2025 (1) TMI 32 - AT - Income Tax

Revision u/s 263 - AO failed to make sufficient inquiries and without application of mind passed reassessment order relating to the income from house property accrued to the appellant company on unsold inventories - Whether the AO's failure to make an addition for the deemed annual letting value of unsold inventories constitutes an error that is prejudicial to the interest of revenue. ? - HELD THAT - Order of the AO is very cryptic and no inquiries/verification were made even though assessment was reopened for that very specific purpose. The Ld. PCIT has issued a show cause notice with a specific purpose as to leaving tax on unsold inventories of Rs. 54.26 crores when the project was 100% complete. Bench agrees with the view of PCIT who relied on the judicial precedent laid down in the case of Ansal Housing Financial and Leasing Company Ltd. 2012 (11) TMI 323 - DELHI HIGH COURT and Emtci Engineering Ltd. 1996 (4) TMI 145 - ITAT AHMEDABAD-C where it was specifically held that the income from house property has to be offered for tax purpose on the unsold inventories. We further draw our inference by placing reliance on the decision Gundecha Builders 2019 (1) TMI 112 - BOMBAY HIGH COURT and CIT Vs. Sane Doshi Enterprises 2015 (4) TMI 882 - BOMBAY HIGH COURT where it was held that the income from unsold inventories of a building should be offered under the head income from house property . Similar view was taken by in the case of DCIT Vs. M/s. Inorbit Malls P. Ltd. 2022 (10) TMI 1150 - ITAT MUMBAI in which reliance was placed on the decision of Ansal Housing Finance Leasing Company Ltd. 2012 (11) TMI 323 - DELHI HIGH COURT where it was held that the vacant units in the possession of the appellant are liable to be charged as notional rental income under the head income from house property on the basis of their annual letting value. The rental income should be offered on notional basis as per the statute. This order of the coordinate Bench was very exhaustive and binding in nature as it dealt with all cases relating to the core issue. AO committed an error of not making the addition of notional annual letting value on vacant units of building, for which the assessment was reopened. This error caused prejudice to the interest of Revenue by not taxing the amount as mentioned above. Thus, the twin conditions of error and prejudice to the interest of Revenue were fulfilled - Decided against assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking the provisions of Section 263 of the Income Tax Act to revise the assessment order passed by the Assessing Officer (AO).
• Whether the AO's failure to make an addition for the deemed annual letting value of unsold inventories constitutes an "error" that is "prejudicial to the interest of revenue."
• Whether the revision order under Section 263 was valid given the AO's alleged non-application of mind and failure to conduct necessary inquiries.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification for Invoking Section 263

• Relevant legal framework and precedents: Section 263 of the Income Tax Act allows the PCIT to revise an assessment order if it is erroneous and prejudicial to the interest of revenue. The judgment references precedents such as Malabar Industrial Co. and Max India Ltd., which establish the conditions under which Section 263 can be invoked.
• Court's interpretation and reasoning: The court found that the AO's order was cryptic and lacked reasoning, particularly regarding the non-addition of the deemed annual letting value of unsold inventories. The PCIT's invocation of Section 263 was deemed justified as the AO's order was erroneous and prejudicial to revenue.
• Key evidence and findings: The AO failed to make any additions for the deemed annual letting value of unsold inventories, despite reopening the assessment specifically for this purpose.
• Application of law to facts: The court applied the principles from relevant case law, concluding that the AO's lack of inquiry and reasoning justified the PCIT's revision under Section 263.
• Treatment of competing arguments: The appellant argued that the AO had applied his mind and that two views were possible, citing Malabar Industrial Co. and Max India Ltd. However, the court found these cases inapplicable as the AO's order lacked any substantive reasoning.
• Conclusions: The court upheld the PCIT's revision order, finding that the AO's failure to address the specific issue for which the assessment was reopened constituted an error prejudicial to revenue.

Issue 2: Validity of Revision Order under Section 263

• Relevant legal framework and precedents: The court referenced decisions such as Ansal Housing Finance & Leasing Co. Ltd., Gundecha Builders, and Sane and Doshi Enterprises, which support the taxation of notional rental income from unsold inventories under "income from house property."
• Court's interpretation and reasoning: The court agreed with the PCIT's reliance on these precedents, which mandate the inclusion of notional rental income from unsold inventories in taxable income.
• Key evidence and findings: The court noted that the AO's order was non-speaking and lacked any explanation for not taxing the unsold inventories.
• Application of law to facts: Given the precedents and the AO's failure to apply them, the court found the revision order valid under Section 263.
• Treatment of competing arguments: The appellant's reliance on decisions suggesting that two views were possible was dismissed, as the court found no alternative view supported by high court decisions.
• Conclusions: The court concluded that the PCIT correctly exercised revisionary jurisdiction, as the AO's order was erroneous and prejudicial to revenue.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: The court emphasized that "a cryptic and non-speaking order of the Assessing Officer is an erroneous and prejudicial to the interest of revenue and hence the Revision order u/s. 263 of the Act is liable to be upheld."
• Core principles established: The judgment reinforces that an AO's failure to conduct necessary inquiries or provide reasoning in an assessment order can justify a revision under Section 263 if it results in an error prejudicial to revenue.
• Final determinations on each issue: The court upheld the PCIT's revision order under Section 263, dismissing the appellant's appeal and affirming the necessity of taxing notional rental income from unsold inventories.