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Facts
The assessee, a doctor, filed a return declaring income from renting out property to patients as "income from house property." The Assessing Officer (AO) completed the assessment accepting this classification. Subsequently, the Principal Commissioner of Income Tax (PCIT) invoked Section 263 to revise the assessment, contending that the rental receipts should be treated as "professional income" and denying the carry forward of house property loss, deeming the AO's order erroneous and prejudicial to the revenue.
Held
The Tribunal held that the AO had applied his mind to the issue of income classification during the original assessment, making enquiries and accepting the assessee's explanation. The Tribunal found that the AO had taken a possible view in law. Therefore, the PCIT could not invoke Section 263 merely because he held a different opinion, as the assessment order was neither erroneous nor prejudicial to the revenue. The Tribunal set aside the PCIT's order and restored the original assessment order.
Key Issues
1. Whether the PCIT validly invoked Section 263 to revise the assessment order. 2. The correct classification of rental income received by a doctor from patients (income from house property vs. professional income). 3. The allowability of carry forward of house property loss.
Sections Cited
263, 143(2), 142(1), 143(3), 144B, 44ADA, 24
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, VISAKHAPATNAM “DIVN” BENCH, VISAKHAPATNAM
Before: SHRI VIJAY PAL RAO, HON’BLE & SHRI S BALAKRISHNAN, HON’BLE
This appeal filed by the assessee is directed against the order of the Learned Principal Commissioner of Income Tax-1, Visakhapatnam (“Ld. PCIT”) passed U/s. 263 of the Income Tax Act, 1961 (“the Act”) vide DIN & Order No. ITBA/COM/F/17/2024-25/1073408354(1), dated 18/02/2025 for the AY 2020-21.
The facts in brief are that the assessee being an individual filed his return of income on 31/03/2021 for the AY 2020-21 admitting a total income of Rs. 6,61,470/-. Subsequently, the case was selected for limited scrutiny through CASS and notices U/s. 143(2) and 142(1) of the Act were issued from time to time. Considering the submissions furnished by the assessee during the course of the assessment proceedings, the Ld. AO completed the assessment proceedings without any additions to the total income thereby accepting the return of income filed by the assessee. The Ld. PCIT by powers vested U/s. 263 of the Act, considered the assessment by the Ld. AO U/s. 143(3) r.w.s 144B of the Act as erroneous insofar as prejudicial to the interest of the revenue. He therefore issued show cause notices on 13/09/2024 and 29/10/2024 through ITBA asking the assessee to furnish any submissions / representations in the revision of income by denying the benefit of carry forward of house properly loss and denying the claim of the assessee by treating the rental receipts as income from house property instead of income from business. In response to the show cause notices, the assessee furnished his reply on 8/11/2024. It was submitted by the assessee that the assessee is a Doctor by profession and has let out the property to his patients for a short time stay who are undergoing treatment in his clinic. The Ld. PCIT after careful perusal of the replies furnished by the assessee observed that the explanation of the assessee is not acceptable since the income generated from renting of rooms shall be classified based on the nature of activities conducted and accordingly it is more appropriate to consider it as professional income rather than income from house property. The Ld. PCIT therefore directed the Ld. AO to re-do the assessment by providing a reasonable opportunity of being heard to the assessee by re- computing the assessee’s income by treating the house property income as professional income and also denying the benefit of carry forward loss from house property as the assessee has admitted income from profession U/s. 44ADA of the Act. On being aggrieved by the order of the Ld. PCIT, the assessee is in appeal before us by raising the following grounds of appeal:
1. That under the facts and circumstances of the case, the order passed by the Ld. PCIT U/s. 263 dated 18/02/2025 is not in accordance with the provisions of law.
2. Ld. PCIT erred in invoking the provisions of section 263 of the Act to revise the assessment order in sole reason that Assessing Officer is wrong in assessing the rental income as income from house property instead of assessing it as business income.
3. Ld. PCIT ought to have known that the proceedings U/s. 263 of the Act can be initiated only when the assessment order is both erroneous and also prejudicial to the interest of the revenue whereas in the present case the assessment order is not erroneous inasmuch as the issue considered for review U/s. 263 of the Act has been examined in the assessment proceedings wherein AO applied his mind in verifying the subject issue before completing the assessment.
4. When the Ld. AO has examined the subject issue and has taken a view to assess the rental income as income from house property, Ld. PCIT has erred in invoking the impugned revision U/s. 263 of the Act only to thrust upon his opinion in assessing the income in a particular manner as he thinks fit by setting aside the assessment which is not allowed under the provisions of section 263 of the Act.
5. The contention of the Ld. PCIT while passing the subject order U/s. 263 of the Act that Ld. AO allowed the house property loss to be carried forward without making any enquiry or examination on the issue from his side is erroneous and factually misplaced since Ld. AO made enquiries called for the details of rental income examined its nature before completing the subject assessment.
6. For these and other reasons that are to be urged at the time of hearing of the appeal the appellant prays that there is no error in the order passed by AL and in fact the order passed by the Ld. PCIT itself is erroneous both on facts and as well as in law, therefore, the same needs to be set aside in the interest of justice.”
