2018 (12) TMI 1958 - AT - Income Tax

Revision u/s 263 - Revision based on the basis of audit objection - assessee had claimed deduction of interest on housing loan and assessee had also taken interest free deposits over and above the rental income - HELD THAT - We find that on identical issue in the case of Inderchand Amarchand Chopda 2011 (10) TMI 772 - ITAT PUNE , the Co-ordinate Bench of the Tribunal after relying on the decision in the case of B A Plantation Industries Ltd. 2006 (12) TMI 101 - GAUHATI HIGH COURT has held that when PCIT assumed jurisdiction u/s 263 to give effect to the audit objection, the assumption of jurisdiction to be not valid. On the merits of considering the interest free deposits for determining A.L.V. we find in the case of CIT Vs. Tip Top Typography 2014 (8) TMI 356 - BOMBAY HIGH COURT has held that the notional rent on security deposits cannot be taken into account for determination of Annual Letting Value. Similar view has also been taken in the case of CIT Vs. J K Investors (Bombay) Ltd. 2000 (6) TMI 9 - BOMBAY HIGH COURT We further find that no addition on 9 the issue on which the present proceedings u/s 263 has been initiated, has been made by the AO in the assessment order passed u/s 143(3) for A.Y. 2010-11 and for subsequent assessment orders i.e., A.Y. 2012-13, and 2014-15. Here, it would be relevant to point out that the order for A.Y. 2014-15 was passed u/s 143(3) of the Act on 27.02.2014 which was much after the order passed by PCIT u/s 263 for A.Y. 2011-12. Before us, Revenue has not placed any material on record to demonstrate that the view taken by the AO while framing the assessment u/s 143(3) of the Act was an impermissible view or was upon erroneous application of legal principles necessitating the exercising of revisionary powers u/s 263 - the cases laws relied upon by D.R. are distinguishable on facts and are not applicable to the present facts. We are of the view that in the present case, PCIT was not justified in resorting to revisionary powers u/s 263. - We therefore set aside the order and thus, the ground of the assessee is allowed.

Summary

Issues Involved:
1. Validity of proceedings initiated under Section 263 of the Income Tax Act.
2. Merits of considering interest-free deposits for determining Annual Letting Value (ALV).

Issue-wise Detailed Analysis:

1. Validity of Proceedings Initiated Under Section 263 of the Income Tax Act:

The appeal by the assessee challenges the order passed by the Principal Commissioner of Income Tax (Prl.CIT) under Section 263 of the Income Tax Act, 1961. The Prl.CIT noticed that the assessee had claimed a deduction of interest on a housing loan while also taking interest-free deposits over and above the rental income. The Prl.CIT opined that the interest-free deposits should have been considered to reduce the loan and, consequently, the interest thereon. He believed that the assessment order framed by the Assessing Officer (AO) was erroneous and prejudicial to the interest of the Revenue due to lack of appropriate verification.

The assessee contended that the initiation of proceedings under Section 263 was based on an audit objection and not on the actual examination of records by the Prl.CIT. The assessee argued that the conditions specified under Section 263 were not satisfied and relied on the Supreme Court decision in Malabar Industrial Co. Ltd. Vs. CIT, which states that for Section 263 to be invoked, the order must be both erroneous and prejudicial to the interest of the Revenue.

The Tribunal observed that the initiation of proceedings was indeed based on an audit objection, as evidenced by the proposal and audit observation letter. It referred to the decision in Inderchand Amarchand Chopda Vs. CIT, which held that assuming jurisdiction under Section 263 based on an audit objection is not valid. Therefore, the Tribunal concluded that the Prl.CIT was not justified in resorting to revisionary powers under Section 263.

2. Merits of Considering Interest-Free Deposits for Determining Annual Letting Value (ALV):

On the merits of the addition, the Tribunal noted that the Prl.CIT considered the order erroneous because the assessee had received interest-free deposits, which he believed reduced the interest burden on the housing loan. The Tribunal referred to the Bombay High Court decisions in CIT Vs. Tip Top Typography and CIT Vs. J K Investors (Bombay) Ltd., which held that notional rent on security deposits cannot be taken into account for determining the ALV.

Additionally, the Tribunal noted that no disallowance on account of interest was made in the assessee's case for earlier or subsequent years, including the assessment year 2014-15, which was assessed after the initiation of the revisionary proceedings for the assessment year 2011-12. The Revenue did not provide any material to demonstrate that the AO's view was impermissible or erroneous, necessitating the exercise of revisionary powers.

Therefore, considering the totality of facts, the Tribunal concluded that the Prl.CIT was not justified in invoking Section 263 and set aside the order, allowing the assessee's appeal.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the order passed under Section 263 of the Income Tax Act, 1961, by the Prl.CIT, as the initiation of proceedings was based on an audit objection and not on the actual examination of records, and the merits of considering interest-free deposits for determining ALV were not justified.