THE issues before the Bench are - Whether the income received
by the assessee by sub-leasing of already leased out property and from
maintenance charges and air conditioning hire charges, is to be assessed as
Income from House Property and not income from business; Whether when the rental
income falls within the specific head of "income from house property", the mere
fact of the assessee having business in letting out the property as stated in
its memorandum, by
itself, will not conclusively point out that the income is nothing but business income and Whether before invoking Section 22 of the Act, for the purpose of assessing the rental income as "income from the house property", the Revenue authorities must go into the question as to whether there was any exploitation of the property by their owner by giving it away for rent, before assessing such rental income as 'income from house property'. Verdict partly goes against Revenue.
itself, will not conclusively point out that the income is nothing but business income and Whether before invoking Section 22 of the Act, for the purpose of assessing the rental income as "income from the house property", the Revenue authorities must go into the question as to whether there was any exploitation of the property by their owner by giving it away for rent, before assessing such rental income as 'income from house property'. Verdict partly goes against Revenue.
Facts of the
case
The assessee company derives income from sub lease of rental properties, maintenance charges, interest income being interest on deposits, A.C. service charges and miscellaneous income. The assessee had shown the receipts from leasing out of property etc, as income from business by claiming expenses towards salaries, wages, bonus, administrative expenses etc., for the relevant AYs. The assessment for the AYs 2003-04, 2006-07 and 2008-09 were taken up for scrutiny, the AO held that the rental income by way of sub-lease of "Annasalai property" and "Kottivakkam property" were assessable as "income from house property". Consequently, the AO disallowed the expenses claimed and allowed deductions u/s 24 of the Act as per permissible under law.
The CIT (A) held that the income from sub-lease of the space allotted in the Anna Salai property and the lease rent in respect of factory premises rented out along with machinery and equipment at Kottivakkam are assessable as "income from house property". As regards the rental income from Anna Salai property, the CIT(A) held that it had been taken on lease at a concessional rent from the developer of the building in the capacity of the owner of the land and the lease was for 33 years, renewable once in five years, the assessee was deemed to be the owner of the superstructure taken on lease from the developer and hence the income from property subleased to various tenants for office premises was assessable as "income from house property".
In respect of the Kottivakkam property, the CIT (A) held that the factory premises along with machinery and equipment was leased out from September 1993 and what is leased out, is essentially a factory building with furniture and fixtures and therefore, the lease rent is assessable as "income from house property". As regards the levy of interest u/s 234D Act on the completion of assessment u/s 143(3) of the Act, the CIT (A) confirmed the levy of interest, accordingly, the appeal was dismissed.
Apart from the above reasons, the CIT (A) relied on the decision of the Division Bench of this Court in the case of CIT vs. Chennai Properties and Investments Ltd. (2008-TIOL-462-HC-MAD-IT), assessed the income for the relevant AY under the head of "income from house property". The additions claimed for the properties during the relevant AY were rejected and dismissed the appeal filed by the assessee.
The Tribunal dismissed the appeals of the assessee filed for the AY 2003-04, by order dated 22.09.2006 following the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd. Following the said order, the appeals in respect of the AYs 2004-05, 2006-07 and 2008-09 were also dismissed.
For AY 2002-03, the return was processed u/s 143(1) of the Act and intimation issued to the assessee. The AO observed that perusal of records showed that the assessee company mainly derived income from lease rentals of properties, maintenance charges, interest, income on interest receipts and deposits, A.C., service charges and miscellaneous income. For the AY 2002-03, the assessee company admitted total receipts of Rs.1,71,60,691/- from the above sources as "business income" and claimed expenses under various heads like salary, wages, bonus etc., to the tune of Rs.1,48,49,883/-. The AO opined that the source of income are of the nature of "house property income" and "income from other sources" and in the absence of any income from business, the expenses claimed under various heads relating to business, are not allowable expenditure under the "income from house property" and "other sources" and therefore, proceedings were initiated u/s 147 of the Act and notice u/s 148 of the Act, was served on the assessee. The assessment was completed in similar manner as in above AYs.
