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2022 (9) TMI 1142 - AT - Income TaxEnhancement of income by CIT u/s 251(2) - Income from sale of Matrix IT Building - head of income from Capital Gains OR Business income - HELD THAT - The person must be made aware about the allegations so that he gets proper opportunity to rebut it. In this case the Department has not brought on record any document to prove that the CIT(A) had issued to the assessee to explain the assessee the intention of CIT(A) to treat the income as Business Income, which was assessed by the AO as Capital Gain and Income from House property. As mandatory for the CIT(A) to show cause the assessee before making any enhancement. In this case we have already held that changing the head of income from Capital Gain to Business Income and changing income from house property to business income, is enhancement in the facts and circumstances of this case and it is also a fact that no opportunity wasgiven to the assessee before such enhancement. This failure to issue show cause goes to the root of the issue of powers of CIT(A) of enhancement. Therefore, it is held that the treatment by CIT(A) of Capital Gain as Business Income is bad in law and not sustainable. Similarly, the treatment of lease rent as business income is bad in law and not sustainable. Accordingly, the ground number 1,5,6,7 of the Assessee are allowed. Difference in revenue recognition from the Hotel Building - HELD THAT - It is important to mention here that the assessee for the same reason also reduced the cost for AY 2011-12 and the department has accepted it. It is the same project, the revenue of which was offered on project completion method for AY 2010-11 and 2011-12. It is fact as demonstrated by the assessee by the Registered Conveyance deed that the Total Cost was reduced by the purchaser as Purchaser decided to complete remaining construction on his own cost. Therefore, there was reduction in the cost. It also means the expenditure to that extent will be reduced for the assessee as the assessee do not have to complete the construction. Therefore, the % of completion will accordingly change. Therefore, we direct the AO to recalculate the Revenue from this activity by taking into consideration the reduced Cost taking into consideration the registered conveyance deed. Thus, the matter is remitted back to the file of the AO for recalculation. Accordingly, Assessee s ground number 4 is allowed for statistical purpose. Treatment of Capital Gain as Business Income - HELD THAT - Proposition of law laid down by the Hon ble High Court M/S. JOGANI DIALANI LAND 2019 (4) TMI 1315 - BOMBAY HIGH COURT is that there is no bar in law for a person dealing in land to also have investment in land. In the case under consideration analysis of facts leads to only one inference that the assessee had kept the impugned asset as investment - we are of the opinion that the impugned Sale is to be Taxed as Capital gain and not as Adventure in the nature of trade. Therefore, we uphold the order of the AO. AO had referred the issue to the departmental valuer for valuation. The Departmental Valuer submitted the report after completion of the assessment, the DVO valued it as mentioned in the order of CIT(A). AO is directed to calculate the Capital gain taking into consideration the valuation done by the DVO. Accordingly, the additional ground number 1 of the Assessee for AY 2011-12 is allowed. As regards to the revenue recognition under percentage completion method for the hotel building, shall apply mutatis mutandis to this appeal. Accordingly, this ground is allowed for statistical purposes. Addition made u/s 14A r.w.r. 8D - HELD THAT - The assessee had shown exempt income - AO recorded his satisfaction in the assessment order. AO asked assessee to substantiate that no expenditure was incurred for earning the exempt income. There were interest expenses debited in the P L a/c. AO observed that the assessee has not maintained separate books for investments. AO therefore, applied Rule 8D to arrive at the disallowance. It is fact that the assessee has not maintained any separate books. The assessee failed to establish that it has not incurred any expenditure for earning the exempt income. Therefore, we are of the opinion that the AO has rightly applied rule 8D to calculate the disallowance. Hence the same is upheld. Therefore, the ground number 2 of the assessee is dismissed.
Issues Involved:
1. Enhancement of income by changing the head of income from Capital Gains to Business Income. 2. Treatment of income from sale of immovable property. 3. Disallowance of deduction claimed under the head business income. 4. Addition on account of difference in revenue recognition from the Hotel Building. 5. Treatment of rental income and maintenance charges as Business Income instead of Income from House Property. 6. Disallowance under Section 14A of the Income Tax Act. 7. Charging of interest under Sections 234B, 234C, and 234D of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Enhancement of Income by Changing the Head of Income from Capital Gains to Business Income: The CIT(A) enhanced the income by treating the sale of 'Matrix IT Building' as Business Income instead of Capital Gains. The assessee argued that this was done without complying with the principles of natural justice and without giving any opportunity of hearing. The tribunal found that the CIT(A) failed to issue a formal written show cause notice before making the enhancement, which is mandatory under Section 251(2) of the Act. Consequently, the tribunal held that the treatment by CIT(A) of Capital Gains as Business Income was bad in law and not sustainable. 2. Treatment of Income from Sale of Immovable Property: The CIT(A) treated the transaction of selling 'Matrix IT Building' as an adventure in the nature of trade, thereby categorizing it as Business Income. The tribunal observed that the assessee had shown the land as a fixed asset in the balance sheet for earlier years, and the AO had accepted it as such. The tribunal concluded that the assessee had always intended to keep the asset as an investment, not stock in trade, and therefore, the sale should be taxed as Capital Gains, not Business Income. 3. Disallowance of Deduction Claimed Under the Head Business Income: Since the tribunal held that the income from the sale of 'Matrix IT Building' should be treated as Capital Gains, the question of disallowing the deduction claimed under the head Business Income became academic and was dismissed as not adjudicated. 4. Addition on Account of Difference in Revenue Recognition from the Hotel Building: The AO made an addition of Rs. 3,89,26,200/- due to a difference in revenue recognition from the Hotel Building, which was upheld by the CIT(A). The tribunal found that the reduction in the contract value was justified due to delays and changes in the scope of work, as evidenced by the registered conveyance deed. The tribunal directed the AO to recalculate the revenue from this activity, taking into account the reduced cost. 5. Treatment of Rental Income and Maintenance Charges as Business Income: The CIT(A) treated the rental income and maintenance charges from the 'Matrix IT Building' as Business Income instead of Income from House Property. The tribunal held that the CIT(A) failed to provide a reasonable opportunity to the assessee to show cause against this change. Consequently, this treatment was found to be bad in law and not sustainable. 6. Disallowance under Section 14A of the Income Tax Act: The AO disallowed Rs. 20,10,855/- under Section 14A, which the CIT(A) confirmed. The tribunal upheld this disallowance, noting that the assessee failed to establish that it had not incurred any expenditure for earning the exempt income. 7. Charging of Interest under Sections 234B, 234C, and 234D of the Income Tax Act: The tribunal did not specifically address the issue of charging interest under Sections 234B, 234C, and 234D, as it was not pressed by the assessee's authorized representative. Conclusion: The tribunal partly allowed the appeals, holding that the CIT(A)'s enhancement of income by changing the head of income was not sustainable due to the lack of opportunity provided to the assessee. The tribunal directed the AO to treat the sale of 'Matrix IT Building' as Capital Gains and to recalculate the revenue from the Hotel Building project. The disallowance under Section 14A was upheld, while other grounds were dismissed as either academic or not pressed.
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