2019 (5) TMI 1675 - AT - Income Tax

Revision u/s 263 - doctrine of the merger the assessment - taxability of rental income - business income or house property - HELD THAT - Commissioner (Appeals) allowed the appeal of the assessee by accepting the lease rental income as business income . Therefore, before the ld Commissioner (Appeals) there was issue of taxability of rental income, which was duly considered and decided by him. Commissioner (Appeals) decided the issue after examining the memorandum of association of the assessee, nature of the income and facts that similar income was accepted as a business income. In our view the order of assessing officer on point of taxability of lease rental income is merged with the order of Commissioner (Appeals). The revenue/ assessing officer accepted the finding of ld. Commissioner (Appeals) as no further appeal was filed before Tribunal. This fact was brought in the notice of ld. Pr Commissioner in the reply furnished by the assessee. Pr Commissioner took the view that the taxability of rental income as House Property Income was not the subject matter before ld. Commissioner (Appeals). In our view the ld. Pr Commissioner is wrong in his approach and the taxability of lease income as was very much before ld. Commissioner (Appeals). Explanation (c) to section 263 places an embargo on the Commissioner in case of subject-matter of any appeal which had been considered and decided in such appeal. Before the ld. Commissioner exercises his jurisdiction under section 263, he is required to ascertain whether the order referred to in subsection (1) of section 263 had been the subject-matter of any appeal, and if yes, the revisional powers should be available only with respect to subject-matter that had not been considered and decided in such appeal. Thus, in the present case, Commissioner was wrong in revising the assessment order on the taxability of rental income as income from house property. Therefore, the order passed by him is not valid. - Decided in favour of assessee

Summary

Issues Involved:
1. Legality of the Principal Commissioner of Income Tax's order under section 263 of the Income Tax Act.
2. Assessment of lease rental income as 'business income' vs. 'income from house property'.
3. Applicability of the Doctrine of Merger.

Detailed Analysis:

1. Legality of the Principal Commissioner of Income Tax's order under section 263 of the Income Tax Act:
The assessee challenged the legality of the Principal Commissioner of Income Tax's (Pr. Commissioner) order under section 263, arguing that the assessment order passed by the Assessing Officer (AO) had merged with the order of the Commissioner of Appeals (CIT(A)) and thus could not be revised. The Tribunal examined the provisions of section 263 and Explanation (c) thereunder, which restricts the Commissioner from revising matters already considered and decided in an appeal. The Tribunal cited various case laws, including CIT Vs K.S Sera Productions Ltd. and CIT Vs Nirma Chemicals Works P Ltd, which support the doctrine of merger and concluded that the Pr. Commissioner had no jurisdiction to revise the assessment order as the issue of taxability of lease rental income had already been adjudicated by the CIT(A).

2. Assessment of lease rental income as 'business income' vs. 'income from house property':
The AO initially assessed the lease rental income as 'income from other sources', which was later treated as 'business income' by the CIT(A) on appeal. The Pr. Commissioner, however, issued a show cause notice under section 263, proposing that the lease rental income should be assessed under 'income from house property'. The assessee contended that the lease rental income consistently claimed as 'business income' was accepted by the department in previous assessment years, and any change would not be prejudicial to the revenue. The Tribunal noted that the CIT(A) had thoroughly examined the nature of the income and had consistently accepted it as 'business income' in previous years. The Tribunal upheld the CIT(A)'s decision, emphasizing that the Pr. Commissioner could not revise the assessment order on this matter.

3. Applicability of the Doctrine of Merger:
The Tribunal extensively discussed the Doctrine of Merger, which implies that once an appellate authority has adjudicated an issue, the original order merges with the appellate order, and the revisional authority cannot revise it. The Tribunal referred to several judicial precedents, including the Hon’ble Bombay High Court's decision in CIT Vs K Sera Sera Productions Ltd, which held that matters decided in an appeal cannot be revised under section 263. The Tribunal concluded that the issue of taxability of lease rental income had been considered and decided by the CIT(A), and thus the Pr. Commissioner’s order under section 263 was invalid.

Conclusion:
The Tribunal allowed the appeal of the assessee, holding that the Pr. Commissioner’s order under section 263 was invalid due to the application of the Doctrine of Merger. The Tribunal did not address the alternative submissions of the assessee, as the primary issue's resolution rendered them academic. The order was pronounced in the open court on 08/05/2019.