On further appeal by the assessee, High Court held that,
++ in the case of CIT vs. Chennai Properties and Investments Ltd. (2008-TIOL-462-HC-MAD-IT), the question of law formulated was whether the Tribunal was right in holding that the amenity charges received in respect of let out property should be treated as "income from other sources". The Division Bench of this Court while dismissing the appeal took note of the decision in the case of Tarapore and Co. v. CIT reported in [2003] 259 ITR 389 (Mad) wherein it was held that the actual rent received by the assessee would constitute the basis for determining the annual value and it was that value which would have to form the basis for determining income from "house property" and for allowing the deduction from income from "house property" to the extent permitted under the other provisions of the Income-tax Act. In making such computation, there was no provision to add other amounts received by the owner of the building and held that the Tribunal was right in holding that the receipts from service charges were liable to be assessed as income from other sources and not "income from house property";
++ in the case on hand, the AO, Commissioner (Appeals) as well as the Tribunal have recorded a factual finding that the assessee closed down the manufacturing business with no evidence of revival and the income from the land and building has to be treated as "income from house property";
++ in respect of the "Kottivakkam Property" for the AY 2003-04, the AO recorded a finding that the assessee company has leased out the factory premises and equipments in the "Kottivakkam Property" to Mr.Ranjith Prathap and his associates and is deriving lease rental therefrom. From the copy of the rental lease agreement dated 16.08.2003, it is seen that the property which has been leased, is vacant land measuring about 25503sq.ft. No other document has been produced to show that the lease was in respect of the factory building, machinery and equipment. Therefore, to this extent, the AO has to examine to ascertain as to whether the lease was together with building, machinery and equipment. In respect of the other findings of the Tribunal, the assessee has not made out a case for interference;
++ coming to the next issue regarding the Anna Salai property, the undisputed facts are that the assessee was the owner of the land and entered into agreements dated 09.10.1981 and 21.06.2000 with M/s.Vira Properties (Madras) Private Ltd., for development and construction. As per the agreement dated 09.10.1981, the assessee was paid a ground rent of Rs.16.25 lakhs per annum, 91200sq.ft., of office space to be made available by the lessor, which was sublet by the assessee resulting in rental income. The assessee claimed that it is its business activity and therefore, the nature of receipt is different from what is contemplated u/s 22 of the Act. Further, the assessee claimed that they are not the owners of the building and it belongs to the developer and the assessee is only a lessee of the building and sublease the property taken on lease at higher rent, as its business activity. It is to be noted that the lease entered into by the assessee with the M/s.Vira Properties is for 33 years with option for five times consecutive renewals of the same for similar period with the right to sub-let and sublease;
++ section 27 (iiib) of Act defines 'Owner of house property', for the purposes of Sections 22 to 26 of the Act, as a person, who acquires any rights excluding rights by way of lease from month to month or for a period not exceeding one year in respect of any building or part thereof, by virtue of any transaction as referred in clause (f) of Section 269UA of the Act [which defines transfer in the relation to any immovable property to mean transfer of such property by way of lease for a term of not less than 12 years], shall be deemed to be the owner of that building or part thereof. The rental lease agreement dated 06.05.2002, is a sublease agreement between the assessee and M/s.J&B Software India Pvt., Ltd., from which it is seen that the lease deed dated 09.10.1981, entered into between the assessee and M/s.Vira Properties in respect of the Anna Salai property is for a period of 33 years with option of five times consecutive renewals of the same for the similar period;
++ the Finance Act 1987, which came into effect from 01.04.1988, enlarged the definition of 'owner' so as to include persons, who acquire rights in or with respect of any building or part thereof by virtue of transaction, falling u/s 269UA (f) of the Act, by doing anything, which has effect of transferring to or enabling their enjoyment of such property by him, the exclusion being month to month lease or lease for less than one year. In the assessee's case the lease is for 33 years with renewals for five consecutive times for the same period and the assessee would squarely fall within the definition of 'deemed to be the owner of house property' as defined u/s 27(iiib) of the Act;
++ the Supreme Court in the case of CIT v. P. V. S. Beedies Pvt. Ltd. (2002-TIOL-895-SC-IT) among other things held that where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back or to restart the same and if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets;
