HGP COMMUNITY PVT LTD (SUCCESSOR TO OMEGA ASSOCIATES),MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 1(2), MUMBAI

These erstwhile partnership firms were engaged in the business of construction and development properties. Apart from constructing various residential buildings, it has also constructed commercial buildings for a period of time which some of them were sold and some of the units were kept for leasing out. The firm had claimed depreciation of Rs.31,34,457/- on furniture and fixtures, Rs.1,37,942/- on interior decoration, and Rs.2,76,666/- on office equipments leased assets. Similarly, in the case of M/s. Omega Associates also assessee has claimed depreciation on similar lease assets and furniture and fixtures. These were part of the block of assets coming from the earlier HGP Community Pvt. Ltd., years. The case of the assessee was that earlier the income from lease of assets were shown as business income and in the tax audit report under Form 3CD, there was a specific note given in Clause 13(a) wherein it was specifically pointed out that the transactions of sale or of lease entered into in course of business as Developer to earn revenue from business. It was further pointed out that the assessee earlier computed and offered income from leasing as business income, but litigation with the income tax department followed in case of the group companies, which is pending before the Hon’ble High Court at Mumbai. To avoid litigation and to buy peace, the assessee has offered the lease income as income from house property. However, it was reiterated that the income is earned in the course of business. In the quantum proceedings also assessee had submitted that primary letting out is of immovable property and letting out of movable assets is incidental to the letting out of immovable property and therefore, depreciation is allowable on such movable assets. The ld. AO has disallowed the depreciation on the ground that assessee had shown lease income under the head ‘income from house property’. This disallowance of depreciation was not challenged. After the order of the ld. CIT (A) it was held that once the assessee had shown income under the head ‘house property’ only expenditure allowable is interest and standard deduction @30%.

In the penalty proceedings, the ld. AO after considering the explanation of the assessee had levied the penalty on the disallowance of depreciation. The allegation of the ld. AO was HGP Community Pvt. Ltd., that assessee had failed to furnish satisfactory explanation and there was deliberate condition on the part of the assessee leading to concealment of income for the year under consideration and accordingly, he has levied the penalty for furnishing inaccurate particulars of income. The ld. CIT (A) has confirmed the addition holding that it was a deliberate Act on the part of the assessee to claim both depreciation as well as standard deduction thereby claiming double benefit.

We have heard both the parties at length and also perused the relevant findings given in the impugned order. As noted above, assessee is a developer of residential and commercial buildings and assessee had either sold the units constructed or leased them out with a view to generating revenue from business. The units which were unsold or not used for self- occupation were leased out alongwith other fixtures and furnitures and lease rentals from such fixed assets were declared as business income in the earlier years. It has been stated that since there was protracted litigation, therefore, the assessee in the A.Y.2015-16 and 2016-17 had offered the lease rental income as ‘income from house property’. A separate disclosure was made for such a claim in the audit report and in the notes to the account as noted above. Before us the case of the assessee is that, firstly, complete disclosure was made by the assessee in relation to its claim of depreciation right from the state of filing of return as well as during the course of assessment proceedings and therefore, there was no furnishing of inaccurate particulars.

HGP Community Pvt. Ltd., Merely making the incorrect claim does not lead to conclusion that assessee has furnished inaccurate particulars. In support, reliance was placed on the judgment of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro products Pvt. Ltd., reported in 322 ITR 158. Secondly, it has been contended that in subsequent years, the assessee again disclosed rental income as business income and such business income has been accepted by the department and depreciation has been allowed.

It is an undisputed fact that assessee in the earlier years has been claiming income from immovable property which was leased out alongwith other fixtures and furnitures (immovable assets) as ‘income from business’. In some of the years it was allowed and in some of the years they were protracted litigation. From this year assessee has shown the lease rental income from house property, however, the assets appearing in the block of assets in the books, depreciation were claimed as per the rules. Assessee has also made a specific disclosure in the audit report filed alongwith return of income stating these facts. Before us, it has been further brought to our notice that in the subsequent years, same lease rental income is now being assessed as business income after the decision of the Hon’ble Supreme Court in the case of Chennai Properties reported in [2015] 56 taxmann.com 456 (SC). Consequently, the depreciation on such assets has been allowed. Thus, full disclosure made in the audit report under the return of income and the basis of claim was not given. In such a situation, it cannot be held that it is a case of HGP Community Pvt. Ltd., furnishing of inaccurate particulars of income. The claim made may not be sustainable later on by the AO that does not lead to any inference that it is a case for levy of penalty u/s.271(1)(c). Thus, the principle laid down by the Hon’ble Supreme Court in the case of Reliance Petro products Pvt. Ltd., (supra) is squarely applicable wherein the Hon'ble Supreme Court has held that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars" The Court further held that:-

"We have already seen the meaning of the word "particulars in the earlier part of this judgment Reading the words in conjunction they must mean that details is supplied in the return which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars.

Before us a similar case has been cited in the case of Brizo Realty Co. Pvt. Ltd. vs. NFAC, Delhi (ITA No. No.2941/Mum/2023 dated 09/01/2025 wherein in that case the assessee claimed depreciation on the immovable property that was leased out and claimed depreciation on the immovable HGP Community Pvt. Ltd., property and equipment. However, during the course of the assessment proceedings, it revised its claim and offered income from house property and claimed depreciation on the immovable property leased out. The ld. AO levied a penalty under section 271(1)(c) of the Act on the ground of furnishing of inaccurate particulars. The penalty was deleted by the Tribunal by, inter alia, following the decision of the Hon'ble Supreme Court in Reliance Petroproducts (supra). Accordingly, the penalty levied by the ld. AO in both the years on account of claim of depreciation is deleted.

In the result, all the appeals of the assessee are allowed.