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Income Tax Appellate Tribunal, “G” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Ravish Sood(JM)
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the validity of the revision order dated 26.03.2018 passed by Ld Pr. CIT-21, Mumbai and it relates to the assessment year 2013-14.
The original assessment was completed by the AO for the year under consideration u/s 143(3) of the Act on 29.02.2016. The Ld Pr. CIT noticed that the assessee is engaged in the business of real estate, i.e., mainly into construction of residential flats. During the year under consideration, the assessee had not undertaken any project nor was there any ongoing project. The Ld Pr. CIT noticed that the assessee has shown investment in properties under two heads, viz:- (a) Premises let out - Rs.4,01,78,217/- (b) Cost of unsold flats - Rs.2,44,15,027/- The “Premises let out” consisted of flats held by the assessee in Samarth Vaibhav Building in Ground floor and 1st floor. The “Cost of unsold flats”
2 Shree Swami Samartha Developers consisted of flats situated in sixth floor and seventh floor. The Ld Pr. CIT noticed that the assessee has transferred certain flats on the Ground floor, Ist floor, 6th Floor and 7th Floor constructed in “Smarth Vaibhav to its own name. However, the assessee has shown rental income only from some of the properties situated in ground and first floor of the building. The Ld Pr. CIT noticed that the assessee has not shown any income from other properties owned by it. The Ld Pr. CIT noticed that, as per provisions of sec. 22 of the Act, the annual letting value of property owned by the assessee (other than that used for his business) shall be taxed under the head Income from House property. Since the AO has not brought the annual letting value of all properties owned by the assessee to tax, the Ld Pr. CIT held that the assessment order passed by the AO is erroneous and prejudicial to the interests of revenue. Accordingly he initiated revision proceedings.
Before Ld Pr. CIT, the assessee submitted that the properties on which the annual letting value was not offered, were actually its stock in trade only and they were transferred to its name in order to avoid confrontation with the Society after handing over the flats to other Society members. The assessee also contended that the AO has applied his mind on this issue and has taken a possible view of the matter. Accordingly, by placing reliance on the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Max India Ltd (295 ITR 282) and other decisions, the assessee contended that the revision proceeding initiated by Ld Pr. CIT is not valid.
The Ld Pr. CIT took the view that there was no two views possible in this matter in view of clear cut provisions of sec. 22 of the Act. The Ld Pr. CIT further observed that the assessee has sold those flats in subsequent years and offered the gain only under the head “Capital gains” and not as business income. The Ld Pr. CIT noticed that the AO did raise queries on the taxability of house property income of the flats owned by the assessee, but simply accepted the explanations given by the assessee without applying his mind thereon. Thus the AO has failed to make further investigation/enquiry on the 3 Shree Swami Samartha Developers matter. The Ld Pr. CIT also took support of the Explanation 2 to sec. 263 of the Act and also the decision rendered by Hon’ble Supreme Court in the case of CIT vs. Amitabh Bachchan (Civil Appeal No.5009 of 2016). The Ld Pr. CIT also took support of following decisions also:- (a) Malabar Industrial Co. Ltd vs. CIT (243 ITR 83)(SC) (b) Gee Vee Enterprises vs. Addl CIT (99 ITR 375)(Delhi) (c) M/s Subhalakshmi Vanijya Pvt Ltd vs. CIT (ITA No.1104/Kol/2014) (d) Daniel Merchants P Ltd vs. ITO (SC 23976/2017)
Accordingly, the Ld Pr. CIT held that the assessment order passed by the AO is erroneous and prejudicial to the interests of revenue. Accordingly the Ld Pr. CIT directed the AO to do the assessment afresh after examining the submissions of the assessee including the one relating to quantification of ALV for the properties situated on the upper floors vis-a-vis ground floor of the building. He also directed the AO to take into account the dedicated parking space allotted to those flats. The assessee is aggrieved by the revision order passed by Ld Pr. CIT.
