2019 (2) TMI 910 - HC - Income Tax

Reopening of assessment - Whether the rent accruing in a prior year, not received in that year, could be assessed in a subsequent year when it is received; as income from house property or otherwise as income from other sources as found by the AO? - Held that - Admittedly the rent arrears received in 2000-01 also related to the various prior years. However, there was no attempt to reopen the assessments of the earlier years by the AO; at least, those in which the limitation period had not expired. Hence for the assessment year 2000-01 reopening of assessment under Section 147 does not arise. All the same, we make it clear that there could be no protective assessment for the earlier years as made by the AO. Hence, for the year 2000-2001, we uphold the order of the Tribunal insofar as setting aside the assessment made on the arrears of rent received in the relevant previous year, which was not the annual rent received or receivable for that previous year s letting of the property. We answer both the questions framed as (i) & (ii) in favour of the assessee and against the revenue. Proceedings initiated u/s 147 - assess the arrears of rent received as income from house property in the previous years of the relevant assessment years, in which the property was let and the rent accrued - whether it was within the period of limitation as provided under Section 149? - Held that - We cannot countenance the argument especially noticing the fact that the assessee had taken legal proceedings for enhancement of rent and was following the mercantile system of accounting. Admittedly on the expiry of lease period, after the assessee acquired the property, the assessee sought for enhancement. There was no claim for eviction of tenants who were continuing in the premises paying rent as per the earlier agreement. The tenants having not acceded to the request of an enhancement, the assessee had taken legal proceedings which culminated in an arbitration and the arbitration concluded with the enhancement sought by the assessee being allowed which resulted in the receipts of arrears in a far later year relatable to various prior years. It cannot be said that the assessee did not have a reasonable expectation of enhancement. The assessee following the mercantile system also should have returned the rent claimed by them before the arbitrator as accruing in the respective previous years of the assessment year when the matter was pending arbitration. The argument holds no merit and is rejected. The question raised as (iii) is answered in favour of the revenue and against the assessee. Claim of deduction of Municipal tax - cheque was issued to the local authority prior to the end of the previous year relevant to the assessment year; but, however, the Bank statements show realization only on the commencement of the next assessment year - Held that - Hon ble Supreme Court in CIT v. Ogale Glass Works Ltd. 1954 (4) TMI 3 - SUPREME COURT , held that when a cheque is not dishonoured but encashed, the payment relates back to the date of tendering of cheque. The date of payment would be the date of delivery of the cheque. We do not find any reason to cause interference to the order of the Tribunal. We, hence, answer question no (iv) in favour of the assessee and against the Revenue. For the year 2002-2003, the Tribunal has looked at the dates and allowed the deduction. For the other two years, the AO would verify the dates and consider it in accordance with the cited judgment of the Hon ble Supreme Court. Credit for the tax deducted at source, on the arrears of rent received - Held that - We find that the Tribunal has only held that the assessee must be given credit of the tax deducted at source. In such circumstances, it is for the AO to verify and give credit to the amounts deducted at source and deposited, evidenced by valid certificates issued by the deductor. The AO would consider the issue and pass appropriate orders. The revenue has a further contention that if tax deducted at source is from an amount, for which no income tax has been charged; being arrears of rent, the same cannot be given credit to. We cannot countenance such an argument, since if the deduction has been erroneously made from the amounts which cannot be categorized as income, necessarily the assessee is entitled to refund of such amounts. The assessee only claims credit insofar as the amounts credited to be set off on the tax payable in that particular year and the balance refunded. Reassessment proceedings - Claim of vacancy allowance as provided in Section 24(1)(i)(ix) - Held that - regular assessments in which the assessee had returned rental income obtained from the very same building at Kolkata. We agree with the learned Senior Counsel that if at all a claim had to be made, it had to be made in the regular assessment. It is also pertinent that the Revenue would be disabled insofar as conducting an enquiry after long years within the period in which the reassessment is made. The Hon ble Supreme Court has also held that re-opening is for the benefit of Revenue to bring to tax the escaped income and the assessee cannot agitate matters concluded in the original assessment. A reassessment has to be confined to that found in the notice which is issued by the AO or any other aspect discovered in the course of the proceedings, which appear prejudicial to the revenue. We, hence, answer the question of law raised as (v) against the assessee and in favour of the Revenue. We set aside the order of the Tribunal which remanded the consideration of vacancy allowance. Set-off of carried forward depreciation as existing in the last year of its operation, in the subsequent years in which the assets of the business