Wednesday, July 2, 2014

Rent receipts of property not taxable in hands of Co. if shareholders are deemed owners of property under sec. 27


a)The assessee-company owned a land. It had constructed a commercial building on the said land and later on, it allotted specific portion of the building to the shareholders.

b)The assessee had distributed rent receipts proportionately to the shareholders after deducting maintenance cost and taxes. The shareholders had filed separate individual returns, in which they had disclosed income from the building allotted to them.

c)The assessee-company had filed a nil return of income. The AO held that the rental income was attributable to the assessee and, accordingly, levied the tax. On appeal, the CIT (A) upheld the order of the AO. Further, the Tribunal set aside the orders of the lower authorities. The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Provision of section 27(iii) provides that a company or a co-operative society can allot or lease a house building to its members. It further provides that a member, to whom building was allotted, would be construed as the owner of such building;

2)In the instant case, the Memorandum of Association permitted the assessee to construct a building, sell or lease it. It also permitted it to distribute properties to its shareholders. The fact that the resolution had been made to allot a specific portion of the building to the shareholders even before its construction, was not a ground to hold that such an action was illegal;

3) The consequence of resolution under the Companies Act may be different and the said aspects need not be imported while considering purport and implication of section 27(iii). Notwithstanding, the fact that allotment of building by society or company may not make the allottee owner of the building in the context of the Transfer of Property Act, but nonetheless, the Act otherwise construes such an allottee as the owner of property;

4)The assessee-company had allotted a specific portion to the shareholders. Under the Act, shareholders are deemed to be the owners of the portion allotted to them and they would be liable for tax. However, the company, which owns the building, was an ostensible owner;

5)Therefore, it could effect the lease and it was to be construed as one executed on behalf of the shareholders. Therefore, it was to be held that the shareholders were the owners of the specific portion of the building allotted to them and the assessee-company had not retained any part of rent amount or rent deposit.

6)Thus, it could not be argued that the company would deemed to have derived the income from rental and rental deposit. Therefore, the order of the Tribunal was to be upheld. – CIT V. MONARCH CITADEL (P.) LTD [2014] 45 477 (Karnataka)