2007 (4) TMI 615 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of Income from House Property.
2. Assessment of Income from Capital Gains.
3. Assessment of Interest Income.
4. Determination of the Status of Co-owners as an Association of Persons (AOP).
5. Validity of Reopening of Assessment under Section 147.
6. Validity of Notice under Section 143(2).

Detailed Analysis:

1. Assessment of Income from House Property:
The Revenue contended that the income from the commercial complex "Krishna Prasad" should be assessed in the hands of the Association of Persons (AOP). The Assessing Officer (AO) held that the income, including rental income, should be taxed as business income in the hands of the AOP. However, the Commissioner of Income-tax (Appeals) (CIT(A)) held that the rental income should be assessed in the individual hands of the co-owners equally, as per Section 26 of the Income-tax Act, 1961. The Tribunal upheld the CIT(A)'s decision, citing the jurisdictional High Court's ruling in CIT v. Sona and Sons, which mandated that rental income derived by an AOP from letting out house property should be assessed under the head "Income from house property" and not as business income.

2. Assessment of Income from Capital Gains:
The CIT(A) ruled that the income arising from capital gains on the sale of portions of the complex should be assessed in the individual hands of the co-owners, as the investment was in the nature of acquiring a capital asset. The Tribunal found that the co-owners had pooled their resources for constructing the commercial complex, maintained common books of account, and the intention was to commercially exploit the property. Therefore, the profit from the sale of the property was to be assessed as business income in the hands of the AOP.

3. Assessment of Interest Income:
The CIT(A) held that the income from interest on bank deposits arising out of the proceeds of the sale of capital assets, rental income, etc., should be assessed under the head "Income from other sources" in the individual hands of the co-owners. The Tribunal observed that the loans were raised collectively, and a common bank account was opened. Hence, the interest income should be taxed in the hands of the AOP.

4. Determination of the Status of Co-owners as an Association of Persons (AOP):
The CIT(A) maintained that the co-owners had definite and ascertainable shares, and therefore, should not be assessed as an AOP. However, the Tribunal noted that the co-owners acted jointly, pooled their resources, and maintained common books of account, indicating a joint venture. The Tribunal concluded that the activities constituted an adventure in the nature of trade, and the income should be assessed in the hands of the AOP.

5. Validity of Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment under Section 147. The Tribunal upheld the reopening, stating that the AO had recorded reasons for the belief that income had escaped assessment. The Tribunal referenced the Supreme Court's decision in ITO v. Ch. Atchaiah, which emphasized assessing the income in the hands of the right person.

6. Validity of Notice under Section 143(2):
The assessee argued that the notice under Section 143(2) was issued beyond the stipulated period of 12 months. The Tribunal dismissed this contention, citing the retrospective effect of the proviso to Section 148, inserted by the Finance Act, 2006, which validated notices issued after the expiry of 12 months.

Conclusion:
The Tribunal partly allowed the Revenue's appeals, holding that the income from the commercial complex should be assessed in the hands of the AOP. The cross-objections filed by the assessee were dismissed, affirming the validity of the reopening of the assessment and the issuance of the notice under Section 143(2).