2015 (11) TMI 863 - AT - Income Tax

Revision u/s 263 - as per CIT(A) action of the AO in summarily accepting the lease rent as business income as offered by the Assessee is thus vitiated by non application of mind - Held that - We concur with the view of the Ld. Commissioner that the terms of the Lease Agreement would show that assessee is no way involved in the manufacturing activity. The assessee is holding the factory premises and industrial unit in the capacity of lessor alone. The terms of the lease agreement does not throw any light on the intention of the assessee to enable it to resume on the manufacturing activity itself at the opportune time. The obligations cast on the Assessee viz. to procure sugarcane from assessee s area of operation, make minimum payment of sugarcane price at SMP etc. etc. as noted in para 13 of the order are trivial. Nothing turns out on such marginal obligations. We notice that the Assessee has drawn blank over the query about the current situation on resumption of manufacturing activities which tantamount to implicit admission that no re-commencement of business activity has taken place. There appears to be no rationale or intelligible nexus between the plea of the Assessee and the fact situation. In the totality of situation viz. stipulations in lease deed revealing the continuance of business by the lessee by exploiting the business set-up of the lessor in exclusion to the lessor, passive conduct over fairly long period of 10 years or so, stepping in of liquidator in the shoes of the management etc., We find ourselves in agreement with the conclusion of the CIT that the situation has become irreversible in the immediate future and the Assessee has exited the business of manufacturing activity without there being any trappings of temporariness about it. The most pertinent of all observations is the complete lack of enquiry and total lack of application of mind. This in itself renders the order erroneous as well as prejudicial to the interest of revenue without anything further. The Assessee has set off current year income of ₹ 2.68 crores approx against the unabsorbed business losses of the earlier years and rest has been carried forward on the premise that the lease rent continues to be in the nature of the business income since the act of let out is only temporary and therefore continue to retain the colour of business . Once it is found that the premise of treating the lease rent as business is factually tenous and not on a sound footing, the set off of the carried forward loss is rendered incorrect and thus causes loss to the revenue. The impugned set off is thus also pre judicial to the interest of revenue. Likewise, the allowability of expenses claimed without examination and its sustainability in terms of legal provision is also prejudicial to the interest of revenue The income returned under the head business income for ₹ 2.68 crores is not reconciliable with the profit & loss account as well as estimated computation under different heads as noted in para 16 supra. The business income of the magnitude of ₹ 2.68 cr. gets converted in loss of 32.35 lacs odd under the narrow and disadvantaged head of income from other sources is perplexing and intriguing. Notwithstanding, the present act of accepting the income as business income will continue to grant the assessee, the right to carry forward and set off. This is also prejudicial to the revenues interest by itself - Decided against assessee.

Summary

Issues Involved:
1. Legality of the Commissioner's order under Section 263 of the Income-tax Act, 1961.
2. Correct head of income for rental income.
3. Allowability of expenses (interest, salary, wages, administrative expenses, and depreciation).
4. Eligibility for set-off of brought forward business losses.
5. Application of principles of consistency in tax assessments.

Detailed Analysis:

1. Legality of the Commissioner's Order under Section 263:
The Commissioner invoked Section 263, considering the assessment order dated 19.11.2010 erroneous and prejudicial to the interest of the Revenue. The Commissioner noted that the Assessing Officer (AO) failed to scrutinize the correct head of income and the eligibility for set-off of brought forward business losses. The AO accepted the income declared under the head "profits and gains of business or profession" without proper enquiry, thus rendering the assessment order erroneous. The Commissioner issued a notice to the assessee to show cause why the assessment order should not be revised.

2. Correct Head of Income for Rental Income:
The Commissioner observed that the assessee had stopped manufacturing activities since 2001 and leased out its entire factory premises and industrial unit. The rental income should be classified under "income from other sources" or "income from house property" instead of "business income." The lease agreement indicated that the assessee had no active role in business operations and was merely receiving periodic lease rent, akin to a landlord. The Commissioner distinguished the cited case laws and relied on decisions like New Sevan Sugar and Gur Refinery Co. Ltd. vs. CIT and Universal Plats Limited vs. CIT to support the reclassification of income.

3. Allowability of Expenses:
The Commissioner noted that the assessee claimed several expenses such as salary, wages, administrative expenses, interest, and depreciation, which were prima facie inadmissible under the heads "income from house property" or "income from other sources." The AO allowed these expenses without proper scrutiny. The Commissioner emphasized that deductions should be allowed only under the respective heads of income if permitted by law.

4. Eligibility for Set-off of Brought Forward Business Losses:
The Commissioner held that since the assessee was no longer carrying on business, it was not entitled to set off brought forward business losses against the current year's non-business income. The AO failed to examine this aspect, erroneously allowing the set-off, which prejudiced the interest of the Revenue. The Commissioner directed the AO to re-examine the issues raised in the notice under Section 263 and decide afresh after calling for relevant details and making necessary enquiries.

5. Application of Principles of Consistency:
The assessee argued that the assessment orders for previous years (2004-05, 2005-06, and 2007-08) accepted the position of the assessee, and there was no reason to deviate from the earlier stand. The Commissioner, however, noted that the previous assessments did not involve a detailed examination of the issues. The long period of non-operation and leasing out the entire factory indicated an exit from business activities, justifying the reclassification of income and denial of set-off of business losses.

Conclusion:
The Tribunal upheld the Commissioner's order under Section 263, agreeing that the assessment order was erroneous and prejudicial to the interest of the Revenue. The Tribunal emphasized the lack of enquiry and application of mind by the AO, which justified the Commissioner's invocation of revisionary jurisdiction. The appeal of the assessee was dismissed, and the matter was remitted to the AO for fresh assessment as per the Commissioner's directions.