were not put to use - Whether the assets can be said to have been kept ready for use and hence a passive use gleaned from the circumstances, so as to permit depreciation in the assessment years in which the assets were not put to use? - Held that - no restriction in carrying forward the depreciation from the last year of operation or from the year it was allowed; even when the business does not continue as such or it does not at all exist. It also is permitted when there is a finding of existence of passive use of plant and machinery. It is not obligatory that the assessee should be carrying on the very same business or any business for that matter in the following year. Hence, even if there is no income from the profits and gains of business or profession in a particular year where there is carry forward of depreciation from the earlier year, then necessarily it has to be allowed as a depreciation for that year and could also be set off as against any other income under the various heads of income under Section 14. We, hence, answer question number (vi) with respect to carried forward depreciation being permitted set-off in the subsequent years, even when there is no business carried on by the assessee, and as against any head of income under Section 14; in favour of the assessee and against the Revenue. Admissibility of depreciation - whether a passive use cannot be extended for time immemorial, nor for the 24 years in which the assessee s unit had remained closed - Held that - Especially when one of the conditions as found from Section 32(1) is the requirement of user of the tangible or other assets, in the previous year in which the deduction or allowance is claimed. On the question of depreciation being allowed in the very same year in which the assessee had no business and as a consequence no income from profit and gain of business or profession, our answer favours the Revenue and is against the assessee. If the allowance as per Section 32(1) does not arise then there is no question of carry forward under sub-section (2) of Section 32. The question numbered as (vii) in both its hues; of a depreciation allowance not being permissible in the long years when the assets were not put to use for the business of the assessee and the carry forward in those years when the allowance itself was not permitted are answered against the assessee and in favour of the revenue. Business expenses claimed by the assessee for that year in which there was no use of assets by the assessee can be permitted - Held that - We have to observe that we are looking at the re-assessment proceedings and not necessarily the factual adjudication of whether the expenses claimed are excessive or not. The principle on which the re-assessment has been made is that if there is no business income, there could be no expenditure claimed under Section 37. We are only called upon to decide the said question of law, which also arises on reassessment and we do not think that our answering the question of law against the Revenue and in favour of the assessee would commend a remand to re-examine the issue on facts. The facts have already been gone into by the Assessing officer and the allowance granted and we do not attempt re-examination by another incumbent officer which would result in a further challenge on the ground of mere change of opinion. We hence reject the said ground raised by the Revenue. Un-absorbed business loss - Held that - It is an accepted position that carry forward can be set off only against business income. The assessee had no business income for the said year. Hence, the said question has to be answered against the assessee and in favour of the Revenue. Unabsorbed depreciation - whether can be permitted to be set off against the income other than the income from profits and gains of business or profession - Held that - There was no use to which the plant and machinery were put to and, hence, there could be no deduction of depreciation claimed for the previous year. When such claim could not have been made under Section 32(1), then there is no question of any carry forward of such depreciation for reason of the claim for depreciation having never arisen in that previous year relevant to the previous assessment year. The claim for carry forward depreciation and set off of income, other than income arising from profits and gains of business has to be rejected. The question numbered as (ix) & (x) are also answered in favour of the Revenue and against the assessee. We make it clear that if there is any depreciation allowance, carried forward from the last year in which it was allowed as passive use , the same can be set-off in any of the subsequent years in which there was income from any other heads. Sustainability of annual value determination made by the AO merely on the basis of the rent paid by the earlier tenant in the premises - Held that - The annual value as available under Section 23 can definitely be assessed on the normal expectation of the rent receivable or received in the relevant previous year. However, here the specific expectation was on the basis of the rent received in the earlier year from a previous tenant. Before the Tribunal the assessee produced an affidavit of the present tenant, the Federal Bank Limited, specifically indicating the amounts paid by them as rent for the tenanted premises. It was also specifically averred that the Federal Bank Limited, the present tenant, is not occupying that much area as the previous tenant. The issue is on facts and we discern no question of law arising from the order of the Tribunal with respect to the deletion of annual value as estimated by the AO. We, hence, refuse to answer the question and uphold the order of the Tribunal.

