My client lets its shop to a group company at a low rent, and that company sub-lets to an outsider at many times the figure. Can the Assessing Officer assess my client on the sub-letting rent?
The Delhi High Court refused to let that structure pass unexamined. It found the Tribunal had proceeded on the factually wrong footing that the tenant was not a sister concern, when the assessee had admitted the connection before the Assessing Officer, and it remitted the appeals to the Tribunal for fresh consideration, answering the question of law partly in favour of the Revenue. It expressly did not decide whether the sub-letting rent can be taxed in the owner's hands, and left that question open.
Decided by the High Court (Sanjiv Khanna J and R.V. Easwar J) on 2011-11-15, reported as ITA Nos. 670/2005, 672/2005 and 944/2005 (Delhi High Court). It bears on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961, in House Property, Assessment & Scrutiny and Evidence & Burden of Proof matters.
The commercially common arrangement — owner lets to a group entity at a nominal rent, group entity sub-lets to a real tenant at market rent — is where the s.23(1)(a) fight actually happens, and this is the decision the Revenue leads with in Delhi. Its reach is limited and should be stated honestly: it is a remand, and the Court refused to say whether the higher rent can be brought to tax in the owner's hands or what the effect is of the intermediary having itself been assessed. The competing authority is the Bombay High Court in CIT v. Akshay Textiles Trading and Agencies (17 October 2007), where properties were let to three companies which sub-let to Reliance Industries and the Assessing Officer substituted the downstream rent; the Bombay High Court answered against the Revenue, but on the narrow footing that the sham or colourable device contention had not been argued before the Tribunal and the CIT (Appeals)'s finding that the transactions were independent therefore stood. Neither Court has held that a related-party letting is immune from scrutiny, and neither has held that the downstream rent is automatically the owner's annual value. What decides these cases is the evidence about the relationship and about whether the intermediary tenancy is real.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee owned property at 74-75 Scindia House, New Delhi. It was let to A-One Travels and Tours Pvt. Ltd. at Rs 3,000 per month. A-One had sub-let the portion in its occupation to DHL World Wide Express by lease deed dated 21 November 1996 at Rs 1,60,000 per month with effect from 1 December 1996. The Assessing Officer held that the rental income of the assessee should be taken at Rs 1,60,000 per month, and recorded that the assessee had tried to conceal that A-One was a sister concern, when in fact it was a sister concern with common shareholders and directors. The assessee's explanation was that A-One was an old tenant which had paid a further security of Rs 3,50,000 for sub-letting rights. The CIT (Appeals) deleted the addition, holding A-One to be an independent and separate assessee with a valid tenancy and permission to sub-let, and that the rents were assessable in the respective hands of each. The Tribunal upheld that view, finding no evidence that the lease was a device to avoid tax and that A-One was entitled to sub-let. The Revenue appealed. The appeals related to assessment years 1997-98, 1998-99 and 1999-2000.
The question of law — whether the Tribunal was right in upholding the deletion of the additions to annual letting value — was answered partly in favour of the Revenue and against the assessee. The Court held that the Tribunal had wrongly stated that A-One was not a sister concern of the assessee, that connection having been admitted before the Assessing Officer, and it remitted the matter to the Tribunal for fresh consideration, directing it to examine whether the rental income earned by A-One had been taxed as income from house property, business income, or income from other sources. The Court declined to express any opinion on whether the rent received by A-One can or cannot be taxed in the hands of the assessee under s.23(1), and did not hold that assessment of A-One precludes assessment of the owner; those questions were left open.
The Court set out the scheme of s.23(1), noting that clause (a) fixes the sum for which the property might reasonably be expected to let from year to year while clause (b) applies where the annual rent received or receivable by the owner exceeds that sum, and that where the computation under clause (b) is lower than the annual value under clause (a) the former clause applies. It referred to the Full Bench in CIT v. Moni Kumar Subba for the proposition that the annual value fixed by the municipal authorities can be a rational yardstick subject to its bearing close proximity to the assessment year, and to the rejection of notional interest on deposits — there being no mandate of law by which the Assessing Officer could convert a depression in the rate of rent into money value by assuming a market rate of interest on the deposit. Against that framework the Court found the Tribunal's factual premise to be wrong: the assessee had admitted the close connection with A-One before the Assessing Officer, and the Tribunal had proceeded on the contrary basis. Because the finding on which the Tribunal's conclusion rested could not stand, the appropriate course was remand rather than substitution of the Court's own view, and the Court was careful to confine itself to that.
we have not expressed any opinion whether or not the rent received by A-One Travels and Tours Pvt. Ltd. can be taxed or not taxed in the hand of the assessee under Section 23(1) of the Act. We have not held that if A-One Travels and Tours Pvt. Ltd. have been taxed, then the appellant cannot be taxed. These questions are left open.
