ARYAN ARCADE LTD vs. PR. COMMISSIONER OF INCOME TAX RAJKOT - I

The   petitioner   has   challenged   a   notice   dated 02/04.01.2008   issued   by   the   respondent   Principal Commissioner of Income­tax, Rajkot, seeking to take the assessment of the petitioner for the assessment year 2013­ 2014 in revision in exercise of powers under section 263 of the Income Tax Act (“the Act” for short).

Brief   facts   are   s   under.   Petitioner   is   a   private   limited company  and   is   engaged   in  the   business   of   letting   out shops   situated   in   Shopping   mall   on   lease.   For   the assessment year 2013­2014, the petitioner had filed return of income on 21.9.2013 declaring total income as nil. This return was later on revised on 21.9.2013 declaring loss of Rs.2.41 crores (rounded off). In the return, the petitioner had   shown   principally   two   sources   of   income   namely, rental income earned by letting out immovable properties and   income   from   other   sources.   In   the   return,   the petitioner had  shown  the rent  receipt  of Rs.3.46  crores (rounded off) and income from other sources at Rs. 1.09 crores (rounded off).

The   Assessing   Officer   undertook   the   assessment   of   the return.   During   the   course   of   assessment   proceedings, several issues came up for consideration. One of them was the   petitioner's   claim   for   expenditure   of   Rs.4.04   crores (rounded   off)   being   interest   paid   on   debentures.   The Assessing   Officer   also   examined   the   petitioner's computation   of   income   from   other   sources   and   the expenditure   claimed   by   the   petitioner   to   have   been incurred for earning such income. The Assessing Officer issued   notice   dated   4.8.2015   asking   the   petitioner   to provide the following details :

The   Assessing   Officer   called   further   details   such   as property   tax   expenses,   receipts   of   security   expenses, receipts of house keeping expenses, receipts of professional charges paid and receipts of electricity expenses, which all were supplied by the petitioner.

The Assessing Officer after such scrutiny passed the order of   assessment   on   9.3.2016   in   which   he   disallowed   the petitioner's claim of interest expenses of Rs. 4.04 crores with which we are not directly concerned. With respect to the   petitioner's   declaration   of   rental   income   as   well   as petitioner's   computation   of   income   from   other   sources which would include the receipt as well as expenditure, the Assessing Officer made no major changes.

To take such order of assessment in suo motu revision, the Commissioner has issued the impugned notice in which he has cited the following grounds : “The Assessment for A.Y. 2013­14 was finalized u/s.143 (3) of the   Act   on   09/03/2016   determining   total   income   at   Rs. 1,63,24,030/­ which was set off against the brought forward losses. 2.On perusal of record, it is seen that during the previous year 2012­13   relevant   to   A.Y   2013­14   your   company   had   shown gross annual rent of Rs.3,46,69,782/­ against the claim of RMC taxes of Rs.1,15,95,495/­ under the head income from house properties. Your company is having single immovable property namely Grand Central Mall at Rajkot and leased out the units to various   parties   and   has   entered   into   leave   and   license agreement with each such parties. The another company M/s Gandhi Reality (India) Pvt. Ltd. having similar kind of property i.e. Crystal Mall, Rajkot in the nearby vicinity, had offered rental income of Rs.1,50,07,501/­ against the payment of RMC taxes of Rs.18,61,053/­. Considering the same rate of the property taxes by the RMC in both the cases, the sum for which your property (Grand Central Mall) might reasonably be expected to let   from   year   to   year   can   be   arrived   at   Rs.9,35,05,882/­ (1,50,07,501 * 1,15,95,495 / 18,61,053). Thus, the assessment has been finalized without inquiries and verification.