The two issues emanating from the grounds raised by the assessee are as follows: (1) Treating the income from house property as income from business and (2) denying the benefit of carry forward loss of income from house property. On this issue, the Ld. AR submitted that the case was selected for limited scrutiny for the purpose of verification of income from house property and the Ld. AO has verified the submissions made by the assessee during the assessment proceedings and by applying his mind and on being satisfied, accepted the return of income of the assessee. She also submitted that the Ld. AO has issued a notice on 22/10/2021 U/s. 142(1) of the Act wherein specific details were sought with respect to the income from house property and the details of house properties. Further, vide notice U/s. 142(1) dated 17/08/2022, the Ld. AO also sought the complete address and PAN of the tenants along with copy of the rental agreement and bank statements. The assessee submitted the replies including the documentary evidence were filed before the Ld. AO. Thereafter, she also submitted that the Ld. AO has issued a show cause notice on the issue of allowability of interest from house property. She therefore pleaded that the Ld. AO on being satisfied with the replies of the assessee, after examining the documentary evidences, completed the assessment without making additions. She further pleaded that once when the assessment is completed by the Ld. AO on being satisfied with a specific issue, the Ld. PCIT cannot exercise his powers U/s. 263 of the Act when there is a possibility of the second view. On this issue, she relied on various case laws as follows:
(1) AP High Court in Deccan Jewellers Pvt Ltd vs. Pr. CIT (Central), Visakhapatnam ITTA No. 8, 9 & 14 of 2021. (2) CIT vs. Gabriel India Ltd [1993] 203 ITR 108 (Bom.) (3) GVR Associates vs. ITO in (4) M/s. Nue-Tech Engineers vs. CIT-1, Visakhapatnam in ITO No. 570/Viz/2013 (5) Supreme Court [2000] 109 taxman 66 (SC)
(6) Andhra Pradesh High Court in Spectra Shares & Scrips (P) Ltd vs. CIT (AP) 354 ITR 35 (7) Visakhapatnam Tribunal in (8) Delhi Tribunal [2019] taxmann.com 92 (Delhi Tribunal) (9) Andhra Pradesh High Court in ITTA No. 512 of 2011 & 177 of 2012 10) Allahabad High Court in [2019] 110 taxmann.com 170 (Allahabad) 11) Allahabad High Court in [2015] 60 taxmann.com 243 (Allahabad) 12) Visakhapatnam Tribunal in 13) Delhi Tribunal in ITA No.3432/Del/2019 She therefore prayed that the order of the Ld. PCIT deserves to be quashed.
Per contra, the Learned Departmental Representative (“Ld. DR”) argued that the property was on rent to the in-patients on the pretext of professional income since it is integrated to the income derived from profession of the Doctor (the assessee). He also submitted that there is no land-lord and tenant relationship and hence cannot be considered as rental income. He also pleaded that there cannot be two possible views since the rental income derived from in-patients shall be considered only as professional income. Countering the arguments of the Ld. DR, the Ld. AR submitted that even if the income is considered as income from profession, it is revenue neutral and hence prayed for allowing the income as income from house property.
We have heard both the sides and perused the material available on record. It is an undisputed fact that the assessee has given on rent the property to his own patients who are undergoing treatment in the clinic. The Ld. AO has issued notices U/s. 142(1) of the Act dated 22/10/2021 and 17/08/2022 which are reproduced below for reference:
Further, the Ld. AO has also issued show cause notice dated 29/08/2022 which is reproduced above. It is noticed that the Ld. AO has issued show cause notice calling for explanation from the assessee. The assessee in response furnished elaborative explanation. The Ld. AO considering the explanation furnished by the assessee accepted the explanation by treating the rental income as income from house property. Accordingly, it is observed that the Ld. AO has verified the rental income earned by the assessee and has accepted the explanation of the assessee for treating such rental income as income from house property instead of income from business. Thus, the Ld. AO has made enquiries to his satisfaction and has applied his mind while deciding the character of income by accepting the submissions of the assessee and therefore, it cannot be set-aside on the ground of lack of enquiries. It is not mandatory for the Ld. AO to give finding on each and every issue he has undertaken during the scrutiny proceedings. Further, it was also submitted by the Ld. AR that the case was selected for limited scrutiny, solely for the purpose of examining the income from house property. Thus, when the Ld. AO is being satisfied on the explanation provided by the assessee for which the limited scrutiny has been initiated it cannot be termed as inadequate or improper enquiry by the Ld. AO. Thus, there is no reason to believe that the Ld. AO did not examine the issue at the assessment stage. Since the scrutiny was based on the sole reason for examining the income from house property, it could not be said that the Ld. AO would not have gone through the material available on record. The Ld. AO has taken one of the possible views in the mater as per law and if the Ld. PCIT does not agree with that view of the Ld. AO, the assessment order cannot be treated as erroneous insofar as it is prejudicial to the interest of the revenue. Considering these facts and circumstances in the light of the material available on record, it cannot be considered as case of inadequate or no enquiry and thus Explanation- 2 to section 263 of the Act cannot be attracted. Therefore, the assessment could not be held to be erroneous insofar as it is prejudicial to the interest of the revenue. We therefore set-aside the impugned order passed U/s 263 of the Act and restore the assessment order.
In the result, appeal of the assessee is allowed.
Pronounced in the open Court on 20th May, 2025.
Sd/- Sd/- (VIJAY PAL RAO) (S. BALAKRISHNAN) उपाध्यक्ष/VICE PRESIDENT लेखा सदस्य/ACCOUNTANT MEMBER Dated :20/05/2025 OKK - SPS आदेश की प्रधतधलधप अग्रेधर्त/Copy of the order forwarded to:- धनिााररती/ The Assessee – Sita Rama Raju Sagi, flat No. 302, Lotus 1. Icon ASR Nagar, Bhimavaram, Andhra Pradesh-534202. राजस्ि/The Revenue – Income Tax Officer, Ward-1, Old Usha 2. Mansion, Juvvalapalem Road, Sivaraopeta, Balusumoodi Bheemavaram-534202, Andhra Pradesh.