2018 (9) TMI 427 - HC - Income Tax

Revision u/s 263 - assessment of immovable properties - Held that - Commissioner merely proceeded to record that both the immovable properties namely, the mall managed by the petitioner company and one managed by M/s. Gandhi Reality (India) Pvt. Ltd., both are situated in the nearby locality, without giving the distance between the two properties and without even prima-facie ascertaining their respective locations. This would be relevant as we discuss the issue further. Next the Commissioner also merely adopted the respective municipal taxes of the two properties as the basis for considering commercial rental value of these properties. The municipal tax rate as well as the potential for fetching rental charges for the immovable properties have many variables. The municipal taxes are fixed on the basis of various factors such as builtup area, the age of the property, location of the property, nature of occupation of the property, use of the property, etc. So far as the rent potential of the property is concerned, equal number of variables would go into deciding the same such as, location of the property, area under rent, the age of the building, the nature of the business surrounding the property. In an immovable property even a small distance of location can make a big difference if one property is situated at a prime location at an important junction and the other does not enjoy any such advantage. These aspects cannot be standardised by applying a mathematical formula. Commissioner compared the two most variable factors by merely taking the proportion of the two sets of properties between RMC taxes and the rentals received or receivable. The starting point for making further inquiry itself was erroneous. Income from other sources - Held that - As noticed the correspondence between the AO and the assessee during the course of assessment proceedings in the earlier portion of his order. Considerable attention was given to the question of assessee s income from other sources and the expenditure claimed by the assessee in order to earn such income. In particular, the entire breakup of such expenditure was before AO. AO having asked for details, the assessee supplied full details of property tax expenses, electricity expenses, legal and professional expenses, security charges, etc. AO made no additions. Clearly a case of full inquiry having been made by the AO before he made up his mind. This is not a case where there were no inquiries or no germane inquiries having been made. On this basis, the second ground of the Commissioner also must fail and yet another area on this ground where the Commissioner has committed error while apportioning the cost between two heads of income where the Commissioner has taken the projected income of ₹ 9.35 crores from the house property as estimated by him on the basis of projections. All in all, we do not find this a fit case where Commissioner would have exercised revisional powers.

Summary

Issues Involved:
1. Validity of the notice issued under section 263 of the Income Tax Act.
2. Comparison of rental income and municipal taxes with another entity.
3. Allocation of expenses between income from house property and income from other sources.

Detailed Analysis:

1. Validity of the Notice Issued under Section 263 of the Income Tax Act:
The petitioner challenged a notice dated 02/04.01.2008 issued by the Principal Commissioner of Income Tax, Rajkot, seeking to revise the assessment for the assessment year 2013-2014 under section 263 of the Income Tax Act. The petitioner contended that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. The High Court observed that for the exercise of powers under section 263, the twin conditions of the order being erroneous and prejudicial to the interest of the Revenue must exist. In this case, both conditions were not met, rendering the notice invalid.

2. Comparison of Rental Income and Municipal Taxes with Another Entity:
The Commissioner compared the petitioner’s gross annual rent of ?3.46 crores and municipal taxes of ?1.15 crores with another entity, M/s. Gandhi Reality (India) Pvt. Ltd., which showed rental income of ?1.50 crores against municipal taxes of ?18.61 lakhs. The Commissioner estimated that the petitioner should have declared rental income of ?9.35 crores based on a mathematical projection. The High Court found this comparison erroneous because it did not consider the numerous variables affecting municipal taxes and rental potential, such as location, built-up area, age of the property, and nature of occupation. The Court emphasized that these aspects cannot be standardized by a mathematical formula, and thus, the starting point for the Commissioner’s inquiry was flawed.

3. Allocation of Expenses Between Income from House Property and Income from Other Sources:
The Commissioner suggested that some expenses claimed under income from other sources should have been apportioned to income from house property. The Assessing Officer had already scrutinized the petitioner’s computation of income from other sources and the related expenses during the assessment proceedings. The petitioner had provided detailed explanations and supporting documents for expenses such as property tax, electricity, legal and professional charges, housekeeping, AMC cost, and security services. The High Court noted that the Assessing Officer had conducted a thorough inquiry and made no major changes to the petitioner’s declarations. Therefore, the Commissioner’s attempt to reallocate expenses was unfounded, and the second ground for revision also failed.

Conclusion:
The High Court concluded that the Commissioner’s notice under section 263 was based on erroneous comparisons and unfounded reallocations of expenses. The detailed inquiry by the Assessing Officer during the original assessment proceedings rendered the notice invalid. Consequently, the impugned notice was set aside, and the petition was disposed of.