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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI N.K. BILLAIYA & SHRI AMARJIT SINGH
आदेश / O R D E R PER N.K. BILLAIYA, AM: These appeals by the assessee are preferred against two separate orders of the Ld. CIT(A)/CIT for assessment years 2008-09 & 2009-10. As both these appeals were heard together, they are disposed of by this consolidated order for the sake of convenience.
ITA No. 6216/Mum/2013 – A.Y. 2008-09
The assessee has raised two substantive grounds of appeal. The issues in both these grounds are inter-linked and relates to the treatment of rental income under the head ‘House property’ against the claim of the assessee to be under the head ‘business income’ and simultaneously disallowance of business loss,
The assessee is engaged in the business of property leasing. While scrutinizing the return of income, the Assessing Officer noticed that the assessee has credited income of Rs. 23,49,497/- which as per Schedule ‘J’ of the P&L account consists of rent received of Rs. 22,50,000/- and miscellaneous income of Rs. 99,497/-. The Assessing Officer further found that the rental income has been shown from letting out office space as per leave and license agreement. The AO also noted that interest free security deposit of Rs. 7.05 lakhs has also been taken and in respect of another property interest from security deposit of Rs. 60 lakhs has been taken. The assessee has shown income from letting out these office premises as income from business and after deducting various expenses and depreciation of property, net business loss of Rs. 84.07 lakhs has been shown.
3.1. The assessee was asked to explain as to why, since there is no business activity, receipts from letting out property may not be assessed as income from House Property. The assessee in its reply vide letter dated 5.10.2010 explained that the main business activity of the assessee is to acquire properties, develop the same and give them on rent. Strong reliance was placed on the main object clause of the Memorandum of Association. It was explained that because of 3.2. The AO did not accept this contention of the assessee. Drawing support from various judicial decisions discussed by the AO at Para- 4.4. of his order, the income was treated under the head ‘Income from House Property’ and accordingly depreciation and other related expenses were disallowed.
The assessee carried the matter before the Ld. CIT(A) but without any success.
Before us, the Ld. Counsel for the assessee vehemently submitted that this issue has been elaborately discussed and decided by the Hon’ble Supreme Court in the case of Chennai Properties & Investments Ltd Vs CIT 373 ITR 0673. It is the say of the Ld. Counsel that in this case the Hon’ble Supreme Court has held that deciding factor is not ownership of land or leases but nature of activity of assessee and nature of operations in relation to them. The Hon’ble Supreme Court highlighted and stressed that objects of the company must also be kept in view to interpret the activities. The Ld. Counsel concluded that in that case letting of properties is infact is business of the assessee therefore the income was taxed under the head ‘Income from business’. The Ld. Counsel referred to the main object clause of the Memorandum of Association and pointed out that in the case in hand, the main object is to acquire properties, develop the same and give them on rent. Therefore, the income should be taxed under the head “Profits and Gains of Business”.
We have carefully perused the orders of the authorities below. We have also considered the decision of the Hon’ble Supreme Court (supra) in the light of the facts of the case in hand. We find force in the contention of the Ld. Counse. In the case relied upon by the Ld. Counsel (supra), we find that the Hon’ble Supreme Court has laid emphasis of the objects of the company as the deciding factor. Considering the facts of the case in hand as identical to the facts of Chennai Properties (supra), we restore this issue to the file of the AO. The AO is directed to decide the issue afresh in the light of the decision of the Hon’ble Supreme Court taken in the case of Chennai Properties & Investments Ltd. Ground No. 1 is allowed for statistical purpose.
Grievance raised vide ground No. 2 as mentioned elsewhere, is inter-linked with the outcome of ground No. 1. Therefore, the same is restored to the file of the AO to be decided afresh in the line with the directions given for ground No. 1 hereinabove. Ground No. 2 is also treated as allowed for statistical purpose.
In the result, the appeal filed by the assessee is allowed for statistical purpose.
ITA No. 2775/M/2014 – A.Y. 2009-10
Vide ground No. 1,2 & 3, the assessee has challenged the assumption of jurisdiction by the CIT-6, Mumbai u/s. 263 of the Act.
5 ITA No. 6216/M/2013 11. Briefly stated the facts of the case are that the assessment was made on 7.12.2011 u/s. 143(3) of the Act in which the total income of the assessee which was a loss of Rs. 30,11,340/- was converted into a profit of Rs. 11,59,696/- by disallowing the claim of expenditure amounting to Rs. 41,71,036/-.
11.1. Invoking the powers conferred upon him u/s. 263 of the Act, the Commissioner issued a show cause notice dated 10.2.2014 by which the Ld. CIT(A) alleged that the AO failed to carry out all the relevant and meaningful enquiry which were warranted by the facts and circumstances of the case. This failure of the AO to make relevant and meaningful enquiry made the assessment erroneous and prejudicial to the interest of the Revenue. With these allegations, the Ld. CIT sought to set aside the assessment order with a direction to the AO to redo the same.
