2016 (4) TMI 901 - AT - Income Tax

Revision u/s 263 - CIT was of the view that nature of income arising from the transaction is not from Long term capital gain but Income from House Property and the AO has erroneously allowed the exemption u/s 54EC - Held that - The property constitute a bundle of rights and transfer by way of allotment of perpetual tenancy with right of occupancy and enjoyment of property perpetually in favour of tenant is also transfer of one of the right out of the bundle of rights which property carries with it and shall be chargeable to tax u/s 55(2)(a) read with Section 45 of the Act as Income from Capital Gains. No doubt the assessee-HUF has right to evict the tenant but that is only in the situation of tenant in default of monthly rent and that too with a notice of six months to tenant whereby the tenant can always rectify the default and continue enjoying the tenancy perpetually more so the tenant is protected tenant under Maharashtra Rent Control Act, 2000. The AO has made an inquiry before granting exemption under section 54 EC of the Act with respect to the grant of the tenancy right which was replied by the assessee-HUF vide letter dated 07-12-2011 filed with AO on 08-12-2011 and has also enclosed copies of agreements and details along with the said letter, In the instant case , proper and adequate enquiry has been duly made by the AO and after due application of mind has arrived at the instant decision of bringing to tax one time lumpsum payment received by the assessee-HUF on allotment of tenancy rights vide tenancy agreement dated 06-05-2008 as capital receipt chargeable to tax as Income from Capital Gains u/s 45 of the Act. Further, in the case of other co-owner Dushyant P Bobado(HUF), the CIT(A) has accepted this lumpsum payment on allotment of tenancy rights by the tax-payer in favour of the tenants received vide tenancy agreement dated 06-05-2008 as capital receipts chargeable to tax as Income from Capital Gains u/s 45 of the Act. Order passed u/s. 263 of the Act by the CIT is not sustainable under law as in our considered view the AO has made proper and adequate inquiries and has applied his mind and has taken decision after due application of mind and the view of the AO is one of the plausible and possible view and infact a correct view which is duly supported by provisions of the Act being Section 55(2)(a) and Section 45 of the Act and several judicial pronouncements and cannot by any stretch of imagination be categorized as erroneous view whereby in view of the AO one time premium for grant of tenancy is capital receipt and hence in our considered view, this order CIT passed u/s 263 of the Act is not sustainable in law and we hereby set aside - Decided in favour of assessee

Issues Involved:
1. Validity of the order passed under Section 263 of the Income Tax Act, 1961.
2. Whether the CIT erred in passing the order without giving full and proper opportunity of being heard.
3. Whether the CIT properly appreciated the facts of the case.
4. Whether the order passed by the ITO was erroneous and prejudicial to the interest of the revenue.
5. Classification of the receipts as capital gains or income from house property.
6. Disallowance of exemption under Section 54EC of the Income Tax Act.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263 of the Income Tax Act, 1961:
The Tribunal examined whether the CIT was justified in invoking Section 263 to revise the assessment order passed under Section 143(3). The CIT believed that the assessment order was erroneous and prejudicial to the interest of the revenue because the AO had allowed the exemption under Section 54EC incorrectly. The Tribunal, however, concluded that the AO had made proper and adequate inquiries and had taken a plausible view supported by the provisions of the Act and judicial pronouncements. Therefore, the order passed under Section 263 by the CIT was not sustainable.

2. Opportunity of Being Heard:
The assessee-HUF contended that the CIT passed the order under Section 263 without giving them a full and proper opportunity to be heard. The Tribunal noted that the assessee-HUF had made written submissions in response to the show cause notice issued under Section 263, and these submissions were considered by the CIT. Hence, the Tribunal did not find merit in the claim that the assessee-HUF was denied an opportunity of being heard.

3. Appreciation of Facts:
The Tribunal reviewed whether the CIT had fully and properly appreciated the facts of the case. The CIT had concluded that the ownership of the property remained with the assessee-HUF and there was no transfer of tenancy rights, thus the income should be classified as income from house property. However, the Tribunal found that the assessee-HUF had indeed transferred tenancy rights and received a one-time premium, which should be treated as capital receipts. The Tribunal held that the CIT did not fully appreciate the facts and the legal position.

4. Erroneous and Prejudicial Order:
The CIT held that the AO's order was erroneous and prejudicial to the interest of the revenue because it allowed the exemption under Section 54EC. The Tribunal, however, determined that the AO had taken one of the possible and plausible views, which was supported by the provisions of the Act and judicial precedents. Therefore, the AO's view could not be considered erroneous.

5. Classification of Receipts:
The primary issue was whether the receipts from the tenants should be classified as capital gains or income from house property. The Tribunal noted that the assessee-HUF had transferred tenancy rights and received a one-time premium, which constituted a capital receipt. The Tribunal referred to Section 55(2)(a) and various judicial pronouncements to conclude that the receipts should be treated as capital gains and not as income from house property.

6. Exemption Under Section 54EC:
The CIT directed the AO to disallow the exemption under Section 54EC, arguing that the receipts were not capital gains. The Tribunal, however, found that the AO had correctly allowed the exemption under Section 54EC, as the receipts were indeed capital gains from the transfer of tenancy rights. Therefore, the Tribunal restored the AO's order allowing the exemption.

Conclusion:
The Tribunal set aside the order passed by the CIT under Section 263 and restored the original assessment order passed by the AO under Section 143(3). The appeals filed by the assessee-HUF were allowed, affirming that the one-time premium received for granting tenancy rights should be treated as capital receipts and the exemption under Section 54EC was correctly allowed.

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