2015 (11) TMI 576 - AT - Income Tax

Reopening of assessment - income of the assessee should be assessed under the head Income from house property whereas in the impugned assessment order passed in pursuance of such reasons recorded the Assessing Officer has treated the income to be assessed under the head Income from other sources - Held that - In the assessment year 2007- 08, the assessee admitted that income from flats owned by the assessee should be assessed as income from house property. Up to the assessment year 2001- 02, the Department itself has treated the licence fee and the service charges from the flat taken on tenancy basis as business income. Thus, the material on record itself negates the premise on which the Assessing Officer has entertained his reason to believe which is based on wrong presumption of facts and therefore, the same cannot be held to be a valid ground for reopening the case within the scope of section 147 of the Act. Accordingly, we hold that the reasons recorded by the Assessing Officer for reopening the case under section 147 is bad in law as there is no reason to believe or any relevant material on the basis of which the assessee s case can be reopened. Accordingly, the entire proceedings initiated vide notice under section 148 of the Act, is void ab initio and consequently the assessment orders are quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 147 of the Income-tax Act, 1961.
2. Classification of income received as license fees and service charges from flats.
3. Allowability of expenses claimed against such income.

Detailed Analysis:

1. Validity of Reopening of Assessment under Section 147:
The assessee challenged the reopening of the assessment under section 147 on the grounds that the initiation was based on "reasons recorded" that were bad in law. The Assessing Officer (AO) reopened the case on the premise that the assessee's income should be classified under "Income from house property" instead of "Business income," leading to a potential escapement of income. The assessee argued that the AO did not have any new material or information to justify the reopening and that the belief was arbitrary and irrational. The Tribunal found that the AO's "reasons recorded" lacked any tangible material or information to justify the reopening. The Tribunal emphasized that the belief must be based on relevant and material reasons held in good faith, as established in the case of Ganga Saran and Sons P. Ltd. v. ITO. The Tribunal concluded that the reasons recorded by the AO did not meet the legal requirements for reopening the case under section 147, rendering the entire proceedings void ab initio.

2. Classification of Income Received as License Fees and Service Charges:
The Revenue contended that the income received as license fees and service charges from flats should be classified under "Income from house property" rather than "Business income." The assessee argued that the flats were taken on tenancy basis and not owned by the company during the relevant assessment years (2003-04 and 2004-05). The Tribunal noted that up to the assessment year 2001-02, the Department had accepted the income from these flats as business income. Additionally, the Tribunal found that the flats were purchased by the assessee only in the subsequent year (2005-06), and until then, the income was rightly shown under "Business income." The Tribunal also highlighted that in the assessment year 2007-08, the Tribunal had treated service charges as business income and license fees as income from house property. Therefore, the Tribunal held that the AO's attempt to reclassify the income without any new material was unjustified.

3. Allowability of Expenses Claimed Against Such Income:
The AO disallowed various expenses claimed by the assessee on the grounds that the income should be classified under "Income from house property," where only specific deductions under section 24(i) are allowable. The Tribunal found that the AO's reasoning for disallowing the expenses was based on an incorrect classification of income. Since the Tribunal upheld the assessee's classification of income as "Business income," the expenses claimed were deemed allowable. The Tribunal emphasized that the AO's premise for disallowing the expenses was negated by the factual position of the assessee not owning the flats during the relevant assessment years.

Conclusion:
The Tribunal quashed the reassessment proceedings for both assessment years 2003-04 and 2004-05, holding that the reopening under section 147 was invalid due to the lack of "reason to believe" based on relevant material. Consequently, the classification of income as "Business income" was upheld, and the expenses claimed by the assessee were allowed. The Departmental appeals were dismissed, and the assessee's cross-objections were allowed.