2016 (12) TMI 1710 - AT - Income Tax

Reopening of assessment - addition under the head income from house property - determination of fair rental value - Held that - AO on the basis of the search 41, 69, 718/-. Therefore the AO himself was not sure about the presumptive let out value. Noting has been brought on record that the assessee had received the rent of 11, 77, 528/- as worked out by the AO and not 1, 80, 000/- which was offered for taxation - AO reopened the assessment only on the basis of the presumption which is not tenable in the eyes of law - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of jurisdiction for reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Determination of fair rental value and addition under the head "income from house property."

Issue-Wise Detailed Analysis:

1. Validity of Jurisdiction for Reopening the Assessment under Section 147 of the Income Tax Act, 1961:

The primary issue raised by the assessee was the validity of the jurisdiction for reopening the assessment under Section 147 of the Income Tax Act, 1961. The assessee contended that the conditions precedent for initiating proceedings under Section 147 were not fulfilled. The original return was filed on 30.03.2006, and the notice under Section 148 was issued on 29.03.2012, based on information obtained from a search and seizure operation at the premises of M/s Today Homes and Infrastructure Pvt. Ltd. and its associates, of which the assessee was a part. The assessee argued that the Assessing Officer (AO) acted on mere suspicion without verifying the information received and failed to establish that income chargeable to tax had escaped assessment.

The CIT(A) upheld the AO's decision, stating that there was no illegality in using evidence collected during the search of third persons for making an assessment under Section 147. The CIT(A) found that the jurisdiction under Section 147 was assumed after recording reasons and obtaining necessary approvals.

Upon appeal, it was observed that the AO's reasons for reopening the assessment were based on the presumption that the property at 48, Friends Colony East, New Delhi, was not used by the assessee for its business but by the Gambhir brothers for their residence. The assessee provided evidence, including the address used in the Income Tax Return and the notice issued by the AO, to establish that the property was used for business purposes. The AO's assumption of the property’s rental value was not substantiated with concrete evidence. Consequently, it was concluded that the reopening under Section 147 was based on presumptions and not on tangible material facts, leading to the quashing of the reassessment.

2. Determination of Fair Rental Value and Addition under the Head "Income from House Property":

The second issue concerned the determination of the fair rental value of the property and the resulting addition to the income from house property. The AO determined the annual value of the property at ?41,69,718, attributing ?11,77,528 to the assessee's 28.24% share. The assessee argued that only a portion of the property was let out, and the fair rental value should be ?7,09,508, not ?11,77,528 as determined by the AO.

The assessee contended that the property was partially used for its business and partially let out, with rental income duly disclosed and taxed. The AO’s determination of the rental value was not clear and lacked a detailed working. The reassessment was based on the search findings from the assessment year 2010-11, which were inappropriately applied to the assessment year 2005-06 without concrete evidence.

Upon review, it was noted that the AO's calculation of the rental value was speculative and not backed by actual rental income received by the assessee. The assessee had already disclosed rental income of ?1,80,000, which was accepted. The AO’s presumption that the property could fetch a higher rental value was not substantiated by facts. Therefore, the addition of ?8,24,270 to the income from house property was deemed unjustified.

Conclusion:

The appeal was allowed, and the reassessment framed under Section 147 was quashed due to the AO’s reliance on presumptions rather than verified facts. The determination of the fair rental value and the subsequent addition to the income from house property were also found to be baseless and unsupported by concrete evidence. The judgment emphasized the necessity for the AO to act on tangible material facts rather than mere suspicion or presumption.