2023 (4) TMI 619 - AT - Income Tax

Revision u/s 263 - CIT found fault with the action of the AO accepting the service charges received by it as rental income - According to CIT(E), the assessee trust has claimed deduction u/s 24(a) of the Act on service charges received by it and wondered as to how the service charge can be included in property income and standard deduction can be claimed and allowed by AO, which action of AO was erroneous and that the assessment order has been passed without basic verification about the allowability of claim under section 24(a) of the Act which is erroneous in so far as it was prejudicial to the interest of revenue - HELD THAT - These are essential requirements/ necessities and in-extricable part for usage of the property taken on rent by the tenant, and without which they cannot function in the leased out premises. And it can be seen that when the amenities given to the leased out premises/tenant have nexus to the enjoyment of the property, then it can be included in the income from house property as held by the Hon ble Calcutta High Court 2001 (3) TMI 77 - CALCUTTA HIGH COURT which has been upheld by the Hon ble Supreme Court in Shambu Investments Vs. CIT 2003 (1) TMI 99 - SC ORDER and Raj Dadarkar Associates 2017 (5) TMI 586 - SUPREME COURT and by Tribunal in assessee s own case 2013 (7) TMI 1209 - ITAT MUMBAI wherein the Tribunal was considering whether the assessee was entitled to deduction us/ 24(a) of the Act or not on the composite rent income comprising of income from renting out of property and income from amenities, which was allowed by the Tribunal by relying on the decision in similar case of Sri Satya Sai Trust Since the AO view after enquiring is plausible view it could not have been interfered with unless the Ld CIT(E) has conducted during revisional proceedings enquiry or verified the facts in order to come to a conclusion that AO s view was erroneous/un-sustainable in law. As noticed once AO has conducted enquiry (on an issue) then the Ld Pr. CIT before holding the order of AO to be erroneous, should have conducted necessary enquiries or verification in order to show that the finding given by the AO on that issue is erroneous/unsustainable in law. Coming back to the present case, once we have found that AO has discharged the duty of investigator (on the issue of deduction claimed u/s 24(a) of the Act which included amenities charges), then before CIT(E) holds the view of AO as erroneous, it was imperative on the part of CIT(E) to have made necessary enquiries or verification and should have arrived at a conclusion that the view of AO was unsustainable in law. Admittedly, in the instant case, CIT(E) has not conducted any such enquiry or verification. In such a scenario, we have to hold that he has initiated revision jurisdiction on mere conjectures, suspicions and surmises, which is not permitted. In such a scenario, his impugned action of holding the claim of assessee (deduction u/s 24(a) of the Act which includes amenity charges) as erroneous and prejudicial to the interests of revenue is untenable - we are of the view that the impugned revision order passed by Ld PCIT is not sustainable in law and assessee succeeds on the legal issue.

Summary

Issues Involved:
1. Invocation of revisional jurisdiction under Section 263 of the Income Tax Act.
2. Examination of the eligibility for exemption under Section 11 of the Income Tax Act.
3. Classification of income from service charges as rental income and the applicability of Section 24(a) deduction.

Detailed Analysis:

1. Invocation of Revisional Jurisdiction under Section 263:
The primary issue is whether the Ld. CIT(E) correctly invoked the revisional jurisdiction under Section 263 of the Income Tax Act. The Tribunal emphasized the twin conditions required for such invocation: the order must be erroneous and prejudicial to the interests of the revenue, as established in the case of Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83 (SC). The Tribunal noted that the Assessing Officer (AO) had conducted inquiries regarding the income from leave and license fees and service charges, thus fulfilling his duty as an investigator. The Tribunal held that the Ld. CIT(E) should have conducted further inquiries or verification to establish that the AO's order was erroneous and unsustainable in law. Since the Ld. CIT(E) failed to do so, the invocation of Section 263 was deemed unjustified.

2. Examination of Eligibility for Exemption under Section 11:
The AO had denied the exemption under Section 11 of the Act, contending that the assessee's activities were commercial in nature, thus losing its charitable character as per the proviso to Section 2(15) and Section 13(8) of the Act. The Tribunal did not delve deeply into this issue in the judgment, as the primary focus was on the procedural correctness of the revisional jurisdiction invoked by the Ld. CIT(E).

3. Classification of Income from Service Charges as Rental Income and Applicability of Section 24(a) Deduction:
The Ld. CIT(E) found fault with the AO for accepting service charges as rental income and allowing a deduction under Section 24(a). The assessee argued that the service charges were part and parcel of the rental income, as the amenities (water, electricity, elevator, CCTV, security services) were essential for the use of the rented property. The Tribunal referred to the decision in the case of Smt. Nirmala Zaverchand Shah vs. DCIT and the Supreme Court's ruling in M/s. Shambu Investments, which supported the inclusion of service charges in rental income if they were integral to the use of the property. The Tribunal concluded that the AO's view was a plausible one, consistent with earlier years' assessments and supported by judicial precedents. Therefore, the AO's decision to allow the deduction under Section 24(a) was not erroneous.

Conclusion:
The Tribunal quashed the revision order passed by the Ld. CIT(E), holding that the AO had conducted sufficient inquiries and that the Ld. CIT(E) failed to establish that the AO's order was erroneous and prejudicial to the interests of the revenue. The appeal of the assessee was allowed, and the Tribunal emphasized the importance of conducting necessary inquiries before invoking revisional jurisdiction under Section 263. The judgment underscores the principle that mere dissatisfaction with the AO's inquiry process does not justify the invocation of Section 263 without concrete evidence of error and prejudice to revenue.