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.

Summary

Issues Involved:
1. Whether the assessment orders were erroneous and prejudicial to the interests of the Revenue.
2. Whether the rental income should be taxed as "business income" or "income from house property".

Detailed Analysis:

Issue 1: Whether the assessment orders were erroneous and prejudicial to the interests of the Revenue.

Both the appeals by the Assessee are directed against different Orders of the Ld. CIT (Central)-II, New Delhi, Dated 30.03.2018, for the A.Ys. 2013-2014 and 2014-2015 under section 263 of the I.T. Act, 1961.

A search and seizure operation under section 132 of the Income Tax Act, 1961 was conducted by the Investigation Wing of the Department in M/s AMQ India Pvt. Ltd., M/s Abdul Majeed Qureshi (Prop. Moin Akhtar Qureshi) pertaining to AMQ Group of cases on 15.02.2014. During the course of search and seizure proceedings, certain incriminating documents/hard disk pertaining to assessee were found and seized. Subsequently, assessment proceedings were completed on 31.03.2016 for both the assessment years by the Assessing Officer, Central Circle-19, New Delhi at total income of ?4,14,07,930/- against the return of income declaring loss of ?7,72,570/- declared by the assessee in A.Y. 2013-2014 and at total income of ?1,29,366/- against the return of income of ?1,29,366/- declared by assessee in A.Y. 2014-2015.

The Ld. CIT on examination of the records of assessments observed that both the assessment orders dated 31.03.2016 are erroneous, as well as prejudicial to the interests of the Revenue to the extent that assessment was completed without proper examination/verification. The A.O. completed the assessments in which he allowed the rental income as income from business and profession without proper examination/verification. Show cause notices under section 263 of the I.T. Act were issued to the assessee, pointing out that rent of house property is taxable under section 22 of the I.T. Act, 1961, which have not been verified by the A.O. at assessment stage.

The Ld. CIT, however, did not accept the contention of assessee and noted that the main object of the assessee company is construction and development of any type of properties, which is not same as in the case Chennai Properties & Investments Ltd. vs CIT (supra). The assessee has declared rental income and claimed depreciation against the income. The approach of the A.O. is not correct because the same should be taxed as income from house property. The assessment orders were, therefore, held to be erroneous in so far as prejudicial to the interests of the Revenue. Both the assessment orders were accordingly set aside and restored back to the file of the A.O. on the aforesaid issue only. A.O. was directed to pass fresh assessment orders, after giving opportunity of being heard to the assessee.

On the other hand, Ld. D.R. submitted that this issue has not been examined by the A.O. and no enquiry has been made. No opinion has been expressed by the A.O. on the issue. The A.O. has not applied his mind. Therefore, it was rightly set aside by the Ld. CIT, under section 263 of the I.T. Act.

The Hon’ble Supreme Court in the case of Chennai Properties and Investments Ltd. vs. CIT (supra), held as under: “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.”

The Hon’ble Supreme Court in the case of Rayala Corporation (P.) Ltd. Vs. ACIT (supra), held as under: “Where assessee-company was engaged in business of leasing out its house properties to earn rent, income so earned as rent should be treated as ‘business income', and not as 'income from house property'.”

The Honourable Delhi High Court in the case of Pr.CIT-3, New Delhi vs. Delhi Airport Metro Express Pvt. Ltd., (supra), held as under: “For the purposes of exercising jurisdiction under Section 263 of the Act, the conclusion that the order of the AO is erroneous and prejudicial to the interests of the Revenue has to be preceded by some minimal inquiry. In fact, if the PCIT is of the view that the AO did not undertake any inquiry, it becomes incumbent on the PCIT to conduct such inquiry.”

The ITAT, Mumbai Bench in the case of Damsak Projects (P.) Ltd., vs. DCIT, Range-6(2), Mumbai (supra), held as under: “Thus, even if the revised return had been completely ignored by the AO that would only make the assessment order erroneous but by any stretch of imagination, it could not be said to be prejudicial to the interest of the Revenue. Thus, there was no merit in the assumption of jurisdiction by the Commissioner under section 263”.