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Handle my notice → Ask a CA on WhatsAppThe Delhi High Court refused to let that structure pass unexamined. It found the Tribunal had proceeded on the factually wrong footing that the tenant was not a sister concern, when the assessee had admitted the connection before the Assessing Officer, and it remitted the appeals to the Tribunal for fresh consideration, answering the question of law partly in favour of the Revenue. It expressly did not decide whether the sub-letting rent can be taxed in the owner's hands, and left that question open. This was decided by the High Court (Sanjiv Khanna J and R.V. Easwar J) and bears on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961. It is reported as ITA Nos. 670/2005, 672/2005 and 944/2005 (Delhi High Court). The commercially common arrangement — owner lets to a group entity at a nominal rent, group entity sub-lets to a real tenant at market rent — is where the s.23(1)(a) fight actually happens, and this is the decision the Revenue leads with in Delhi. Its reach is limited and should be stated honestly: it is a remand, and the Court refused to say whether the higher rent can be brought to tax in the owner's hands or what the effect is of the intermediary having itself been assessed. The competing authority is the Bombay High Court in CIT v. Akshay Textiles Trading and Agencies (17 October 2007), where properties were let to three companies which sub-let to Reliance Industries and the Assessing Officer substituted the downstream rent; the Bombay High Court answered against the Revenue, but on the narrow footing that the sham or colourable device contention had not been argued before the Tribunal and the CIT (Appeals)'s finding that the transactions were independent therefore stood. Neither Court has held that a related-party letting is immune from scrutiny, and neither has held that the downstream rent is automatically the owner's annual value. What decides these cases is the evidence about the relationship and about whether the intermediary tenancy is real. If it applies to you, the first step is this: Do not conceal or understate the relationship with the tenant. The Court records that the assessee tried to conceal that the tenant was a sister concern with common shareholders and directors, and that admission before the Assessing Officer is what carried the day for the Revenue on remand.
The assessee owned property at 74-75 Scindia House, New Delhi. It was let to A-One Travels and Tours Pvt. Ltd. at Rs 3,000 per month. A-One had sub-let the portion in its occupation to DHL World Wide Express by lease deed dated 21 November 1996 at Rs 1,60,000 per month with effect from 1 December 1996. The Assessing Officer held that the rental income of the assessee should be taken at Rs 1,60,000 per month, and recorded that the assessee had tried to conceal that A-One was a sister concern, when in fact it was a sister concern with common shareholders and directors. The assessee's explanation was that A-One was an old tenant which had paid a further security of Rs 3,50,000 for sub-letting rights. The CIT (Appeals) deleted the addition, holding A-One to be an independent and separate assessee with a valid tenancy and permission to sub-let, and that the rents were assessable in the respective hands of each. The Tribunal upheld that view, finding no evidence that the lease was a device to avoid tax and that A-One was entitled to sub-let. The Revenue appealed. The appeals related to assessment years 1997-98, 1998-99 and 1999-2000. The matter was decided on 2011-11-15 by the High Court (Sanjiv Khanna J and R.V. Easwar J). On those facts the High Court held as follows. The question of law — whether the Tribunal was right in upholding the deletion of the additions to annual letting value — was answered partly in favour of the Revenue and against the assessee. The Court held that the Tribunal had wrongly stated that A-One was not a sister concern of the assessee, that connection having been admitted before the Assessing Officer, and it remitted the matter to the Tribunal for fresh consideration, directing it to examine whether the rental income earned by A-One had been taxed as income from house property, business income, or income from other sources. The Court declined to express any opinion on whether the rent received by A-One can or cannot be taxed in the hands of the assessee under s.23(1), and did not hold that assessment of A-One precludes assessment of the owner; those questions were left open.
The Court set out the scheme of s.23(1), noting that clause (a) fixes the sum for which the property might reasonably be expected to let from year to year while clause (b) applies where the annual rent received or receivable by the owner exceeds that sum, and that where the computation under clause (b) is lower than the annual value under clause (a) the former clause applies. It referred to the Full Bench in CIT v. Moni Kumar Subba for the proposition that the annual value fixed by the municipal authorities can be a rational yardstick subject to its bearing close proximity to the assessment year, and to the rejection of notional interest on deposits — there being no mandate of law by which the Assessing Officer could convert a depression in the rate of rent into money value by assuming a market rate of interest on the deposit. Against that framework the Court found the Tribunal's factual premise to be wrong: the assessee had admitted the close connection with A-One before the Assessing Officer, and the Tribunal had proceeded on the contrary basis. Because the finding on which the Tribunal's conclusion rested could not stand, the appropriate course was remand rather than substitution of the Court's own view, and the Court was careful to confine itself to that. In the words reproduced by the source cited on this page: "we have not expressed any opinion whether or not the rent received by A-One Travels and Tours Pvt. Ltd. can be taxed or not taxed in the hand of the assessee under Section 23(1) of the Act. We have not held that if A-One Travels and Tours Pvt. Ltd. have been taxed, then the appellant cannot be taxed. These questions are left open." The decision followed or applied CIT v. Moni Kumar Subba (Full Bench, Delhi) — applied on the municipal rateable value as a yardstick and on notional interest.
