2024 (3) TMI 532 - AT - Income Tax

Revision u/s 263 - Classification of rental income - House property v/s business income - as per CIT AO has not made any inquiries as to why such rental income should not be classified as income from business and failed to make detailed inquiries on certain aspects like why the property was classified as investment, whether the assessee has claimed depreciation on such property for income tax purposes and once AO has already held such income as income from business in earlier years, such treatment ought to have been followed HELD THAT - Assessee is not engaged in the business of earning rental income, but is engaged in providing IT Services, it cannot be inferred that the rental income earned by the assessee on such house property held as non-current investment , would qualify as it s business income - also seen from the financial statements of the assessee that the aforesaid rental income has been reflected as non-operational income and not as the business income of the assessee. Accordingly, from the instant facts assessee has not taken an incorrect position by offering the rental income earned by the assessee on aforesaid property income from house property . In various judicial precedents, a distinction has been drawn as to when the rental income earned by an assessee can be classified as it s business income and under what circumstances, such rental income would qualify as income from house property . The Courts have held that whether the income earned from property would qualify as business income or income from house property would primarily depend upon the objects / main business of the assessee company. If the assessee company is primarily engaged in the business of real estate / construction of which letting out properties on rent, alongwith facilities part of its regular business, then the income from letting out would qualify as business income , however, in case the assessee is engaged at other business activities and the rental income has been earned by the assessee, not on it s business assets but on other investments, then such rental income should normally qualify as income from house property. In the case of Raj Dadarkar Associates ( 2017 (5) TMI 586 - SUPREME COURT held that where assessee having obtained a property on lease, constructed various shops and stalls on it and gave the same to various persons on sub-licencing basis, since assessee was not engaged in systematic or organized activity of providing service to occupiers of shops/stalls, income from sub-licensing was to be taxed as income from house property and not as business income . Also held in M/S MEERAJ ESTATE AND DEVELOPERS 2019 (10) TMI 1002 - ALLAHABAD HIGH COURT since assessee did not indulge in any kind of recurring, systematic and organized business activity and, moreover, in respect of maintenance and upkeeping of let out premises, it appointed only one person, Assessing Officer was justified in treating rental income assessable as income from house property . Thus claim of the assessee that such rental income qualifies as income from house property has been accepted, looking into the instant facts - order passed u/s 263 of the Act is directed to be set-aside. Decided in favour of assessee.

Issues Involved:

1. Validity of the order passed under Section 263 of the Income Tax Act.
2. Whether the order passed by the Assessing Officer (AO) is erroneous and prejudicial to the interest of revenue.
3. Disallowance of Standard Deduction under Section 24 of the Act.
4. Depreciation claim on the investment property.
5. Initiation of penalty proceedings.

Summary:

Issue 1: Validity of the order passed under Section 263 of the Income Tax Act

The assessee challenged the order passed by the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act, arguing it was arbitrary, capricious, and contrary to settled principles of law. The PCIT failed to verify the twin conditions for initiating proceedings under Section 263.

Issue 2: Whether the order passed by the AO is erroneous and prejudicial to the interest of revenue

The PCIT concluded that the order passed by the AO was erroneous and prejudicial to the interests of the revenue. The AO had accepted the assessee's treatment of rental income as "income from house property" and allowed a standard deduction under Section 24, resulting in an under-assessment of Rs. 3,74,74,320 and a short levy of tax of Rs. 1,76,37,993. The PCIT argued that the AO failed to make detailed inquiries regarding the classification of the rental income and the depreciation claimed on the property. The Tribunal, however, found that the AO had applied correct legal principles and arrived at a reasonable conclusion based on the facts of the case.

Issue 3: Disallowance of Standard Deduction under Section 24 of the Act

The PCIT directed the AO to disallow the standard deduction under Section 24(a) amounting to INR 3,74,74,320 by treating the rental income as business income instead of house property income. The Tribunal observed that the assessee had treated the property as a non-current investment and not as a business asset, and had not claimed any depreciation under Section 32 of the Income Tax Act. Therefore, the rental income should be classified as "income from house property."

Issue 4: Depreciation claim on the investment property

The PCIT failed to appreciate that the assessee had not claimed any depreciation for the investment property held at Thane in the Return of Income. The Tribunal noted that the treatment of expenses in books of accounts is governed by accounting standards and may differ from the methodology under the Income Tax Act. The assessee had correctly offered the rental income under "income from house property" and claimed standard deduction as per the provisions of the Act.

Issue 5: Initiation of penalty proceedings

The PCIT erred in directing the AO to initiate penalty proceedings under the provisions of the Act. The Tribunal found no infirmity in the assessment order and directed the order passed under Section 263 to be set aside.

Conclusion:

The Tribunal allowed the appeal of the assessee, setting aside the order passed under Section 263 of the Income Tax Act. The rental income was correctly classified as "income from house property," and the standard deduction under Section 24 was rightly claimed. The initiation of penalty proceedings was also deemed erroneous.

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