The Ld A.R submitted that the AO has raised a specific query during the course of assessment proceedings with regard to the taxability ALV of flats located in sixth and seventh floor. The assessee has given reply to the AO and the same has been accepted by him. He submitted that the assessing officer examined this aspect in AY 2010-11 also and the assessee replied that it has stored its old records, files etc in the premises situated in 6th and 7th floors. The AO has accepted the same in AY 2010-11. He submitted that the assessment for AY 2012-13 was completed by the AO u/s 143(3) of the Act and no addition was made with regard to the flats situated in 6th and 7th floor. Accordingly, by placing reliance on the decision rendered by Hon’ble Supreme Court in the case of Radhasamy Satsang (193 ITR 321)(SC), the Ld A.R contended that the Principle of Consistency should be followed in this year also. The Ld A.R further submitted that the assessing officer has taken a possible view of the matter.
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He further submitted that the assessee has used the flats for its own business by storing its old records, files etc., and hence there is no necessity to compute house property income for flats used for the purpose of business. The Ld A.R further submitted that the Ld Pr. CIT is required to make preliminary investigation into the matter before coming to the conclusion that the assessment order is erroneous and prejudicial to the interest of revenue. However, in the instant case, the Ld Pr. CIT did not make any such investigation/enquiry. He further submitted that the Ld Pr. CIT has referred to the decision rendered by Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd (2013)(354 ITR 180). He submitted that the said decision is applicable only to flats held as stock in trade. In support of all his submissions, the Ld A.R placed his reliance on the following case laws:- (a) CIT vs. Gabriel India Ltd (203 ITR 108)(Bom) (b) The CIT vs. M/s Fine Jewellery (India) Ltd (IT Appeal No.296 of 2013) (c) Grindlays Bank Ltd vs. ITO (1978)(115 ITR 799)(Cal), wherein the significance of notice issued u/s 142(1) of the Act and the explanations furnished by the assessee are dealt with.
The ld D.R, on the contrary, submitted that the Rule of Consistency can be deviated if there is strong and compelling reasons. He submitted that the issue, in the instant case, relates to the application of correct law and hence, the Rule of consistency will not be applicable when the AO has committed mistake in applying correct law. He further submitted that the mistake of law cannot be perpetuated as held in the case of Distributors Baroda (155 ITR 120)(SC) and also in the case of Foss Electronics (263 ITR 125)(Raj). Accordingly, the Ld D.R submitted that the view taken by the AO in AY 2010- 11 and 2012-13 need not be followed in this year, as there is mistake of law.
The Ld D.R further submitted that the assessee has transferred the flats located in 6th and 7th Floor to its own name and has also offered the gains arising on their sale as Capital Gains only. Since the assessee has become
5 Shree Swami Samartha Developers owner of the flats, the ALV of the flats is assessable under the Income tax Act. The reasoning given by the assessee for transferring the flats to its own name is not relevant for determining the income under the head Income from House Property. Since the assessee is owner of flats, the question of having two views in the matter does not arise at all. He further submitted that there may be possibility of two views, had the assessee held the flats as its stock in trade. The ld D.R further submitted that the AO has simply accepted the explanations furnished by the assessee for not offering income under the head Income from House property without examining the applicability of the relevant provisions of the Act and without causing further investigation/enquiry. Since the AO has failed to make necessary enquiries and also failed to apply correct provisions of Law, the Ld D.R submitted that the Ld Pr CIT has rightly set aside the assessment order.
The Ld D.R further submitted that the assessee had given explanations regarding storage of old records in AY 2010-11. No such explanation was given during the year under consideration. In any case, the AO has not verified that explanation in AY 2010-11 also.
The ld D.R further submitted that the AO did not discuss anything in the assessment order and he has mechanically accepted the explanations given by the assessee. He submitted that assessment order has also been passed mechanically. Accordingly the Ld D.R submitted that the assessment order passed without causing due enquiry and also in a mechanical manner is liable to be set aside. In support of his contentions, the Ld D.R placed his reliance on the following case laws:- (a) Arvee International vs. Addl CIT (2006)(101 ITD 495)(Mum) (b) Adani Agro (P) Ltd vs. DCIT (2013)(32 taxmann.com 356)(Guj) (c) Rajmandir Estates (P) Ltd vs. Pr. CIT (386 ITR 162)(Cal) (d) Rajmandir Estates (P) Ltd vs, Pr. CIT (77 taxmann.com 285)(SC)
The Ld D.R also submitted that the Explanation 2 to sec. 263 of the Act also deems the assessment order as erroneous and prejudicial to the interests of revenue, if the same is passed without making necessary enquiries.
