Facts of the Case

  • Two assessees:
    • Ambience Developers & Infrastructure Pvt. Ltd. (ADI)
    • Ambience Hotels & Resorts Pvt. Ltd. (AHR)
  • AHR owned a hotel property with retail spaces in Gurugram, while ADI operated nearby commercial assets.
  • An agreement dated 31.03.2008 was executed whereby:
    • ADI paid ₹75 crore as interest-free refundable deposit to AHR.
    • ADI obtained rights to lease, manage, and collect rental income from certain retail spaces owned by AHR.
  • ADI declared the lease income in its return, whereas AHR did not.
  • The Assessing Officer (AO) held that:
    • Ownership of property remained with AHR.
    • Rental income must be taxed in AHR’s hands under Section 22.
  • CIT (Appeals) and ITAT upheld the AO’s view, treating the arrangement as a device to avoid tax.
  • ITAT also dismissed rectification applications under Section 254(2).
  • The assessees approached the Delhi High Court challenging ITAT’s orders.

Issues Involved

  1. Whether lease rental income can be taxed in the hands of a non-owner (ADI) based on an agreement.
  2. Whether the arrangement amounted to transfer of income without transfer of asset under Section 60.
  3. Whether ITAT committed a mistake apparent on record warranting rectification under Section 254(2).
  4. Whether the agreement constituted a genuine business transaction or a tax avoidance device.

 

Petitioner’s Arguments

  • The agreement was a bona fide commercial transaction granting ADI rights to enjoy rental income.
  • ADI should be treated as the beneficial owner, relying on judicial precedents.
  • The Income Tax authorities cannot rewrite contractual terms between independent parties.
  • ITAT failed to consider key judgments and submissions, justifying rectification under Section 254(2).
  • The transaction created an overriding title, diverting income before accrual.

Respondent’s Arguments

  • Ownership of property remained with AHR; hence income is taxable under Section 22.
  • The arrangement merely transferred income, not the asset → attracts Section 60.
  • ADI declared losses while AHR had profits, indicating tax avoidance motive.
  • ITAT had considered all relevant facts and case laws; no mistake apparent on record exists.
  • The agreement was a camouflage to shift tax liability.

 

Court’s Findings / Order

  • The High Court upheld ITAT’s decision and dismissed the writ petitions.
  • The agreement did not transfer ownership of the property to ADI.
  • It only allowed ADI to collect rental income → transfer of income without transfer of asset.
  • Therefore, Section 60 applies, and income must be taxed in the hands of AHR (owner).
  • The arrangement was revocable and time-bound, reinforcing that ownership remained with AHR.
  • ITAT had considered all arguments and precedents; hence no rectifiable error existed under Section 254(2).
  • The Court agreed with authorities that the arrangement was structured to avoid tax liability.

Final Outcome:
Writ petitions dismissed; ITAT orders upheld.

Important Clarifications by the Court

  • Income from house property is taxable in the hands of the legal owner, regardless of who actually receives it.
  • Section 60 overrides contractual arrangements where only income (not asset) is transferred.
  • Rectification under Section 254(2) is limited to mistakes apparent on record, not re-arguing the case.
  • Commercial agreements cannot be used to artificially shift taxable income.

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2018:DHC:6883-DB/SRB25102018CW105722018.pdf

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