2023 (7) TMI 646 - AT - Income Tax

Revision u/s 263 - claiming business expenditure while claiming standard deduction in the rental income - CIT observed that, assessee has declared rental income and also maintenance charges which is the common source income and also common expenditure - since there is no record on the assessment record to show that Assessing Officer has verified the claim of the assessee CIT issued notice of revision - HELD THAT - We observe that assessee has filed the detailed submissions before CIT that assessee has already declared all the material facts necessary for completion of assessment in the return of income as well as in the computation of income. Assessee submitted that in computation of income wherein voluntary disallowance is made under the head income from business - The details of these voluntary disallowance, as required, are now filed herewith. These expenditures were pertaining to income from house property were disallowed under the head business income and the same were claimed under the head income from house property Therefore there is no prejudicial to the interest of the Revenue. The assessee has explained to the Ld. Pr.CIT that assessee has segregated the expenditure claimed for income from house property in which assessee is claiming standard deduction, accordingly, the relevant expenditure was voluntarily disallowed while computing the income from business and the expenditures which are relevant for the business expenditure were claimed. Therefore, there is absolutely no additional expenditure claimed by the assessee. No doubt assessee has claimed the voluntary expenditure under the head income from business. However, on a perusal of the various submissions made before CIT we observe that CIT has not brought on record any loss to the revenue except by observing that the submissions of the assessee itself clearly shows that Assessing Officer has not verified the same. Accordingly, he invoked the Explanation 2(a) to provisions of section 263 of the Act incorrectly. Interest paid to partners - As fact on record that assessee has paid interest @18% to the related parties and which comes under the provisions of section 40A(2)(b) - At the same time, we observe that assessee has also taken several loans from unrelated parties and paid interest in the range of 12% to 18% to unrelated persons. With regard to related parties assessee has paid standard rate of 18%. We also observed that all these informations were submitted before the Assessing Officer (as per the declaration made before us in the Paper Book) it clearly shows that assessee has paid various rate of interest to unrelated persons the average may come to less than 18%, however, it maintains to pay @18% to the related parties.Therefore, as per the principle of consistency the rate adopted by the assessee should be accepted. We have considered the submissions carefully and we observe that there is no whisper of any discussion in any of the Assessment Orders submitted by the assessee on the aspect of payment of excess interest to the related parties, that means, in none of the AY Assessing Officer has not verified this aspect of additional payment of interest to the related parties much above the industry average or average interest rate to the assessee itself. Therefore, merely accepting the submissions made by the assessee without there being any evidences on record to show that AO has actually verified or enquired on this aspect. The submissions by the assessee before us does not show any evidence that AO has actually verified the above said aspect. Therefore, we are inclined to accept the revision proceedings with the observation that the AO has not verified on this aspect of interest payment to related parties itself makes the revision proceedings proper. Decided partly in favour of assessee.

Summary

Issues Involved:

1. Bifurcation of expenses between different heads of income.
2. Payment of interest to partners at a higher rate than the prevailing market rate.

Issue-wise Detailed Analysis:

1. Bifurcation of Expenses Amongst Different Heads:

The assessee filed an appeal against the order of the Learned Principal Commissioner of Income Tax (Pr.CIT) under Section 263 of the Income-tax Act, 1961. The Pr.CIT observed that the assessee's main sources of income were rent and receipts against Common Area Maintenance Charges (CAM). The assessee offered rental income as income from house property and CAM as business income. The Pr.CIT noted that the Assessing Officer (AO) did not ask for a bifurcation of expenses added as expenses considered separately to ascertain whether all expenses related to house property had been added, including interest and finance charges. The AO completed the assessment without making the necessary verifications, making the order erroneous and prejudicial to the revenue's interest.

In response, the assessee argued that the voluntary disallowance of expenses related to house property was correctly computed and offered for income. The assessee claimed interest under Section 24 as the loans were utilized for constructing the building yielding rental income. The assessee contended that there was no loss to the revenue, and the scrutiny order passed under Section 143(3) was neither erroneous nor prejudicial to the revenue's interest.

The tribunal observed that the Pr.CIT did not bring on record any loss to the revenue except by stating that the AO did not verify the claims. The tribunal concluded that the Pr.CIT invoked Explanation 2(a) to Section 263 of the Act without substantial evidence of revenue loss.

2. Payment of Interest to Partners:

The Pr.CIT noted that the AO allowed the claim of interest to persons specified under Section 40A(2)(b) at the rate of 18% without verifying the reasons for paying interest at a rate higher than the prevailing market rate. The Pr.CIT issued a notice under Section 263, questioning why the assessment should not be revised or set aside.

The assessee argued that the interest paid to partners was not claimed as a deduction and that the interest paid was to the bank and other loan parties for construction loans. The assessee maintained that the provisions of Section 40A(2)(b) did not apply to the interest paid under Section 24(b).

The tribunal noted that the AO had asked for details of loans and interest payments during the assessment proceedings. However, the Pr.CIT observed that the AO failed to make necessary verifications about the nature of expenses and the interest rate paid to related parties. The tribunal found that the AO did not verify whether the interest claimed by the assessee fell under the appropriate head of income. Therefore, the tribunal upheld the revision proceedings initiated by the Pr.CIT, holding that the AO's failure to verify the interest payments made the revision proceedings proper.

Conclusion:

The tribunal concluded that the initiation of proceedings under Section 263 of the Act was proper due to the AO's failure to verify the bifurcation of expenses and the interest payments to related parties. The appeal filed by the assessee was partly allowed, with the tribunal directing the AO to carry out due verification of the allowability of expenses claimed out of income from house property and the payment of interest at higher rates to persons specified under Section 40A(2)(b) of the Act.