2019 (3) TMI 226 - HC - Income Tax

Advance for rent and never turned into income - Recovery barred by limitation - still remains as a liability in its account. - Business income or unexplained investment or an unexplained cash credit - whether the amounts can be assessed under the Income Tax Act under any other head? - HELD THAT - AO had specifically proposed to treat the amount as the assessee company s income, as is seen from the assessment order itself. It could not have been treated as an unexplained cash credit or as an unexplained investment; since it was neither. The source was clear and there was proper explanation for the amounts as seen from the books of accounts. We are also of the opinion that under the Income tax Act, the proposal is essentially to assess a particular amount, as income, which the assessee has not reckoned as such in its return. To propose under one head of income and in scrutiny or a reassessment to finalise under another head is perfectly permissible. Whether there was any possibility of it being recovered - If the recovery had been barred by limitation, necessarily, it has to be treated as an income from the business and the same had to be assessed under the Income Tax Act as has been held in T.V. Sundaram Iyengar and Sons Ltd. 1996 (9) TMI 1 - SUPREME COURT . Even if the deviation from the proposal is found to be improper, the assessment has to be sustained, as an income from business; which was the original proposal. If the other company had occupied the premises the amounts would definitely be shown as income from business. Limitation having not expired in the relevant previous year, it is to be noticed that the assessment itself was finalised after three years, which is the normal period of limitation for recovery of money, even calculated from the date on which the last refund was made. The assessee had also not produced any agreement and in all possibility there would have been a restrictive clause, in so far as forfeiture of the advance amounts, if the contract did not fructify. The assessment order itself was passed, after three years from the date of commencement of limitation and there was no claim made by the assessee, who participated in the assessment proceedings, as to any recovery proceedings having been commenced by the other company or a repayment having been effected. we do not approve of the treatment of the amounts as an unexplained investment or an unexplained cash credit, we are of the opinion that the assessment has to be upheld as an income from business. The questions stand answered accordingly and the appeal stands allowed, restoring the order of the Assessing Officer; but however making modification as herein, assessing the rent received in advance as income in the relevant previous year.

Summary

Issues:
Assessment of ?12,49,000 as income; Treatment of the amount as unexplained investment; Deviation from the original proposal; Possibility of recovery; Application of limitation period.

Analysis:
The case involved the assessment of ?12,49,000 as income by the Department, which the Company claimed remained as an advance for rent and not income. The Company, engaged in letting out commercial spaces, had received the amount as rent advance but later refunded a portion due to the tenant's inability to occupy the premises. The Department treated the amount as unexplained investment under Section 69 of the Income Tax Act, as no agreement was produced, and a Director of the Company was also a Director in the tenant company.

The First Appellate Authority, however, found no grounds for adding the amount as unexplained investment, noting the money was credited through the bank with a confirmation letter from the tenant company's Director. The Tribunal upheld this decision. The Department argued that the tenant's claim was barred by limitation, and the Company failed to explain why the amount was not returned or remained a liability. The Department relied on a Supreme Court decision to support adding the amount as income.

The Court re-framed the questions of law, addressing whether the amount could be assessed as unexplained investment and if the lower authorities erred in setting aside the assessment without considering other applicable tax heads. The Court found that the deviation from the proposal was permissible, and the amount was not an unexplained credit or investment. The source was clear, and proper explanations were provided in the accounts, justifying the assessment as income from business.

Regarding the possibility of recovery and limitation, the Court noted that the assessment was finalized within the normal recovery limitation period. Despite disapproving of the treatment as unexplained investment, the Court upheld the assessment as income from business, modifying it to include the rent received in advance as income for the relevant year. The appeal was allowed, restoring the Assessing Officer's order, with no costs awarded.

In conclusion, the Court held that the assessment as income from business was justified, considering the clear source of the amount and the absence of unexplained credit or investment. The decision also addressed the relevance of recovery limitation and upheld the assessment within the permissible period, modifying it to include the rent advance as income for the relevant year.