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The Ld D.R, in the rejoinder, submitted that the Ld Pr CIT has presumed that the flats have been kept vacant, where as the assessee has explained before AO in AY 2010-11 that they have been used for business purposes for storing old records. Hence there is no requirement of determining ALV for the premises used for the purpose of business. He further submitted that the AO, in the instant year, has raised queries and the assessee has furnished the reply also. Hence this case cannot be taken as a case of lack of enquiry. He further submitted that the assessee has already sold the premises in 2015 and hence the actual user of the property could not have been ascertained by the AO at the time of completion of assessment in February, 2016, even it he has conducted enquiry as contended by the Ld DR.
We have heard rival contentions and perused the record. The scope of revision proceedings initiated under section 263 of the Act was considered by Hon'ble Bombay High Court, in the case of Grasim Industries Ltd. V CIT (321 ITR 92) by taking into account the law laid down by the Hon'ble Supreme Court. The relevant observations are extracted below: “Section 263 of the Income-tax Act, 1961 empowers the Commissioner to call for and examine the record of any proceedings under the Act and, if he considers that any order passed therein, by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the Revenue, to pass an order upon hearing the assessee and after an enquiry as is necessary, enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment. The key words that are used by section 263 are that the order must be considered by the Commissioner to be “erroneous in so far as it is prejudicial to the interests of the Revenue”. This provision has been interpreted by the Supreme Court in several judgments to which it is now necessary to turn. In Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83, the Supreme Court held that the provision “cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer” and “it is only when an order is erroneous that the section will be attracted”. The Supreme Court held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. An order passed in violation of the principles of natural justice or without application of mind, would be an order falling in that category. The expression “prejudicial to the interests of the Revenue”, the Supreme Court held, it is of wide import and is not confined to a loss of tax. What
7 Shree Swami Samartha Developers is prejudicial to the interest of the Revenue is explained in the judgment of the Supreme Court (headnote) :
“The phrase ‘prejudicial to the interests of the Revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.”
The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.”
We shall examine the instant case on the basis of principle laid down by the Hon’ble Supreme Court in the case of Malabar Industrial Company (supra) and the Hon’ble Bombay High Court in the above cited case. It is an admitted fact that the assessee has transferred the flats located in sixth and seventh floors from stock in trade and acquired them as its own assets. There should not be any dispute that the provisions of sec. 22 of the Act requires taxing of Annual Value of Properties (other than the properties used for the purpose of business) under the head Income from House property. Even if the property is kept vacant, still the annual value of property is taxable. We notice that the AO did raise a query about taxability of flats located in sixth and seventh floor. The reply given by the assessee is extracted below, for the sake of convenience:- 6) Why Sixth and 7th Floor owned by the assessee firm be not considered as deemed let out and annual value computed. In this regard, we submit that during the course of assessment proceedings of the assessee for A Y 2010-11, similar show cause notice was given to the assessee by the then A O. we submitted following reply vide letter dated 05.03.2013.
"Reply to Point No.5 : Besides ground floor & first floor of Samrtha Vaibhav Building which is owned by the assessee firm and which 8 Shree Swami Samartha Developers has been leased out to various parties (details of which have been furnished), the assessee firm is also owner some of the premises situated on 6th & 7th floor of the said building. The aggregate cost of the same of Rs.2,45,05,027/- appears en the assets side of balance sheet. Even these premises have been transferred by the assessee firm in its own name after payment of stamp duty & registration charges. The reason for transfer of the said premises in assessee firm's name was that the building was to be handed over to society formed by majority of the members and assessee firm did not want to have any problem from, committee members of the society when these premises were to be sold to prospective buyers later on.