It was decided by the High Court on 2011-11-15 and is reported as ITA Nos. 670/2005, 672/2005 and 944/2005 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 22, section 23, section 23(1)(a), section 23(1)(b), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The question of law — whether the Tribunal was right in upholding the deletion of the additions to annual letting value — was answered partly in favour of the Revenue and against the assessee. The Court held that the Tribunal had wrongly stated that A-One was not a sister concern of the assessee, that connection having been admitted before the Assessing Officer, and it remitted the matter to the Tribunal for fresh consideration, directing it to examine whether the rental income earned by A-One had been taxed as income from house property, business income, or income from other sources. The Court declined to express any opinion on whether the rent received by A-One can or cannot be taxed in the hands of the assessee under s.23(1), and did not hold that assessment of A-One precludes assessment of the owner; those questions were left open. It arises in House Property, Assessment & Scrutiny and Evidence & Burden of Proof matters, on section 22, section 23, section 23(1)(a), section 23(1)(b) of the Income Tax Act 1961, and was decided by Sanjiv Khanna J and R.V. Easwar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the commercial file for the intermediary tenancy before the assessment closes: the age of the tenancy, the express right to sub-let, any premium or additional security paid for that right, and why the rent was set where it was. Establish and document how the intermediary's rental income has been assessed and under which head — the Court specifically directed the Tribunal to examine whether the rent earned by the intermediary was taxed as income from house property, business income, or income from other sources. Where you act for the Revenue or are anticipating the argument, note that Akshay Textiles was lost by the Revenue because the sham or colourable device plea was never raised before the Tribunal; raise it at the assessment stage and press it at every tier. Treat the point as open, not settled, in any opinion you give — the Court said in terms that it had not expressed any view on whether the intermediary's rent can be taxed in the owner's hands under s.23(1).
Searched for later treatment; none was found. That is not the same as a source affirming it. Data note first: the id stored for this entry (716054) is a different judgment altogether - CIT v Akshay Textiles Trading and Agencies Pvt Ltd, Bombay High Court, 17 October 2007 - and should be corrected. This judgment is at doc/62690041. Run on the right id the citator returns a single later decision, and it is not a treatment: in Dr Manju Dang v DCIT (ITAT Delhi, 31 July 2018) the judgment appears only at para 3 in the assessee's list of authorities on fair market rent, and the Bench then held at para 7 that 'the facts involved in the case in hand ... are not prevailing in the decisions relied by the assessee, the same are not applicable, being distinguishable on facts'. A name search returns 41 documents but the rest are unrelated proceedings of the same company against the NDMC and the Ministry of Defence. So no court has been found taking up the holding that the Tribunal proceeded on a factually wrong footing about the tenant being a sister concern, or the approach to annual letting value where the parties are connected. Nothing overrules or doubts it either. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
I read the judgment through the Indian Kanoon print view in two passes and could not obtain a continuous verbatim text of every paragraph; paragraphs 4, 5, 6, 13, 14 and 15 came back in the Court's own words and the intervening paragraphs on the statutory scheme and on the Full Bench in Moni Kumar Subba came back partly in the Court's words and partly in condensed form. The related Bombay decision in Akshay Textiles was read separately at https://indiankanoon.org/doc/716054/?type=print, also without a continuous verbatim text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The question of law — whether the Tribunal was right in upholding the deletion of the additions to annual letting value — was answered partly in favour of the Revenue and against the assessee. The Court held that the Tribunal had wrongly stated that A-One was not a sister concern of the assessee, that connection having been admitted before the Assessing Officer, and it remitted the matter to the Tribunal for fresh consideration, directing it to examine whether the rental income earned by A-One had been taxed as income from house property, business income, or income from other sources. The Court declined to express any opinion on whether the rent received by A-One can or cannot be taxed in the hands of the assessee under s.23(1), and did not hold that assessment of A-One precludes assessment of the owner; those questions were left open.
TaxSphere, “CIT v Sardar Exhibitors P Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-sardar-exhibitors-sister-concern-tenant-sub-letting/ (validity last checked 2026-09-07)
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