11.2. The assessee strongly objected to this show cause notice of the CIT. It was strongly contended that all the relevant details were furnished before the AO during the course of the assessment proceedings and on the basis of the details/documents, the AO has taken a view which is a possible view and accordingly taxed the income under the head ‘business income’. It was requested to drop revision proceedings u/s. 263 as the order passed by the AO was neither erroneous nor prejudicial to the interest of the Revenue.
11.3. The claim of the assessee did not find any favour with the CIT who proceeded by invoking the power conferred upon him by the provisions of Sec. 263 of the Act and directed the AO to frame fresh
Aggrieved by this, the assessee is before us.
The Ld. Counsel for the assessee reiterated what has been submitted before the CIT. It is the say of the Ld. Counsel that vide notice u/s. 142(1) of the Act, the AO called for every related information which were duly complied by filing necessary documentary evidences and after examining the same, the AO made the assessment order u/s. 143(3) of the Act.
Per contra, the Ld. Departmental Representative strongly supported the order of the CIT. It is the say of the Ld. DR that the AO has completed the assessment by overlooking a very important fact that of filing of revised return by the assessee. The Ld. DR continued by arguing that since the AO has completely ignored the revised return, the entire assessment has become erroneous and prejudicial to the interest of the Revenue and there is no error in the assumption of jurisdiction by the Commissioner u/s. 263 of the Act.
Having heard the rival submissions at length, we have carefully perused the assessment order and the order of the Commissioner with related documentary evidences brought on record. The first thing which has to be considered is whether the Learned Commissioner has rightly assumed the power under section 263 of the Act. The Hon’ble Supreme Court in Malabar Industrial Co. Ltd. 243 ITR 83 has laid down the following ratio:-
7 ITA No. 6216/M/2013 “A bare reading of section 263 of the Income-tax Act, 1961, makes it clear that the prerequisite for the exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous ; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent—if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue— recourse cannot be had to section 263(1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous”
Now, let us see in the light of the above ratio whether the assessment has been made on an incorrect assumption of facts or an incorrect application of law. The first objection is that the AO worked out the assessable income on the basis of original return electronically filed on 30.9.2009 declaring loss of Rs. 30,11,340/-. It is further alleged that the AO remained totally silent on the observations of the auditors that property was purchased only as stock-in-trade but inadvertently shown as fixed assets on which depreciation was claimed. It is also alleged that no details have been brought on record to show that there was composite rental agreement and the AO failed to examine that in the previous year assessment has been completed by treating rental income as Income from House property and not as business income.
16.1. Let us now examine these allegations in the light of the query raised vide notice issued u/s. 142(1) of the Act.
By Q. No. 1, the assessee was asked to file copy of lease agreement
Q.4. `Copy of purchase deed of immoveable properties purchased during the previous year relevant to assessment year 2008-09 and 2009-10.
Q.8. Copy of original and revised return filed alongwith copy of P&L account, balance sheet, auditor’s report from A.Yrs 2008-09 & 2010-11.
Q.9. Purpose of transferring fixed assets to stock and stating whether such transfer attracts the provisions of capital gain?
Q.13. Produce bank statement for the period from 1.4.2007 to 31.3.2009.
16.2. A detailed reply was filed on 9.8.2011 by which the assessee extensively explained why the rental income should not be assessed under the head ‘Income from House property’. Copies of lease agreement were filed. The purpose of transferring fixed assets as stock-in-trade was explained alongwith copies of purchase deed of immoveable properties. A certified copy of the Board Resolution was also filed by which the accounting error of treating the properties under the head fixed assets was rectified and the same was resolved and treated as under the head ‘inventory’ and accordingly the claim of depreciation was reversed. Accordingly, the accounts were revised and the revised accounts were adopted by the company. Considering all these facts in totality in the light of the main objects of the company, we do not find any lack of enquiry on the part of the 9 ITA No. 6216/M/2013 Officer for taxing the income under the head business income and not under the head income from house property. The AO has taken a view which may be different from the view of the Ld. Commissioner and assuming that the view taken by the AO is a loss to the Revenue but the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd (supra) has held that “every loss of Revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the Revenue”, for e.g. 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 Ld. Commissioner does not agree, it cannot be treated as an order which is erroneous or prejudicial to the interest of Revenue unless the view taken by the Income Tax Officer is unsustainable in law.
16.3. Moreover, the view taken by the AO is now well supported by the decision of the Hon’ble Supreme Court taken in the case of Chennai Properties & Investment Ltd 373 ITR 0673. Thus, even if the revised return have been completely ignored by the AO that would only make the assessment order erroneous but by any stretch of imagination, it cannot be said to be prejudicial to the interest of the Revenue in the light of the ratio laid down by the Hon’ble Supreme Court in the case of Chennai Properties & Investment Ltd (supra). Considering the facts in totality, in the light of the judicial decisions referred to hereinabove, we do not find any merit in the assumption of jurisdiction by the Commissioner u/s. 263 of the Act. We, therefore, set aside the order of the CIT and restore that of the AO made u/s. 143(3) of the Act.
With this the grievance raised vide ground No. 4 become otiose.
In the result, the appeal filed by the assessee in is allowed and ITA No. 6216/M/2013 is allowed for statistical purpose.