Sections 22 and 24(a) – Where in terms of lease deed, lessee on expiry of lease term; is required to handover land and building as then standing free from any lien or encumbrance back to the lessor (assessee), then income from leasing of land with a building constructed thereon is chargeable to income tax under the head “Income from house property” and assessee is entitled to claim deduction u/s. 24(a) even if lessee demolishes old building and constructs a new building thereon.

5. [2017] 162 ITD 45 (Chandigarh – Trib.)

Premier Electrical Industries vs. JCIT

A.Y.: 2011-12 Date of Order: 3^rd October, 2016

FACTS

The assessee had leased out its land along with building
constructed thereon to ‘S’ Ltd. for a period of 50 years. The lessee had
demolished the whole of old structure and constructed a hotel building on said
land.

The assessee had declared the amount received from lessee
under the head ‘Income from house property’ and had claimed deduction of 30 %
of the said amount u/s. 24(a).

The AO analysed lease deed and inferred that right to
construct on the plot was with ‘S’ Ltd. and so the assessee was not eligible for
deduction u/s. 24(a) of the Act.

The Ld. CIT-(A) also noted that the construction done by
lessee did not belong to the assessee as the lessee was claiming depreciation
on the hotel constructed by it. The Ld. CIT-(A) therefore concluded that rental
income received by the assessee was for leasing out of the land and hence the
same was to be assessed as ‘income from other sources’ and not ‘Income from
House Property’.

On appeal by the assessee before the Tribunal:

HELD

The fact that the assessee had let out the property is not in
dispute. It has been specifically mentioned in the Schedule-1 of lease deed
that land along with building constructed thereon has been let out to the
lessee.

According to the lease deed, the lessee/tenant was at liberty
to raise any type of construction in the property. However, in case lease was
not renewed after 50 years or lease was terminated, the lessee was required to
handover land and building as then standing free from any lien or encumbrance,
back to the lessor (assessee) within one month of expiry of lease period and
lessee would be free to move its movable asset from the hotel structure or any
structure constructed on the land.

It therefore, clearly proves that the assessee had let out
land and building to the lessee along with superstructure and at the time of
vacating the property in question, the assessee would be entitled for
restoration of land/building with superstructure from the lessee. The balance
sheet of the assessee also shows that in earlier year, demised property was
land and building. Therefore, the rental income received out of letting out the
demised property shall be taxable in the nature of income from house property.
Merely because lessee had raised some construction over the demised property,
the assessee would not be disentitled from claiming deduction u/s. 24(a). The
assessee would always be deemed to be owner of land and buildings so let out.

Even if the lessee is claiming deduction of depreciation on
their constructed building, there is nothing to bar the assessee from claiming
deduction u/s. 24(a) of the Act. Further, the authorities below denied claim of
deduction u/s. 24(a) of the Act on the reason that the same is allowed to the
owner of building so that he could carry out requisite repairs to building.
These findings of the authorities below are against the provisions of section
24(a) of the Act, because it is a statutory deduction and would not depend upon
carrying out of any repair in the building. A sum equal to 30% of the annual
value is allowable as a deduction without proving or giving any evidence of any
repair etc.

On the basis of aforesaid discussion, the rental income is
clearly chargeable to tax under the head ‘income from house property’ and the
assessee is entitled to claim deduction u/s. 24(a).