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2011 (12) TMI 299 - AT - Income TaxValidity of Reopening - Time limitation - reason to believe - Held that - there was no assessment on the return of income filed by the assessee for the AYs 2001-02 to 2004-05 and only processed u/s 143(1); therefore the cases for these assessment years do not fall under the first proviso to sec. 147. - for those two years apart from no assessment the reopening is within four years the first proviso to sec. 147 is not applicable. Re-opening on the basis of a case of next year - the information and the material gathered during the course of assessment proceedings for the AY 2005-06 whereby the rental income was assessed under the head income from house property constitute a tangible material for forming to believe by the Assessing Officer that the income assessable to tax has escaped assessment. Accordingly the reopening for the AY 2001-02 to 2004-05 is valid and as per law. Regarding regarding treatment of rental income as income from house property - the agreement to sub-let the property by the assessee to the third party it is clear that the assessee was in the possession of the property with full transferable rights and has been receiving the rent from the sub-tenant in his own capacity being owner of the property - it is clear that for the purpose of I T Act the aspect of ownership is different from the common law and if the assessee is having right to use and occupy the property and to enjoy its usufruct in his own right would be the owner of the property though may not be having the formal deed of title in his favour as contemplating under the Transfer of Property Act - Held that the lower authorities have rightly treated the assessee as deemed owner u/s 27(iiib) of the Act and subsequently treated the rental income from sub-tenant as income from house property - Decided against the assessee. Regarding determination of the Annual Letting Value (ALV) - Assessing Officer took future agreements into consideration while computing the ALV in the years under consideration - Held that for determination of the ALV under section 23(1) the Assessing Officer has first to find out the reasonably expected rent which the property might fetch by letting out from year to year and then this reasonably expected rent has to be compared with the annual rent received or receivable by the owner and if annual rent received or receivable as contemplated under section 23(1)(b) is in excess of the reasonable rent expected from letting out the property from year to year as determined u/s 23(1)(a) the amount so received or receivable would the annual value for the purpose of section 22 of the Act - Appeals are partly allowed for statistical purpose
Issues Involved:
1. Validity of reopening the assessment. 2. Treatment of rental income as income from house property. 3. Determination of the Annual Letting Value (ALV). 4. Disallowance of expenses of interest on borrowed money for payment of lease premium and lease rent. 5. Claim of bad debts. 6. Interest under section 234D. 7. Assessment of sundry balances written back as income from other sources. 8. Disallowance of set off of brought forward business loss against the business income of the current year. Issue-wise Detailed Analysis: 1. Validity of Reopening the Assessment: The assessee contested the validity of reopening the assessment for AYs 2001-02 to 2004-05, arguing that no new material or information came to the knowledge of the Assessing Officer (AO) to form the opinion that income assessable to tax had escaped assessment. The AO issued notices under section 148 based on findings from AY 2005-06, where rental income was assessed under the head 'income from house property'. The CIT(A) upheld the reopening, citing that assessment can be reopened based on information from subsequent years. The Tribunal confirmed this, noting that the AO had tangible material from the AY 2005-06 assessment to believe income had escaped assessment for earlier years, thus validating the reopening under section 147. 2. Treatment of Rental Income as Income from House Property: The AO assessed the rental income from the leased premises as 'income from house property' under section 27(iiib), treating the assessee as the deemed owner. The assessee argued that the lease period was only ten years and did not confer ownership rights. The Tribunal upheld the AO's view, citing the Supreme Court's decision in Podar Cements (P.) Ltd., which held that ownership for tax purposes includes the right to use and enjoy the property. The Tribunal concluded that the assessee had substantial rights in the property, making it a deemed owner under section 27(iiib). 3. Determination of the Annual Letting Value (ALV): The AO computed the ALV based on the rent received by the sub-tenant, which was significantly higher than the rent received by the assessee. The assessee argued that the AO incorrectly considered future agreements and rents received by the sub-tenant. The Tribunal remanded the issue to the AO, directing a re-determination of the fair market rent under section 23(1)(a), considering the Full Bench decision of the Delhi High Court in Moni Kumar Subba, which emphasized that the rent received by the sub-tenant is a relevant factor but not the sole determinant. 4. Disallowance of Expenses of Interest on Borrowed Money for Payment of Lease Premium and Lease Rent: The AO disallowed the expenses related to interest on borrowed funds used for paying the lease premium and lease rent. The Tribunal allowed the interest paid on borrowed capital under section 24(b) but disallowed the lease rent expenses, citing that no other expenses are allowable once the standard deduction of 30% is granted under section 24. 5. Claim of Bad Debts: The assessee claimed bad debts for advances given to sister concerns. The AO disallowed the claim, stating that the advances did not constitute trading loss. The Tribunal upheld the disallowance, noting that the assessee failed to establish commercial expediency for giving such loans. However, for AY 2005-06, the Tribunal allowed the claim to be set off against the written-back amount of sundry balances. 6. Interest under Section 234D: The Tribunal directed the AO to levy interest under section 234D only for the assessment years covered by the provision, following the jurisdictional High Court's decision in CIT v. Bajaj Hindustan Ltd., which held that section 234D cannot be applied retrospectively before 1.6.2003. 7. Assessment of Sundry Balances Written Back as Income from Other Sources: The AO assessed the written-back sundry balances as income from other sources, not business income, as the assessee had not carried out any business activity. The Tribunal upheld this assessment, agreeing with the lower authorities. 8. Disallowance of Set Off of Brought Forward Business Loss Against the Business Income of the Current Year: The AO disallowed the set-off of brought forward business loss against the current year's income, citing no business activity during these years. The Tribunal upheld this disallowance, noting that brought forward business loss cannot be set off against income from house property. Conclusion: The appeals were partly allowed for statistical purposes, with the Tribunal remanding the issue of ALV determination to the AO and allowing the interest on borrowed capital while disallowing the lease rent expenses. The Tribunal upheld the reopening of assessments, treatment of rental income as income from house property, disallowance of bad debts (except for AY 2005-06), and the assessment of sundry balances as income from other sources. Interest under section 234D was directed to be levied only for the applicable years.
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