2024 (7) TMI 1419 - AT - Income Tax

Revision u/s 263 - Character of income - rental income as business income or house property income - assessee has claimed deduction under section 24 of the Income Tax Act towards repairs and maintenance of such house property income - CIT was of the opinion that this issue has not been examined by the ld. Assessing Officer in the assessment order - HELD THAT - There is a major shift in recognition of his income from house property. It is not ascertainable as to how the assessee has given different treatments to the same agreement. He has shown such rental income as a business income and then all of a sudden, he has a house property income. The income could be a house property income, but the shift made by the assessee has not been examined by the AO in the impugned assessment order. Therefore, an apparent error has been committed by the AO which has caused a prejudice to the interest of revenue. As far as the judgment which has been upheld in the case of Shambhu Investment (P) Ltd. 2001 (3) TMI 77 - CALCUTTA HIGH COURT is concerned, in this judgment, Hon ble Courts are unanimous to propound that whether rental income is to be treated as a business income or house property income, it would depend upon the nature of agreement and user of the premises. In that case, the assessee had let out portion of the said property to various occupants by giving them additional right of using furniture and fixtures and other common facilities. The rental income was assessed as a business income. How this exercise has not been done by the AO in the present case in A.Y. 2015-16. It is also pertinent to note that prior to A.Y. 2015-16, the assessee himself was showing rental income under the head business income . In this year, there is a change in the methodology, therefore, before accepting that change, AO ought to have enquired as to how the same agreement can give rise to income as a house property income. Therefore, ld. Commissioner has not committed any error while exercising the powers u/s 263. Decided against assessee.

Issues Involved:

1. Legitimacy of invoking Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (Pr. CIT).
2. Classification of rental income as business income or house property income.
3. Change in accounting policy by the assessee.
4. Examination of the assessment order by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legitimacy of invoking Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (Pr. CIT):

The primary issue raised by the assessee is that the Pr. CIT erred in invoking Section 263 of the Income Tax Act, thereby setting aside the assessment order dated 22.12.2017 passed under Section 143(3). The Pr. CIT issued a notice under Section 263, highlighting that the rental income shown by the assessee was previously treated as business income but was later shown as house property income for A.Y. 2015-16. The Pr. CIT considered this change in accounting policy without proper examination by the AO as erroneous and prejudicial to the interests of the revenue. The Tribunal noted that the assessment order was silent on this aspect, and the AO did not address this issue. The Tribunal upheld the Pr. CIT's action under Section 263, stating that the AO's failure to examine the change in accounting policy constituted an apparent error causing prejudice to the revenue.

2. Classification of rental income as business income or house property income:

The Tribunal examined the Pr. CIT's contention that the assessee had shown rental income as business income up to A.Y. 2014-15 but changed its classification to house property income for A.Y. 2015-16, claiming deductions under Section 24 for repairs and maintenance. The Tribunal referred to the judgment in the case of Shambhu Investment (P) Ltd., where it was held that the classification of rental income depends on the nature of the agreement and the use of the premises. The Tribunal found that the AO had not examined the change in the classification of rental income, which was previously treated as business income. Therefore, the Tribunal agreed with the Pr. CIT that this issue required proper examination by the AO.

3. Change in accounting policy by the assessee:

The Tribunal noted that the assessee had changed its accounting policy from A.Y. 2015-16 by classifying rental income as house property income instead of business income. The Tribunal emphasized that the AO did not scrutinize this change, which was a significant shift in the recognition of income. The Tribunal highlighted that the assessee had not provided scrutiny assessments for subsequent years (A.Y. 2016-17 and 2017-18) and only submitted copies of returns. The Tribunal found that the AO's failure to examine the change in accounting policy constituted an apparent error, justifying the Pr. CIT's invocation of Section 263.

4. Examination of the assessment order by the Assessing Officer (AO):

The Tribunal reviewed the assessment order and found it lacking any discussion or examination of the change in the classification of rental income. The Tribunal referred to the broader principles for invoking Section 263, including the requirement for the CIT to record satisfaction that the AO's order is erroneous and prejudicial to the interests of the revenue. The Tribunal concluded that the AO's failure to examine the change in accounting policy and the classification of rental income rendered the assessment order erroneous and prejudicial to the revenue. Therefore, the Tribunal upheld the Pr. CIT's action under Section 263 and dismissed the assessee's appeal.

Conclusion:

The Tribunal upheld the Pr. CIT's invocation of Section 263, finding that the AO's failure to examine the change in accounting policy and the classification of rental income constituted an apparent error causing prejudice to the revenue. The Tribunal dismissed the assessee's appeal, emphasizing the need for proper examination of such significant changes in accounting policy by the AO.

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