2010 (10) TMI 703 - AT - Income Tax

Business income/ House property - income in the form of License fee and compensation received by the assessee on renting out of a property - assessee was merely let out the property and deriving rental income. He was not carrying on any systematic or organized activity which could be said to be carrying on a business - The fact that in the past the treatment of the income as one from business cannot be a bar to make assessment of the income under the correct head of income in accordance with law - In the case of the assessee there are no facts brought out as to why the income in question has to be considered as income from business - Decided against the assessee Regarding reopening - it was submitted that in the assessment completed in the past the income has been accepted as income from business and reopening has been done purely on a change of opinion - assessee by claiming the income from letting out the property under the head business income was also claiming deduction of expenses which were allowed normally under the head income from house . By reason of changing of head of income those expenses cannot be allowed as a deduction - Decided against the assessee

Summary

Issues Involved:

1. Classification of income from letting out property.
2. Classification of interest income.
3. Validity of reassessment proceedings.
4. Allowability of compensation and other expenses.
5. Taxation of commission income.
6. Taxation of profit from construction projects.
7. Consequential interest under sections 234A, 234B, and 234C.
8. Initiation of penalty proceedings.

Detailed Analysis:

1. Classification of Income from Letting Out Property:

The primary issue across all appeals was whether the income from letting out property should be classified as "income from house property" or "income from business." The Tribunal upheld the CIT(A)'s decision that the income should be classified as "income from house property." The Tribunal reasoned that the assessee was merely letting out the property and deriving rental income without engaging in any systematic or organized activity that could be considered a business. The reliance on the Supreme Court decision in CIT v. Shambu Investments P. Ltd. (249 ITR 47) supported this view, affirming that income from letting out property should be treated as "income from house property" even if additional services or facilities were provided.

2. Classification of Interest Income:

The Tribunal upheld the CIT(A)'s decision to classify interest income as "income from other sources." The assessee failed to prove that the interest income was derived from its business activities. For instance, the interest received from M/s. Vinod Associates was not reflected as part of the business assets or liabilities in the balance sheet, indicating it was not part of the money lending business.

3. Validity of Reassessment Proceedings:

The Tribunal dismissed the assessee's challenge to the validity of reassessment proceedings. The reassessment was initiated based on the findings from the assessment year 2005-06, where it was determined that income from letting out property should be assessed under "income from house property." The Tribunal found that the Assessing Officer had sufficient reason to believe that income had escaped assessment, thus justifying the reassessment.

4. Allowability of Compensation and Other Expenses:

The Tribunal remanded the issue of allowability of compensation and other expenses to the Assessing Officer for fresh consideration. This decision was contingent on the outcome of the reassessment regarding the classification of income from letting out property. If the income is classified as "income from house property," the expenses would be reconsidered accordingly.

5. Taxation of Commission Income:

The Tribunal upheld the CIT(A)'s decision to classify commission income as "income from other sources." The assessee failed to provide evidence of the nature of services rendered to earn the commission. Consequently, the expenses related to this income were not allowed as deductions.

6. Taxation of Profit from Construction Projects:

The Tribunal ruled in favor of the assessee, holding that no income had accrued from the construction project due to ongoing litigation. The construction project was locked in litigation, and the assessee could not part with the possession of the flats. Therefore, neither the completed contract method nor the percentage completion method of accounting could be applied. The Tribunal concluded that there was no accrual of income to the assessee under the mercantile system of accounting.

7. Consequential Interest under Sections 234A, 234B, and 234C:

The Tribunal noted that the grounds related to the levy of interest under sections 234A, 234B, and 234C were purely consequential and would depend on the final tax liability determined after reassessment.

8. Initiation of Penalty Proceedings:

The Tribunal held that the initiation of penalty proceedings could not be a subject matter of appeal at this stage.

Conclusion:

The appeals were partly allowed for statistical purposes, with specific issues remanded to the Assessing Officer for fresh consideration, while other grounds were dismissed based on the Tribunal's detailed analysis.