++ in case of Sultan Brothers P. Ltd. v. CIT (2002-TIOL-925-SC-IT-CB), the Supreme Court held that before invoking Section 22 of the Act, for the purpose of assessing the rental income as "income from the house property", the Revenue authorities must go into the question whether there was any exploitation of the property by their owner by giving it away for rent, before assessing such rental income as 'income from house property';
++ in the case of East India Housing and Land Development Trust Ltd. v. CIT (2002-TIOL-420-SC-IT), when the rental income falls within the specific head of "income from house property", the mere fact of the assessee having business in letting out the property as stated in its memorandum, by itself, will not conclusively point out that the income is nothing but business income;
++ as regards the question on the assessment under proper head of income useful reference could be made to the recent decision of the Division Bench of this Court in Commissioner of Income-Tax vs. Ideal Garden Complex P. Ltd., [2012] 340 ITR 609 (Mad). The Division Bench held that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a businessman's point of view and before invoking Section 22 of the Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent. It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset, the contention of the assessee could not be accepted. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but 'business income';
++ thus, by applying the decision of this Court in the case of CIT vs. Ideal Garden Complex, to the facts as found by the AO that the assessee company has stopped its business activities long back and is not carrying out any other business activity and the assessee has parted with the commercial assets and confined solely to receive some income by virtue of ownership thereof by lease or otherwise and the act of leasing was the outcome of the assessee's decision to get out of the business, we accept the case of the Revenue that the income receipt from letting out of the property was rightly assessed by the AO as "income from house property". It was made clear that in so far as the 'Kottivakkam Property', it was submitted that the written down value of the machinery was only Rs.6,777/-, however, we have remitted the same to the AO to verify the aspect whether the lease was together with machinery and equipments;
++ in the result, the assessment of the income in respect of the Anna Salai property as 'income from house property' is affirmed. Insofar as the income from Kottivakkam property for the AY 2003-04, the matter is remanded to the AO to consider the entire materials for the purpose of ascertaining as to whether the lease of the Kottivakkam property, was together with plant and machinery;
++ in respect of AY 2002-03, we now proceed to consider the contention of the assessee that the reopening of assessment u/s 147 of the Act, is without jurisdiction and illegal. In terms of the Section 147 of the Act, if the AO has reason to believe (substituted with effect from 01.04.1989) that any income chargeable to tax has escaped assessment for any AY, he may, subject to the provisions of the Section 148 to 153 of the Act, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings u/s 147 of the Act. The proviso stipulates a period of limitation of four years from the end of the relevant AY unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return or in response to a notice issued u/s 142(1) or Section 148 of the Act, or to disclose fully and truly all material facts necessary for his assessment for that AY. Explanation 1 states that production before the AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by the AO will not necessarily amount to disclosure within the meaning of the proviso. The word "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the AO may act on direct or circumstantial evidence, but not on mere suspicion;
++ the Supreme Court in the case of Indian Ideal Corporation vs. ITO reported in [1986] 159 ITR 956 (SC), held that reason to believe is not the same thing as reason to suspect. Therefore, the AO has to act based on information secured by him that there is a case for reopening of assessment u/s 147 of the Act;
++ it is equally a well settled proposition that change of opinion does not give jurisdiction to reassess. As laid down by the Supreme Court in the case of ITO vs. Lakhmani Mewal Das (2002-TIOL-823-SC-IT) the material on record should be such as to lead to the inference that income has escaped assessment and there should be a rational connection, direct nexus or live link between the material and the belief;
++ as per the scheme introduced in Section 143(1) of the Act, a provision has been made that where a return is filed u/s 139 or in response to a notice u/s 142(1) of the Act and any tax or refund was found due on the basis of such return after adjustment of tax deducted at source, any advance tax or any amount paid otherwise by way of tax or interest, an intimation is to be sent, without prejudice to the provisions of the Section 143(2) of the Act, to the assessee specifying the sum so payable and such intimation is deemed to be a notice of demand issued u/s 156 of the Act;
++ u/s 143(1)(a) of the Act, the permissible adjustments are, (a) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (b) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (c) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/allowed/ disallowed.