Summary

Issues Involved:
1. Taxation of rent arrears received in subsequent years.
2. Applicability of Section 25B as clarificatory.
3. Validity of reassessment proceedings under Section 147.
4. Deduction of municipal tax based on cheque issuance date.
5. Credit for tax deducted at source on arrears of rent.
6. Claim of vacancy allowance under Section 24(1)(i)(ix).
7. Set-off of carried forward depreciation.
8. Passive use of assets and depreciation allowance.
9. Business expenses claimed in years with no business operations.
10. Set-off of unabsorbed business loss and depreciation.
11. Determination of annual rental value.

Detailed Analysis:

1. Taxation of Rent Arrears Received in Subsequent Years:
The court addressed whether rent arrears from prior years, received in a subsequent year, should be taxed as 'income from house property' or 'income from other sources.' The assessee argued that income tax was not leviable on rent arrears not accruing in the relevant previous year. The court concluded that the rent received in subsequent years retains its character as 'income from house property' and should not be taxed as 'income from other sources.' However, such arrears could not be taxed under the heads of 'income from house property' for the relevant previous year due to the absence of Section 25B during those years.

2. Applicability of Section 25B as Clarificatory:
The court examined whether Section 25B, which taxes arrears of rent received in subsequent years as 'income from house property,' is clarificatory. The court disagreed with the Delhi High Court's finding that Section 25B is clarificatory and held that it is not applicable to assessment years before its introduction on 01.04.2001. The court relied on the Calcutta High Court's decisions, which held that arrears of rent could only be taxed in the years they accrued.

3. Validity of Reassessment Proceedings under Section 147:
The court analyzed whether reassessment proceedings initiated under Section 147 were proper and within the limitation period under Section 149. The court upheld the reassessment proceedings for the years 1985-86, 1996-97, 1997-98, 1998-99, and 1999-2000, finding that the notices issued were within the limitation period. The court rejected the assessee's argument that the right to receive arrears crystallized only by the arbitration award, emphasizing the assessee's reasonable expectation of rent enhancement.

4. Deduction of Municipal Tax Based on Cheque Issuance Date:
The court upheld the Tribunal's decision that the date of payment for municipal tax is the date of cheque issuance, not the date of bank realization, following the Supreme Court's decision in CIT v. Ogale Glass Works Ltd. The Tribunal's remand for verification of dates was also upheld.

5. Credit for Tax Deducted at Source on Arrears of Rent:
The court held that the assessee must be given credit for tax deducted at source (TDS) on arrears of rent, provided valid certificates are produced. The court rejected the revenue's contention that TDS credit should not be given for amounts not taxed as income, emphasizing the assessee's entitlement to a refund for erroneously deducted amounts.

6. Claim of Vacancy Allowance under Section 24(1)(i)(ix):
The court ruled that the assessee could not claim vacancy allowance in reassessment proceedings if it was not claimed in the regular assessment. The court set aside the Tribunal's remand for considering vacancy allowance, following the Supreme Court's decision in Chettinad Corporation P. Ltd. v. CIT.

7. Set-off of Carried Forward Depreciation:
The court held that carried forward depreciation could be set off against any head of income under Section 14, even if the assessee did not carry on any business in the subsequent years. The court relied on the Supreme Court's decision in C.I.T. v. Virmani Industries Pvt. Ltd., which allowed carry forward depreciation irrespective of the business's continuity.

8. Passive Use of Assets and Depreciation Allowance:
The court rejected the concept of 'passive use' for allowing depreciation in years when the assessee's business was closed for 24 years. The court followed the Delhi High Court's decision in Oswal Agro Mills Ltd., which held that 'passive use' cannot be extended to absurd limits. The court denied depreciation allowance for the years when the assets were not put to use for business purposes.

9. Business Expenses Claimed in Years with No Business Operations:
The court allowed the deduction of business expenses under Section 37 for the years when the assessee's business was closed, provided the expenses were laid out wholly and exclusively for the purpose of business. The court relied on the Supreme Court's decision in Rajendra Prasad Moody, which emphasized the purpose of expenditure over the fulfillment of the intention behind it.

10. Set-off of Unabsorbed Business Loss and Depreciation:
The court held that unabsorbed business loss could only be set off against business income, which the assessee did not have for the relevant years. The court also denied the set-off of unabsorbed depreciation for the years when the business was closed and the assets were not used, following the same reasoning as for depreciation allowance.

11. Determination of Annual Rental Value:
The court upheld the Tribunal's decision to delete the annual rental value determined by the AO based on the rent paid by the previous tenant. The court found that the issue was factual, and the Tribunal's reliance on the affidavit of the current tenant, indicating a lower rent and lesser occupied area, was justified.