Also it is seen that in the preceding year your company had shown income from other sources u/s 56 of Rs.1,09,25,338/­ (1,02,02,408 CAM charges + 7,22,930 interest on income tax refund) and claimed deduction of Rs.1,59,96,787/­ u/s 57 on it. However, some of the expenditure which may not be entirely related to income offered u/s 56 ie. AMC cost of Rs.15,93,440/­, Housekeeping   expenses   of   Rs.19,52,284/­,   Legal   and Professional   charges   of   Rs.18,86,800/­   and   Marketing   and Event expenses of Rs.13,52,369/­ etc. could be related to the operating expenses of the Grand Central Mall also. Therefore, the entire expenses were required to be apportioned between the income under the head income from House Property and that of the income from Other Sources. The proportional expenditure for   the   income   from   other   sources   can   be   arrived   at Rs.87,81,340/­ (1,09,25,338 * 8,39,37,543/10,44,31,220 total deemed   income).   Thus   your   company   has   claimed   excess deduction of Rs.72,15,447/­ (1,59,96,787­87,81,340).

Thus, the assessment order passed by the Assessing Officer for A.Y 2013­14 is erroneous and prejudicial to interest of the revenue. Therefore,1 hereby initiate proceedings u/s 263 of the Act with a view to pass a suitable order. Before passing of such order, you are hereby given an opportunity of being heard in the matter. In this connection you are requested to attend this office on 16­01­2018 at 5:30 PM. alongwith your written submission.”

The petitioner opposed such notice by filing a detailed reply dated 9.2.2018. In  such  reply,  the  petitioner  contended that   the   order   of   assessment   is   neither   erroneous   nor prejudicial to the Revenue. It was therefore, not open for the   Commissioner   to   exercise   revisional   powers.   The petitioner made detailed submissions with respect to the two grounds sought to be pressed in such notice. With respect   to   the   first   of   the   two   grounds,   the   petitioner contended that the annual rental charges of a property cannot be made the basis for assessing the rent received by the   assessee   in   a   particular   year.   In   any   case,   annual rental  value of   two  properties cannot  be compared for assessing rent receivable for the respective properties. With respect to the second ground raised by the Commissioner, the   petitioner   contended   that   the   issue   was   thoroughly examined   by   the   Assessing   Officer   during   the   original assessment   proceedings.   The   assessee   had   satisfied   the Assessing Officer about the correctness of the expenditure claimed for earning the income from other sources. There was no basis for shifting any part of the expenditure for rental charges. The petitioner also referred to large number of judgments of various High Courts and Supreme Court in support of the contention that when proper inquires have been made by the Assessing Officer, pursuant to which the Assessing   Officer   has   taken   a   view   which   is   plausible, revisional power could not be exercised. When the Principal Commissioner was unrelenting, the petitioner moved the present   petition   and   challenged   the   very   notice   under section 263 of the Act.

Learned   counsel   for   the   petitioner   submitted   that   the Commissioner has committed a serious error in assuming juri iction not vested in him. For exercise of powers under section 263, the twin conditions of order of assessment being   erroneous   and   prejudicial   to   the   interest   of   the Revenue must exist. Both these conditions in the present case   are   not   existing.   With   respect   to   the   first   issue, counsel submitted that the Commissioner has compared two   incomparable   instances.   There   is   no   basis   for contending   even   prima   facie   that   merely   because   other entity  engaged in the same business has shown  higher rental income in proportion to the Municipal charges paid for   the   property   in   question,   the   petitioner   also   must declare rental income at the same rate. Counsel submitted that range of factors go into deciding the municipal taxes of an immovable property. Equal number of variables go into deciding   the   rental   charges   for   such   properties.   The Commissioner   cannot   bring   down   the   two   on   a mathematical calculation erroneously devised by him. With respect to the second issue raised by the Commissioner in the impugned notice, counsel submitted that the Assessing Officer had carried out detailed inquiry during the course of   assessment   proceedings.   Merely   because   the Commissioner holding a different belief would not permit him to take the order in revision.

On the other hand, learned counsel Shri Bhatt for the department   opposed   the   petition   contending   that   the challenge at this stage of issuance of show cause notice should not be encouraged. The Commissioner has recorded proper reasons. The petitioner would have full opportunity to participate in the proceedings. The proceedings at this stage should not be terminated. Counsel further submitted that both the grounds are valid and germane. A similar property   in   the   same   locality   has   fetched   much   higher charges   in   case   of   another   entity   engaged   in   the   same business.  There is thus the starting point to suggest that the petitioner had not correctly declared the rental charges for   its   properties.   Regarding   the   second   issue,   counsel submitted   that   same   was   completely   unrelated   and independent of the first one. The petitioner had diverted greater expenditure towards income from other sources. Proper allocation should have been done and part of the expenditure should have been diverted for earning income from house property.

