2018 (9) TMI 346 - AT - Income Tax

Revision u/s 263 - whether rental income was to be taxed under the Head Business Income or Income from House Property ? - Held that - The assessee-company filed copy of the Memorandum of Association and Learned Counsel for the Assessee referred to main objects to be pursued by the assessee-company on its incorporation which provides that assessee-company would be carrying on business for construction of any type of property and to let-out or sell the same to the public therefore renting-out the properties is also one of the main objects of the assessee-company. Letting-out/renting-out the property was in fact business of the assessee-company. Therefore same was correctly claimed by assessee-company as income from business and profession. The assessee-company in response to the show cause notice issued under section 263 of the I.T. Act has specifically raised the above points in its reply before Ld. CIT. However the Ld. CIT without considering the explanation of assessee-company passed the impugned orders. CIT did not examine the explanation of assessee-company at all and passed the order without giving any reasons for decision for the same. Thus no enquiry have been conducted by the CIT to come to the conclusion that original assessment orders were erroneous and prejudicial to the interests of the Revenue. A.O. has correctly accepted the rental income as business income in the facts and circumstances of the case. The Orders of the Ld. CIT thus cannot be sustained in Law. We accordingly set aside the impugned Orders of the Ld. CIT passed under section 263 of the I.T. Act and restore the original assessment orders. - Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the rental income declared by the assessee should be classified as "business income" or "income from house property" under the Income Tax Act, 1961.
Whether the assessment orders passed by the Assessing Officer (A.O.) were erroneous and prejudicial to the interests of the Revenue, justifying revision under Section 263 of the Income Tax Act, 1961.
Whether the Commissioner of Income Tax (CIT) properly exercised jurisdiction under Section 263 by setting aside the assessment orders without conducting a sufficient inquiry into the assessee's explanation and evidence.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of Rental Income

Relevant Legal Framework and Precedents: The classification of rental income under the Income Tax Act, 1961, hinges on whether it should be taxed as "business income" or "income from house property." The relevant precedents include the Supreme Court judgments in Chennai Properties and Investments Ltd. vs. CIT and Rayala Corporation (P.) Ltd. vs. ACIT, which support treating rental income as business income when the main object of the company is to earn such income.
Court's Interpretation and Reasoning: The court found that the assessee's Memorandum of Association indicated that one of its main objects was renting out properties. This aligns with the precedents where rental income was considered business income if it was the primary business activity.
Key Evidence and Findings: The assessee provided its Memorandum of Association and argued that its primary business activity was renting properties, supported by the absence of other income activities.
Application of Law to Facts: The court applied the principles from the cited precedents, concluding that the rental income should be treated as business income, consistent with the assessee's stated business objectives.
Treatment of Competing Arguments: The CIT argued that the rental income should be taxed as income from house property, but the court found this view unsupported by the facts and legal precedents.
Conclusions: The court concluded that the rental income was correctly treated as business income by the A.O., and the CIT's contrary view was not sustainable.

Issue 2: Erroneous and Prejudicial Assessment Orders

Relevant Legal Framework and Precedents: Under Section 263, an assessment order can be revised if it is erroneous and prejudicial to the interests of the Revenue. The Supreme Court case Malabar Industrial Co. Ltd. provides guidance on when an order can be deemed erroneous and prejudicial.
Court's Interpretation and Reasoning: The court emphasized that not every loss of revenue due to an A.O.'s order is prejudicial. If the A.O. adopts a permissible view under the law, it cannot be considered erroneous unless unsustainable in law.
Key Evidence and Findings: The A.O. had considered the necessary details and explanations provided by the assessee, indicating a conscious decision to classify the income as business income.
Application of Law to Facts: The court found that the A.O. had conducted sufficient inquiry and that the CIT's revision was based on a mere disagreement with the A.O.'s permissible view.
Treatment of Competing Arguments: The CIT's argument that the A.O. failed to conduct a proper inquiry was rejected, as the court found that the A.O. had indeed examined the relevant details.
Conclusions: The court concluded that the assessment orders were neither erroneous nor prejudicial to the interests of the Revenue, and thus, the CIT's revision under Section 263 was unwarranted.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "Where in terms of memorandum of association, main object of assessee-company was to acquire properties and earn income by letting out same, said income was to be brought to tax as business income and not as income from house property."
Core Principles Established: The classification of income should align with the company's main business objectives as stated in its Memorandum of Association. A permissible view taken by the A.O. cannot be deemed erroneous merely because the CIT disagrees.
Final Determinations on Each Issue: The court set aside the CIT's orders under Section 263, restoring the original assessment orders and affirming the classification of rental income as business income.

In conclusion, the court upheld the A.O.'s assessment orders, emphasizing the importance of aligning income classification with the company's stated business objectives and reinforcing the limits of the CIT's revisionary powers under Section 263.

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