2010 (1) TMI 1191 - AT - Income Tax

Summary

Issues Involved:
1. Income declared under the wrong head "Income from house property".
2. Capitalization of interest.
3. Matter pertaining to income from the basement.
4. Outstanding loans' cessation of liabilities.

Summary:

1. Income Declared Under the Wrong Head "Income from House Property":
The CIT observed that the rental income from the property was declared under the head "Income from house property" instead of "business income" as per the partnership deed. The CIT held that the income of Rs. 9,30,124 received from letting out the commercial complex should have been treated as business income. The AO's failure to examine this issue in detail rendered the assessment order erroneous and prejudicial to the interest of Revenue.

2. Capitalization of Interest:
The CIT noted that the building was not complete during the assessment year 2005-06, and thus, the AO should have allowed the deduction of interest proportionate to the completion of the building, with the rest of the interest being capitalized. The CIT held that the AO's failure to capitalize the interest portion of the loan for the portion of the building under construction made the assessment order erroneous and prejudicial to the interest of Revenue.

3. Matter Pertaining to Income from the Basement:
The CIT observed that although the basement was complete in the financial year 2004-05, no income was shown from it. The AO did not make any enquiry on this issue, making the assessment order erroneous and prejudicial to the interest of Revenue.

4. Outstanding Loans' Cessation of Liabilities:
The CIT raised concerns about the details of loans from relatives and friends amounting to Rs. 68.54 lakhs, noting that these loans were very old and should have been paid back. The AO's failure to examine this issue in detail and consider it as cessation of liability for taxation rendered the assessment order erroneous and prejudicial to the interest of Revenue.

Conclusion:
The Tribunal found that the AO had considered the issues raised by the CIT during the assessment proceedings and had taken a possible view. The CIT failed to establish how the AO's order was erroneous and prejudicial to the interest of Revenue. The Tribunal held that the CIT erred in invoking jurisdiction and passing the order u/s 263 of the IT Act. Consequently, the Tribunal set aside the order passed u/s 263, allowing the appeal of the assessee.