Having heard the learned advocates for the parties and   having   perused   the   documents   on   record,   we   may peruse   the   reasons   recorded   by   the   Commissioner   for issuing the impugned notice minutely. The Commissioner relied on two factors. In first one, he suggests that the petitioner had shown gross annual rent of Rs. 3.46 crores. The petitioner had paid monthly taxes of Rs.1.15 crores (rounded off) for such property. Such property was a single mall situated in Rajkot. The petitioner had leased out the units situated in such property out of which it had earned rental income. He pointed out that another entity one M/s. Gandhi Reality (India) Pvt. Ltd.  which is also engaged in similar business who possesses property of similar kind which is also a mall at Rajkot in the nearby vicinity had offered   rental   income   of   Rs.1.50   crores   (rounded   off) against   the   payment   of   RMC   taxes   of   Rs.   18. 61   lacs (rounded   off).   In   the   opinion   of   the   Commissioner,   this would demonstrate extremely low rental charges declared by the petitioner. He took the mathematical projection of the   proportion   of   the   rental   income   declared   by   M/s. Gandhi Reality (India) Pvt. Ltd. against RMC taxes paid in case of the petitioner by taking RMC taxes of Rs. 1.15 crores as a test. In the process, he arrived at the figure of Rs. 9.35 crores (rounded off) which ought to have been rental charges received by the petitioner.

In our opinion, this comparison is wholly erroneous. Firstly, the Commissioner merely proceeded to record that both the immovable properties namely, the mall managed by   the   petitioner   company   and   one   managed   by   M/s. Gandhi Reality (India) Pvt. Ltd., both are situated in the nearby locality, without  giving the distance between the two properties and without even prima facie ascertaining their respective locations. This would be relevant as we discuss   the   issue   further.   Next   the   Commissioner   also merely adopted the respective municipal taxes of the two properties as the basis for considering commercial rental value of these properties.

The municipal tax rate as well as the potential for fetching rental charges for the immovable properties have many variables. As is well known, the municipal taxes are fixed on the basis of various factors such as built­up area, the age of the property, location of the property, nature of occupation   of   the   property,   use   of   the   property,   etc. Further,   so   far   as   the   rent   potential   of   the   property   is concerned,   equal   number   of   variables   would   go   into deciding the same such as, location of the property, area under   rent,   the   age   of   the   building,   the   nature   of   the business   surrounding   the   property.   In   an   immovable property even a small distance of location can make a big difference if one property is situated at a prime location at an important junction and the other does not enjoy any such advantage. These aspects cannot be standardised by applying   a   mathematical   formula.   The   Commissioner compared the two most variable factors by merely taking the proportion of the two sets of properties between RMC taxes and the rentals received or receivable. In our opinion the   starting   point   for   making   further   inquiry   itself   was erroneous.

Coming   to   the   second   issue,   we   have   noticed   the correspondence   between   the   Assessing   Officer   and   the assessee during the course of assessment proceedings in the earlier portion of his order. Considerable attention was given   to   the   question   of   assessee's   income   from   other sources and the expenditure claimed by the assessee in order to earn such income. In particular, the entire break­ up of such expenditure was before the Assessing Officer. The Assessing Officer having asked for details, the assessee supplied full details of property tax expenses, electricity expenses,   legal   and   professional   expenses,   security charges,   etc.   It   was   after   such   detailed   inquiry,   the Assessing Officer made no additions. This was thus clearly a case of full inquiry having been made by the Assessing Officer before he made up his mind. This is not a case where   there   were   no   inquiries   or   no   germane   inquiries having been made. On this basis, the second ground of the Commissioner also must fail and yet another area on this ground where the Commissioner has committed error while apportioning the cost between two heads of income where the Commissioner has taken the projected income of Rs. 9.35 crores from the house property as estimated by him on the basis of projections. All in all, we do not find this a fit   case   where   Commissioner   would   have   exercised revisional powers.

Impugned notice therefore, is set aside. Petition is disposed of. (AKIL KURESHI, J) (B.N. KARIA, J) Raghu