2019 (8) TMI 770 - AT - Income Tax

Taxability of notional rent - income from house property OR business income - as per assessee the property being used as registered office and does not have any other property, the same cannot be considered to be a vacant property - further property was also partly let out - notional rate of rent was enhanced by CIT(A) - HELD THAT - We are of the view that the company having occupied the property for its own purposes, no notional rent can be added. It may be germane to mention here that this is the only property owned and occupied by the assessee as its registered office. It is not the case of the AO that the assessee company was having some other premises to have its office. A company having been incorporated is legally required to have its registered office irrespective of the fact whether during the year it has carried on any activity or not. There is a statutory requirement under the Companies Act to have a registered office. We are also in agreement with the contention of the Ld. AR for the assessee that the cost incurred by the company in order to comply with various statutory functions is allowable even in the absence of any business income. In case, a company does not have its own premises then such company will be required to take a premises on rent for its registered office and rent so paid being towards meeting statutory obligation will be allowable expenditure. As against this, a company which owns its own premises and uses such premises for its registered office, it cannot be said that such premises was vacant so as to charge notional rent as its income u/s 23(1). Further, we are of the view that there is no restriction or condition about the size of the registered office. Thus, merely on the basis of the area of the office being large, the same cannot be said to be vacant property so as to attract the provision of section 23. Further in the preceding assessment years and succeeding years there is no such addition has been made despite there being no change in facts. - appeal of the assessee is allowed

Issues Involved:
1. Determination of income under 'house property' versus 'business income' for a factory building.
2. Applicability of notional income computation under section 23(1)(a) versus section 23(1)(c).
3. Adverse inferences recorded by CIT(A) and their sustainability.
4. Jurisdictional overreach by CIT(A) in enhancement of income.
5. Legitimacy of interest levy.

Issue-wise Detailed Analysis:

1. Determination of Income under 'House Property' vs. 'Business Income':
The primary contention was whether the income from the factory building should be classified under 'house property' or 'business income.' The assessee argued that the property served as the registered office and was partially let out for a nominal rent to group companies, thus should be considered 'business income.' The Tribunal found that the property was indeed used as the registered office, which is a statutory requirement under the Companies Act. Therefore, it was held that the property was occupied for business purposes, and no notional rent could be added under section 23(1)(a).

2. Applicability of Notional Income Computation under Section 23(1)(a) vs. Section 23(1)(c):
The Tribunal analyzed whether the property was vacant and if section 23(1)(c) could be invoked. It was established that the property was occupied by the company for its registered office, fulfilling statutory obligations, and was not vacant. Consequently, the Tribunal ruled that section 23(1)(c) was inapplicable, and no notional rent should be computed.

3. Adverse Inferences Recorded by CIT(A):
The CIT(A) had recorded various adverse inferences, including the incorrect area of the property and the rental value. The Tribunal noted that the area considered by the CIT(A) was based on a potential future development plan and not the actual built-up area. The Tribunal accepted the assessee's contention that the actual area was 30,000 sq. feet, not 48,770 sq. feet as determined by the CIT(A). Additionally, the rental value used by CIT(A) was found to be without basis.

4. Jurisdictional Overreach by CIT(A) in Enhancement of Income:
The Tribunal addressed the issue of CIT(A)'s enhancement of income, which was beyond the scope of powers vested under section 251(2) of the Act. The Tribunal found that the enhancement was not justified as it was based on incorrect assumptions and misinterpretations of the property’s use and area.

5. Legitimacy of Interest Levy:
Given that the primary addition of notional rent was deleted, the Tribunal did not find it necessary to adjudicate on the legitimacy of the interest levy separately, as it became academic.

Conclusion:
The Tribunal concluded that the property was used for business purposes as the registered office, and thus, no notional rent could be added under section 23(1). The CIT(A)'s enhancement and adverse inferences were found unsustainable. Consequently, the Tribunal directed the deletion of the entire addition made by the AO and further enhanced by the CIT(A), allowing the appeal in favor of the assessee.

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