2017 (11) TMI 1290 - AT - Income Tax

Rentals received during the period of project completion - taxability under what head? - nature of income - Held that - In view of the clear distinction of interest earned on surplus funds deposited during the completion of project and the receipts which are inextricably connected to setting up of the project, the law is very clear. In the present case, the rents are received on a property purchased for setting up of the project and is inextricably linked to the completion of the project. Considering the fact that the assessee had taken steps to evict tenants and also paid compensation to them while getting vacant pocession for completing the project, the rental receipts received during the period have to be set off to the cost of project. Accordingly, it is of the opinion that the said amounts cannot be brought to tax as income from house property , and as assessee has rightly treated them as capital receipts and set off to work-in-progress, the stand of the assessee is consistent with the principles governing such receipts. Accordingly, the orders of the Ld. CIT(A) and A.O. are set aside and assessee s grounds on the issue are treated as allowed. The receipts are to be considered as capital receipts only. In the light of the above decision of treating the rental receipts as capital receipts during the impugned years, hereby direct the A.O. to exclude the rent received from M/s. Ramdharam Kanta only as capital receipt. Since the proceedings initiated are u/s 147 of the Act, on the return of income filed by the assessee declaring house property income following the principles laid down by the Hon ble Supreme Court in the case of CIT vs. Sun Engineering Work P. Ltd., (1992 (9) TMI 1 - SUPREME Court) the amounts already offered cannot be excluded. The proceedings u/s 147 are for the benefit of the revenue aimed at gathering the escaped income of the assessee, as held by the Hon ble Supreme Court. To that extent, in AY 2008-09 assessee s offering of rental income in the return filed is to be accepted and cannot be excluded. In other years, the rental receipts are to be treated as capital receipts and therefore gets excluded to be adjusted in capital work in progress of the project. Appeals of assessee are partly allowed.

Summary

Issues Involved:
1. Taxability of rentals received during the period of project completion.
2. Appropriate head under which such rentals should be taxed.
3. Validity of reopening assessments under Section 147 of the Income Tax Act.

Detailed Analysis:

1. Taxability of Rentals Received During Project Completion:
The core issue in these appeals is whether the rental income received by the assessee during the period of project completion is taxable. The assessee, a company incorporated for the development and construction of a commercial complex, received rental income from various tenants during the assessment years 2008-09 to 2012-13. The assessee argued that these rentals were collected during the eviction process of tenants and should be set off against the expenditure incurred for evicting them, treating the receipts as capital receipts credited to the work-in-progress account. The Assessing Officer, however, held that these rentals are taxable as they have no direct relation to the project being set up.

2. Appropriate Head for Taxing the Rentals:
The Assessing Officer initially assessed the rental income under the head "income from other sources." The CIT(A) directed the AO to treat the income as "income from house property" instead. The CIT(A) reasoned that since the business had not commenced, the assets could not be treated as business assets, and the transaction was merely an exploitation of property by the owner. The CIT(A) further held that the rental income could not be adjusted with work-in-progress as the construction of the Industrial Park was not completed during the relevant assessment years. This decision was contested by the assessee, who cited various Supreme Court rulings, including CIT vs. Bokaro Steel Limited, arguing that the receipts should be treated as capital in nature and set off against project costs.

3. Validity of Reopening Assessments Under Section 147:
The assessee also challenged the reopening of assessments under Section 147, arguing that the notice issued was without jurisdiction. The CIT(A) upheld the reopening, stating that the information about rental income came to the Assessing Officer's knowledge in AY 2012-13, and no scrutiny assessments had been completed in the impugned years. This position was maintained by the Tribunal, which rejected the grounds of reopening assessments.

Tribunal's Findings:
The Tribunal considered the principles laid down by the Supreme Court in several cases, including CIT vs. Bokaro Steel Limited, CIT vs. Karnataka Power Corporation, and CIT vs. Bongaigaon Refinery and Petrochemicals Ltd. It concluded that the rental income received during the project’s formative period is inextricably linked to the construction of the project and should be treated as capital receipts. Thus, these amounts should be set off against the project costs and not taxed as "income from house property."

Specific Judgments:
- The Tribunal directed the AO to exclude the rental income from M/s. Ramdharam Kanta as capital receipts and adjust it in the capital work-in-progress for the project.
- For AY 2008-09, since the assessee had already offered rental income in the return filed, the Tribunal upheld the inclusion of this income as "house property income" based on the principles laid down in CIT vs. Sun Engineering Work P. Ltd.
- The reopening of assessments under Section 147 was upheld as the information about rental income was obtained in AY 2012-13, and no prior scrutiny assessments were completed.

Conclusion:
The Tribunal allowed the appeals partly, treating the rental receipts as capital receipts to be adjusted against the project costs, except for the rental income already offered in AY 2008-09. The reopening of assessments under Section 147 was upheld. The order was pronounced on 17th November 2017.