Therefore, before taking any adverse view against the assessee-company, the Ld. CIT should have examined the explanation of assessee-company and should have considered the reply of the assessee-company. However, nothing has been done and without any justification, the original assessment orders have been set aside.

Considering the totality of the facts and circumstances of the case, we are of the view that 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.

Issue 2: Whether the rental income should be taxed as "business income" or "income from house property".

Learned Counsel for the Assessee reiterated the submissions made before the authorities below and submitted that assessee has main objects of carrying on business on construction and renting out properties. Copy of the Memorandum of Association of Assessee is filed at page-24 of the paper book and main objects 1 to 3 to be pursued by the Assessee-Company on its incorporation are as under:

“1. To carry on the business of construction of any type of projects such as residential houses, commercial buildings, flats and factory’s sheds and buildings in or out side of India and to act as builders, colonizers and civil and constructional contractors and to do all activities as contractor.

2. To purchase, take on lease or in exchange, hire or otherwise acquire, sell and mortgage any estates, lands, agricultural lands, buildings easements or such other interest in any immovable property and to develop and turn to account by laying out, plotting and preparing the same for building purposes, constructing building, furnishing, Fitting up and improving buildings and by paying, draining and building on lease.

3. To buy, exchange or otherwise acquire, an interest in any immovable property such as houses, buildings and lands within or outside the limits of Municipal Corporation or such other local bodies and to provide roads, drains, water supply electricity and lights within these areas, to divide the same into suitable plots and rent or sell the plots to the people for building, houses, bungalows and colonies for workmen according to schemes approved by improvement Trusts Development Boards and Municipal Boards thereon and to rent or sell the same to the public and realise cost in lump-sum installments or otherwise to start any housing scheme in India or abroad.”

He has submitted that assessee-company has one of the objects to be renting out the property and in assessment years under appeals. Assessee has only income from renting out the properties which is business income of the assessee. He has submitted that detailed reply was filed before Ld. CIT, on which, no enquiry have been conducted by him and explanation of assessee-company has not been considered in proper perspective. The explanation of assessee has been supported by material evidences produced on record. He has submitted that since one of the main objects of the assessee-company is renting out the properties, therefore, it was correctly considered as business income by the A.O. He has submitted that on change of opinion, Ld. CIT cannot revise the assessments and that too when two views are possible and A.O. has taken one of the view with which the Ld. CIT does not agree, it cannot be treated as erroneous order, prejudicial to the interests of the Revenue unless the view taken by the A.O. is unsustainable in Law. In support of this proposition, he has relied upon the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Company Limited 243 ITR 83.

Where assessee-company claimed that it was engaged in real estate business, whether rental income was to be taxed under the Head “Business Income” or “Income from House Property” was to be decided as per objects of the assessee-company. 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. Therefore, 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. The Ld. 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 Ld. CIT to come to the conclusion that original assessment orders were erroneous and prejudicial to the interests of the Revenue.

It may also be noted here that the A.O. in A.Y. 2013-2014 has specifically mentioned that necessary details, information and documents have been called for from the assessee-company time to time which have been furnished. The A.O. accepted the returned income of the assessee-company and made addition on account of unexplained investment on protective basis. In A.Y. 2014-2015, the A.O. specifically mentioned in the assessment order that assessee-company has shown income from profits and gains from business or profession. The A.O. examined the source of such income on test check basis and reply/explanation of assessee-company has been duly considered. The A.O. accepted the returned income of the assessee-company which would show that A.O. was conscious of the fact that assessee-company has only declared income from business on account of rent received in both the assessment years. There is no other income declared by assessee-company in its accounts or in the return of income. Therefore, it appears to us that A.O. has accepted the rental income as business income of the assessee-company in the impugned assessment years after satisfying himself on such claim made by assessee-company by producing the necessary details on record. The view of the A.O. is supported by the Judgments of the Hon’ble