2024 (8) TMI 1079 - AT - Income Tax

Correct head of income - rental income earned - house property income or business income - principle of consistency - HELD THAT - AO has not highlighted any aspect, which goad him to say that rental income earned by the assessee is to be assessed as a business income. He simply reproduced some of the activities mentioned in the Memorandum of Association and shown 98% income of the assessee as rental income, therefore, it is to be construed as if, such income earned as a business income. It is not necessary that every time assessee will show profit, only then his business will be accepted separately - he has not highlighted the aspect as to how earning of rental income is being carried out by the assessee in an organized manner and not highlighted that apart from giving the property on rent, assessee has provided certain other facilities. As far as collection of service charges is concerned, i.e. part of statutory requirement, but the assessee has not declared any income for providing additional facilities to the occupiers of the premises and those aspects have not been considered by AO in the impugned assessment order. Therefore, the rental income declared by the assessee deserves to be assessed as a house property income and not as a business income. The rental income declared by the assessee has been accepted as a house property income in two scrutiny assessments, i.e. A.Ys. 2012-13 2013-14. In subsequent years, such income has been accepted under section 143(1). It suggests that in the earlier years as well as in subsequent years, the stand of the assessee has been accepted. It was accepted by AO in the present A.Y. also, in the first round but in the second round of proceeding on the strength of the order passed under section 263, ld. Assessing Officer did not accept. The principle of consistency is fully applicable in the present case. Thus, we are of the view that rental income declared by the assessee deserves to be assessed as an income from house property. The finding of the ld. Assessing Officer that such income is to be assessed as a business income is vacated - AO is directed to treat such income as an income from house property and determine the taxable income of the assessee. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Classification of rental income: whether it should be assessed as house property income or business income.

Detailed Analysis:

Issue 1: Classification of Rental Income

Background and Facts:
The assessee filed a return of income on 15.12.2014 for the Assessment Year (A.Y.) 2014-15, declaring a total income of Rs. 6,93,13,140/-. The Assessing Officer (AO) accepted the assessee's claim that rental income should be assessed as house property income in the scrutiny assessment under section 143(3) on 28.12.2016. The AO determined the income from house property as per the return at Rs. 7,32,44,667/-, and the business income declared by the assessee was at a loss of Rs. 39,31,532/-. This assessment was not disturbed by the AO.

CIT's Action under Section 263:
The Commissioner of Income Tax (CIT) reviewed the assessment record and opined that the rental income should have been assessed as business income. Citing the Supreme Court's judgment in Chennai Properties & Investment Limited vs. CIT, the CIT set aside the assessment order and directed the AO to re-adjudicate the issue, providing the assessee an opportunity to produce supporting documents and evidence.

Assessee's Appeal and Arguments:
The assessee did not appeal against the CIT's order under section 263, which attained finality. In compliance, the AO reassessed the income, treating it as business income based on the CIT's directions. The AO's contribution in considering the issue was minimal, primarily relying on the CIT's observations and the Supreme Court's judgment in Chennai Properties & Investment Limited.

Assessee's Contentions:
The assessee argued that the CIT's reliance on the Chennai Properties judgment was erroneous. The assessee's Memorandum of Association did not indicate that earning rental income was its main business objective. The assessee highlighted that in previous assessment years (2012-13 and 2013-14), the rental income was accepted as house property income in scrutiny assessments. The principle of consistency, as upheld by the Supreme Court in Radhasoami Satsang Saomi Bagh vs. CIT and CIT vs. PFH Mall & Retail Management Pvt. Limited, should be applied.

Revenue's Argument:
The Revenue contended that since the assessee did not challenge the CIT's order under section 263, the AO was bound to assess the income as business income.

Tribunal's Analysis and Judgment:
The Tribunal considered the rival contentions and the record. It noted that the CIT's order under section 263 did not conclusively determine the issue but relegated it to the AO for further inquiry. The Tribunal emphasized that the CIT had not categorically decided that the rental income should be assessed as business income.

The Tribunal referenced the Supreme Court's judgments in Shambhu Investment Pvt. Limited and Chennai Properties & Investment Limited, noting the distinction between house property income and business income. The Tribunal observed that the assessee's main objective was not to earn rental income as a business activity. The CIT's inference that the assessee was in the business of earning rental income was not supported by the facts.

The Tribunal also highlighted that the AO failed to demonstrate that the rental income was earned in an organized manner with additional services provided to tenants. The principle of consistency, as upheld in previous assessments, supported treating the rental income as house property income.

Conclusion:
The Tribunal concluded that the rental income should be assessed as house property income, not business income. The AO's finding was vacated, and the AO was directed to treat the rental income as house property income and determine the taxable income accordingly.

Result:
The appeal of the assessee was allowed, and the order was pronounced in the open Court on 20/08/2024.