in lieu of the consideration. Even the AO has taken into account the rent collected by the sub-licensees from the occupants for working out the ALV and for applying the average rental method, which shows that it was clear to the AO also that sub-licensees were earning rental income by enjoying the property allotted to them by the occupants.

XIII. The learned counsel for the assessee also compared the restrictions imposed in the license deed executed in favour of the assessee by the NDMC and the restrictions imposed by the assessee while executing sub-license deeds in favour of sub-license. According to him, similar restrictions as imposed by the NDMC upon the assessee were imposed by the assessee upon the sub-licensees. In this regard he made reference to various clauses of the two deeds and restrictions contained there under. XIV. According to him, if despite the restrictions imposed upon the assessee under the lease deed, the ownership stood transferred to the assessee, then in view of similar conditions contained under the license deed, the assessee had transferred ownership to the sub-licensees.

21.4. On going through the relevant material, referred to above we find force in this submission of the learned counsel for the assessee. In our considered opinion, the sub-licensees are deemed owners and were enjoying the income from the property allotted to them. They were earning income by farther letting out the property conversely speaking, if by virtue of the restrictions imposed, the sub-licensees cannot be treated to be deemed owners, then on the same logic the assessee also cannot be treated to be the owner because of the restrictions imposed in the license deed.

21.6. The last contention of the learned counsel for the assessee was that since the sub-licensees are to be treated as owners, the assessee cannot be treated to be owner or deemed owner because there cannot be two owners of one property at the same time. In this regard he made reference to the decision of Hon'ble Supreme Court in the case of Mysore Minerals Ltd. 239ITR 775.

21.7. We have considered the argument of the assessee. In the case of
Mysore Minerals Ltd. (supra), after relying upon the earlier judgments in
the cases of Podddar Cement 226 ITR 625 (SC) (supra); and Jodhamal
Kuthiala'case the Hon'ble Supreme Court has observed as under:

“It is well settled that there cannot be two owners of die property simultaneously and in the same sense of the term. The intention of the legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. To take the case at hand it is the appellant-assessee who having paid part of the price, has been placed in possession of the houses as an owner and is using the buildings for the purpose of its business in its own right. Still the assessee has been denied the benefit of section 32. On the other hand, the Housing Board would be denied the benefit of section 32 because in spite of its being the legal owner it was not using the building for its business or profession."

21.8. From the above observations also it is clear that there could not be
two owners of the property. In the present case, the sub-licensees were
having possession over the property. This possession was not for one year
or two but for a large period of 9 years and 11 months which was subject to
further renewal. The user, control and enjoyment of the property was with
them. They were also paying income-tax on the rental income earned by them and therefore they are to be treated as owners of the space sub-licensed to them.

21.9. In view of the above, we are unable to concur with the findings recorded by the learned CIT(Appeals) and setting aside the same we hold that the assessee cannot be subjected to house-property income u/s 22 and 23 of the LT Act as owner of the premises licensed to it. In our view, sub-licensees are to be treated as deemed owner in view of the definition of ownership and transfer as given in sec. 27(iii) read with section 269UA(f)(ii).

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