Since these premises are meant for sale only though they have been transferred by assessee firm in its name, they had to be kept vacant at all the times. Further in view of the fact that the same were to be sold sooner or later, the same could not have been given to any one on lease. In view of these facts, we submit that no notional income can be assigned to these premises and-can be taxed in the hands of assessee firm. It will not be out of place to mention that this position has also been accepted by your predecessors in past assessments and hence does not require a differential treatment in the year under reference."
You are requested to note that this explanation has been accepted by your predecessor. You are further requested to note that since assessment was completed in. Central section, it was compulsorily being monitored by Addl. Commissioner CC-7. Further two more scrutiny assessments have taken place namely for A Y 2011-12 and 2012-13, both the orders have been passed by Dy. Commissioner CC-7 and this proposal of taxing notional rent has not been revived, it means Department has accepted assessee's explanation. Having accepted the explanation, we submit that making disallowance on settled position would be against principle of equity and natural justice.
You are requested to note further that all the premises of 6th and 7th floor that assessee was holding as on 31.03.2013 have been sold off in F Y 13-14 and. 14-15 and net gain of Rs 2.14 Crs and Rs11.75 Crs has been offered to tax.
In view of the above, you are requested not to tax notional rent of the said premises in the hands of the assessee and unsettle a position already accepted by the departmental authorities. In case you wish to tax the same again, you are requested to grant us one more opportunity to plead assessee's case.
We notice that the assessing officer has rightly raised query on taxability of house property income of flats located in sixth and seventh floor. A carefully
9 Shree Swami Samartha Developers perusal of the reply furnished by the assessee would show that the assessee has, in effect, submitted that these flats are meant for sale only and hence it had to keep all the flats all the times. The assessee has furnished certain reasons for transferring the flats from Stock in trade to its own Investment account. As rightly pointed out by Ld D.R, since the assessee has become owner of the flats, the compelling reasons given for acquiring the flats in its own name are not relevant for the purpose of computing income under the head Income from House Property. The explanation of the assessee that it has kept the flats vacant as they are meant for sale, in our view, the above said reasoning is contradictory to the alternative submissions made before the AO in AY 2010-11, which was not repeated during the year under consideration. The alternative submission made in AY 2010-11 reads as under:- “If may not be out of place to state that for the last two three years, the assessee firm has stored its old records, files etc in these office premises which are all interconnected as it did not have any other office place of its own elsewhere in Mumbai.”
As noticed earlier, the assessee has not offered the above said explanation before the AO during the year under consideration. If the flats are meant for sale and hence kept as vacant, then a prudent man will not use them to store old records, files etc., since it will spoil the freshness of the flats. Further, the assessee has submitted in the above said explanation that it did not have any other office place of its own elsewhere in Mumbai, where as we notice that the office of the assessee is located in Dadar and in any case. It may not be a proper reason to substantiate its explanation that the old records, files etc., are stored in the above said flats, which are meant for sale. As observed earlier, the above said explanations were given in AY 2010-11 and not during the year under consideration. Hence there was no occasion for the AO to examine this submission of the assessee and even if the assessee had given explanation, it should have triggered enquiry by the AO as this appears to be a casual explanation and contradictory to the explanation given in the first part. There may be a remote possibility that the assessee might have kept old records in the year relevant to AY 2010-11, but it is always not necessary that 10 Shree Swami Samartha Developers the same position continued in the year relevant to AY 2013-14 also, unless the assessee proves the same. Hence it cannot be said that the explanation given in AY 2010-11, which itself is contradictory one, should be applied in AY 2013-14 also.
The Supreme Court, in the case of Malabar industrial company (supra), has held that an incorrect assumption of fact or an incorrect application of law, will satisfy the requirement of the order being erroneous. In the instant case, we are of the view that the AO has not correctly applied the law relating to taxation of income under the Income from House Property and the same makes the order erroneous. Since the AO has failed to assess income under the head Income from House Property, the same has caused prejudice to the revenue. Accordingly we are of the view that the Ld Pr. CIT was justified in passing the revision order under challenge. Accordingly we uphold the order passed by Ld CIT(A).
In the result, the appeal filed by the assessee is dismissed. Order has been pronounced in the Court on 31.10.2018.