2022 (11) TMI 1203 - AT - Income Tax

House property income - assessee has already claimed deduction u/s 24 on the rental income earned by it and it had voluntarily made disallowance of expenses debited on account of earning of such rental income - AO has made disallowance of 10% of operating expenses, employee benefit expenses and administrative general expenses, keeping in view that the total rental income is approximately 10% of total revenue/income including rental and hotel business - CIT-A deleted the addition - HELD THAT - The principle of res judicata does not apply to the income-tax proceedings, but, rule of consistency is always respected by the tax authorities In the present case, the assessee had shown and included in the other income an amount received as maintenance charges, but, the expenditure towards maintenance of rental area has been incurred from the common pool of expenses which provoked the AO to make the impugned disallowance. We observe that the AO has not made any allegation regarding proportionate lease rent and municipal taxes related to rental portion, but, the disallowance of 10% of total expenses incurred by the assessee on other operating expenses, employee benefit expenses and administrative general expenses has been made. Therefore, the argument of double disallowance has no legs to stand and, thus, we dismiss the same. Obviously, when the assessee is claiming deduction u/s 24 of the Act on the rental income earned by it, then, it is not entitled for claiming any depreciation on the commercial block from which rental income has been earned. From the assessment order, we also observe that it is not the case of the AO that the assessee has claimed depreciation on the rental commercial block and, therefore, he is making disallowance of proportionate expenditure. Therefore, this contention of the ld. Counsel of the assessee is also not acceptable. CIT(A) was not correct and justified in deleting the disallowance by observing that the AO, without identifying any expenses attributable to rental income, assumption of the AO without identifying any expenses attributable to rental income and such disallowance without identifying any expenses cannot be sustained. As the ld. CIT(A) has ignored some factual position as noted above from the audited accounts of the assessee and has completely ignored the audited financial statements and accounts of the assessee especially table 21, 22 and 25 wherein some expenses are clearly identifiable and attributable to hotel business as well as rental activity and which has been incurred from the common pool and the assessee has not made any sustainable and acceptable apportionment to establish that the actual maintenance charges received by it are equal or less than the actual expenses incurred from common pool on the rental operation towards other expenses, employee benefit expenses and other administrative general expenses. Therefore, the issue is restored to the file of the AO with a direction to identify the expenses pertaining to hotel and rental activity from common pool as per table 21, 22 and 25 of accounts and to make proportionate and appropriate disallowance on rental area/portion maintenance. Appeal filed by the Revenue is allowed for statistical purposes only.

Issues Involved:
1. Deletion of disallowances of Rs.7,67,21,258/- related to house property income claimed in the Profit & Loss (P&L) account.
2. Applicability of the principle of res judicata in income tax proceedings.
3. Justification and reasonableness of the disallowance made by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Deletion of Disallowances of Rs.7,67,21,258/-:
The Revenue challenged the deletion of disallowances amounting to Rs.7,67,21,258/- by the CIT(A), which were related to house property income but claimed in the P&L account by the assessee. The AO had disallowed 10% of the operating expenses, employee benefit expenses, and administrative & general expenses, arguing that these expenses were not properly apportioned between the rental income and the hotel business. The AO contended that the assessee had claimed deduction under Section 24(a) of the Income Tax Act but had not apportioned the relevant expenses, leading to a double deduction. The CIT(A) deleted the disallowance, stating that the AO's assumption was based on surmises and conjectures without identifying specific expenses attributable to rental income. The CIT(A) also noted that in previous assessment years, the AO had accepted the method of accounting without any disallowance.

2. Applicability of the Principle of Res Judicata:
The Revenue argued that the principle of res judicata does not apply to income tax proceedings, implying that each assessment year is separate and independent. The AO contended that just because a method was accepted in previous years does not mean it should be accepted in subsequent years if it is found to be incorrect. The CIT(A), however, emphasized the rule of consistency, noting that the AO had accepted the method in earlier years after scrutiny.

3. Justification and Reasonableness of the Disallowance:
The AO argued that the assessee had not maintained separate books of accounts for expenses related to rental income and hotel business, leading to the disallowance of 10% of the total expenses. The AO observed that the assessee had shown maintenance charges received from tenants but had incurred these expenses from a common pool, which included expenses for both hotel and rental operations. The AO's disallowance was based on the proportion of rental income to total income, which was approximately 10%. The CIT(A) found this approach to be arbitrary and unsupported by specific evidence. The CIT(A) noted that the assessee had already disallowed expenses related to municipal taxes and lease rent for the rental portion and had claimed deduction under Section 24 of the Act.

Tribunal's Decision:
The Tribunal observed that while the principle of res judicata does not apply to income tax proceedings, the rule of consistency should be respected. However, the Tribunal also noted that the AO is responsible for preventing revenue leakage and tax evasion. The Tribunal found that the assessee had not sufficiently demonstrated that the actual maintenance expenses were equal to or less than the maintenance charges received. The Tribunal concluded that the CIT(A) had erred in deleting the disallowance without proper examination of the expenses. Therefore, the Tribunal restored the issue to the AO for proper verification and proportionate disallowance, if necessary.

Conclusion:
The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to identify and appropriately disallow expenses related to the rental operation from the common pool of expenses. The Tribunal emphasized the need for a detailed examination of the expenses to ensure that the disallowance is justified and reasonable.

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