By TIOL News Service
NEW DELHI, JULY 26, 2011: THE question before the Bench is - Whether penalty u/s 271(1)(c) can be imposed when the annual rent in the Lease Agreement is found to be suppressed. And the High Court's decision goes against the assessee.
Facts of the case
The assessee entered into a Memorandum of Intent with the Bank to let out its property. Thereafter, the prescribed Form No.37-I was filed u/s 269UC, and the appropriate authority issued a certificate u/s 269UL(3) giving no objection. Thereafter, the appellant by a Lease Agreement had leased out its aforesaid property to the Bank at rental Rs.1,00,000 per annum. As per the aforesaid Lease Agreement, the property admeasuring 11,499 sq. yds together with five existing buildings or structure standing thereon was let out on rent to Bank. The assessee had leased out the said premises having aggregate constructed area of 1,23,490 sq. ft. for a term of 25. The assessee had received a sum of Rs.67,00,00,000/- as interest free deposit from the lessee i.e. Bank. For the A.Y 2006-07, the assessee filed a return of income, declaring loss of Rs.3,87,912/- along with computation of income and annual audited accounts. The assessee had shown rental income of Rs.1,00,000/- per annum based on the aforesaid Agreement dated 06.08.2001 entered into with Bank. The said return of income filed by the assessee company was accepted in intimation u/s 143(1). Thereafter, the case was selected for scrutiny. The AO by an order of assessment u/s 143(3) assessed the income of the assessee at Rs.52,94,352. The AO adopted the annual value of the aforesaid premises at Rs.75,63,360/- as determined by the registered valuer in the report. After deducting Rs.22,69,008/- u/s 24(a), the AO made net addition of Rs.52,94,352/-. The AO also initiated penalty proceedings u/s 271(1)(c) and imposed penalty of Rs.17,82,078/- u/s 271(1)(c). The CIT(A) confirmed the levy of penalty. The Tribunal upheld the action of the CIT(A) in confirming the penalty of Rs 17,82,078/- imposed by the AO.
On Appeal before the HC the contention of the assessee was that the Tribunal had failed to appreciate that in the return of income the assessee had shown rental income of Rs.1 lac per annum based on the aforesaid Lease Agreement entered into with Bank i.e. the lessee. The assessee obtained the valuation report dated 26.11.2008 from Government Registered Valuer and duly submitted the same before the AO wherein the Registered Valuer had determined the annual rental value at Rs.76,63,360/- u/s 23. The assessee in order to avoid prolonged litigation and buy peace, voluntary accepted the said valuation of Rs.76,63,360/- as annual rental value of its property. Thus, the basic contention of Assessee Counsel was that it was not a case of concealment of income or furnishing wrong particulars. Revenue counsel referred to the provisions of Section 23 on the basis of which he submitted that the annual rent in the Lease Agreement was suppressed. It was the duty of the assessee to state the rent which this property could reasonably fetch which was the duty cast upon him having regard to the provisions of Section 23.
On appeal, the HC held that,
++ it is clear from Clause (a) of sub-Section (1) of Section 23 that in case the annual rent received is less than the sum for which the property might reasonably be expected to let from year to year, it is the said sum and not the annual rent which would be the annual value chargeable to tax. Only in case where the property is let and the annual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable shall be taxed. Thus, it is the higher of the two which is chargeable to tax. Along with this specific provisions u/s 23, there is no defence of the assessee that disclosing the annual rent as the annual letting value for the purposes of tax was bona fide. In the instant case, the assessee had entered into an agreement to lease out the property to Bank on a sum of Rs.1 lac per annum. The total area of constructed building leased out by the assessee is given in second schedule to the Lease Agreement, which is 1,23,490 sq. ft. The approved valuer has valued the annual letting value of total constructed area of 1,23,490 sq. ft. at Rs.75,63,360/-;
++ the assessee was called upon to give the valuation. The assessee himself filed the annual letting value by the approved valuer of total constructed area of 1,23,490 sq. ft. at Rs.75,63,360/-. This was done at the instance of the AO when the assessee was exposed and confronted with the aforesaid facts. Had the assessee kept in mind the provisions of Section 23, which it was supposed to, the assessee would have found that the sum for which the property might reasonably be expected from year to year is adjustment than the sum disclosed in the Lease Agreement. Explanation 1 to Section 271(1)(c) of the Act would be fully applicable and the AO was justified in imposing the penalty which was upheld up to the Tribunal level.(See 2011-TIOL-437-HC-DEL-IT in 'Income Tax')
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