Rental Income Doesn’t Come under Tax in the Absence of Agreement

Shubhangi Jain

29 May, 2024

ITAT Ahmadabad pronounced a judgement on 28-09-2022 in the case titled Mansha Textile Pvt. Ltd. Vs ITO observing that the rental income does not come under the tax in the absence of an agreement. The assessee filed 5 appeals five appeals against the order of the ld. Commissioner of Income Tax (Appeals)-2 vide order dated 29/11/2016 & 31.10.2017 passed for the Assessment Years 2008-09 to 2011-12 & 2014-15. The present article discussed the aspects covered in the case.

Background

• Prior to proceeding with deciding the case on merits, the tribunal dealt with the issue of filing the appeal with the delay of 360 days for assessment years 2008-09 to 2010-11 (for each of the AYs ) and the appeal for the assessment year 2014- 15 by 15 days.
• The assessee’s counsel submitted an affidavit of the Director/Authorised Signatory stating the reason for the delay, which is an ongoing dispute between the current and ex-directors of the assessee company M/s Mansha Textile Private Limited.

• The directors needed to be removed from their post due to illegally mortgaging the assets of the company to obtain a loan on the company’s behalf and leasing out the same without prior knowledge/intimation to the existing directors of the assessee company along with fraudulently siphoning off the assessee company’s income to another bank account without the knowledge of the present directors of the assessee company.
• Resultantly, the complaint was filed by the present directors with the (MCA) as well as NCLT). However, despite the substantial dispute couldn’t be amicablly settled (in fact, the dispute is still persisting).
•  Therefore the existing directors of the assessee company, M/s Mansha Textile Private Limited, decided upon completing the pending legal matters, leading to delayed appeal filing before the tribunal (360 days for AYs 2008-09 to 2011-12 and 15 days delay for the assessment year 2014-15) along with submitting the documents to support their contention also submitted that for all the years under consideration, there hasnt be any reciept of taxable income by the assessee company due to the same being illegally siphoned off by the ex-directors, that were subsequently removed from their post. Therefore, the assessee company may be allowed to present its case on merits in the interests of justice, which was allowed by the tribunal.

Facts of the Case

• While verifying the details in form 26AS, the AO noticed that the assessee had received an amount of ₹ 21,42,504/- as rental income for the year under consideration, which wasn’t offered to tax by the assessee company in the income tax return, which led to to the reopening of the assessment by the AO.
• During re-assessment proceedings, it was observed by the AO that there were rental payments made by various parties to the assessee company, which were credited to the assessee company’s current account held with Axis Bank Ltd, which were not reflected in the books of account for the year under consideration and neither the rental receipts filed for tax by the assessee in an income tax return.
• The assessee submitted that the company was incorporated in the year 1988 to conduct the business of textile products with its registered office in Vadodara, Gujarat.
• The original Directors of the company were Mr Ashok Khurana and Mrs Manju Khurana. Later, Mr Deepak Ochhaney approached Mr Khurana with the proposal for developing a commercial property at Noida on a 50-50 sharing basis. Accordingly, the company submitted a request with Noida Authority on 04- 04-2000 for the allotment of commercial plots, which was allotted through a lease deed on 04-07-2002. Mr Deepak Ochhaney was given the authorization to sign the lease deed on behalf of the company.
• After this, Mr Deepak Ochhaney (and 3 of his family members) were admitted as shareholders of the assessee company, with the Khurana group holding 35,720 shares and the Deepak Ochhaney group holding 10,645 shares, respectively.
• However, subsequently, the Khurana group was of the opinion that the Ochhaney group wasn’t working in the interest of the assessee company, and therefore, EGM was called on 28 March 2006 for the removal of Mr Deepak Ochhaney and his family members as directors of the assessee company.
• On 24 March 2006, a public notice was issued in the “Business Standard” newspaper in New Delhi intimating the public regarding the removal of these directors from the company’s Board of Directors, followed by filing necessary Form number 32 with ROC.
• Both groups also approached the Company Law Board that passed an order directing both parties to maintain the status quo with respect to fixed assets, shareholdings and share capital of the company vide order dated 11-12-2008.
• Meanwhile, the Deepak Ochhaney group took complete possession of the property at Noida unlawfully and rented out the premises to various tenants and also illegally siphoned the rental income to another bank account with Axis Bank Ltd.  
• Therefore the assessee contented that neither the company’s directors had entered into any rent agreement on behalf of the company nor money has been deposited in the official bank account of the company towards rental receipts.
• The matter was noticed by the assessee company only upon the receipt of the TDS certificates at the registered office of the company, subsequent to which the assessee company approached the Company Law Board in this matter and is exploring the possibility of restricting Deepak Ochhaney group from taking the rental income from the tenants.

Issue

Whether Rental Income Not Come Under The Tax In The Absence Of An Agreement? 

Grounds of Appeal

According to the assessee, the Ld. CIT (A) erred in law due to the following

Reopening the assessment u/s 148 of the Income Tax Act, 1961

• Confirmation of addition of Rs. 14,99,753/- as rental income of the assessee after all owing standard deduction and not considering the facts submitted to him during the proceedings.
• Confirmation of penalty proceedings u/s 274 r.w.s. 271 (1)(c) of the IT Act.
• The assessee further prayed to allow the submission of any other ground that may meet at the end of justice during the hearing.

The assessee raised an additional ground as the same was legal in nature and can be raised before the ITAT as per the decision of the Hon’ble Supreme Court in the case of National Thermal Power. The additional grounds were

• Dismissal of the appeal by holding that there was an absence of a reasonable cause for filing the appeal belatedly.
• Refusal to grant credit of TDS from the rental income while confirming the AO’s action of assessing the rental income in the taxable income of the assessee.

Contentions of the Assessee

Therefore, the assessee company contended that the assessee company did not receive any income during the year under consideration. Therefore, the same was not taxed as rental income. However, the same was rejected by the AO, and he added a sum of ₹ 2,142,504/- as rental income assessee (after allowing standard deduction@30%) for the year under consideration.

The counsel for the assessee submitted that Ld had passed the order. CIT(Appeals) without granting the assessee an adequate opportunity for a hearing. The assessee had sought an adjournment, which wasn’t granted by Ld. CIT(A), thereby proceeding to dismiss the assessee’s appeal, solely relying upon the order passed by AO even without appreciating the merits of the case. Accordingly, the assessee’s counsel requested to set aside the matter to the Ld. CIT(Appeals’s file for adjudication on merits, after giving the assessee the opportunity to hear. In the interest of justice, 

Judgement

The tribunal observed that the assessee never received the rental income, as the same was siphoned off illegally and fraudulently by the directors of the company.It neither entered into a lease agreement with the tenants nor was the rental income ever received by the company, accordingly the said rental income was not offered to tax by the assessee in its ITR. Secondly, the CIT (A) had passed the order without proving the assessee a chance of being heard hence the order of CIT (A) was set aside by the tribunal

Conclusion

The tribunal directed the CIT (A) to adjudicate the matter afresh and provide an opportunity of being heard by the assessee, thereby upholding its right to be heard as per the principles of natural justice.

Read Our Article: TDS on Rental Income: Section 194I of the Income Tax Act, 1961