++ The corrections which were allowed, are errors apparent on the basis of the documents accompanying the return. It is clear from the statutory provisions that the AO has no authority to make adjustments or adjudicate upon any debatable issues. In other words, the AO has no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief;
++ in terms of Section 143(1) of the Act, return made u/s 139 of the Act is "processed" in accordance with clause (a) of Section 143(1) of the Act, total income or loss "computed" after adjustments provided for under sub clause (i) & (ii) of clause (a) in Section 143(1) of the Act and in terms of clause (b) tax and interest, if any, is "computed" on the basis of total income computed under clause (a). Thereafter, as per clause (c) of Section 143(1) of the Act, the sum payable is assessed or amount refunded is determined. This is "intimated" to assessee as per clause (d), if there is refund permitted under clause (c), then it should be granted as per clause (e) of Section 143(1) of the Act;
++ while making an assessment, the AO is free to make any addition after grant of opportunity to the assessee by making adjustments under the first proviso to section 143(1)(a) of the Act, no addition which is impermissible by the information given in the return could be made by the AO. This is so because no opportunity is afforded to the assessee u/s 143(1)(a) of the Act, and the AO merely proceeds to accept the return and making permissible adjustments only. Thus an assessment u/s 143(3) of the Act, is based on a different methodology which has to be borne in mind while considering the scope, purpose, ambit and import of Section 147 of the Act;
++ as held by the Supreme Court, the acknowledgment is not done by any AO, but mostly by ministerial staff and it can hardly be said that any assessment is done therein by them. Therefore, as per the scheme u/s 143(1)(a) of the Act, the same cannot be treated as an order of assessment in the true sense of its term it being a summary procedure. The intimation u/s 143(1)(a) of the Act, is deemed to be a notice of demand u/s 156 of the Act, for the purpose of facilitating the machinery provisions relating to recovery of tax. Thus, the purpose of such intimation is only for recovery of the tax and no other expansive meaning can be given to such deeming provision. Therefore, the Supreme Court held that there being no assessment u/s 143(1)(a) of the Act, the question of change of opinion, as contended, does not arise;
++ the Division Bench of this Court in the cases of WCI (Madras) (P) Ltd. v. Assistant Commissioner of Income-tax (2009-TIOL-423-HC-MAD-IT), and Commissioner of Income-tax v. Ravindran Prabhakar reported in [2010] 326 ITR 363, held that there was only processing u/s 143(1) of the Act, such intimation cannot be treated as assessment order and reassessment was held to be valid in such cases and hence the argument of change of opinion would not apply. As held by the Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (2007-TIOL-95-SC-IT), the legislative intent is very clear from the use of the word 'intimation' as substituted for 'assessment' that two different concepts emerged;
++ section 147 of the Act, authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any AY has escaped assessment. As held by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd., (2010-TIOL-06-SC-IT), the word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers;
++ if the ingredients of Section 147 of the Act, are satisfied above, the AO is empowered to initiate proceedings, even though no proceedings were taken u/s 143(3) of the Act, and the AO is empowered to initiate reassessment proceedings even when intimation u/s 143(1) of the Act, has been issued. Thus, in a case where there is no regular assessment and consequently no inquiry is held, proceedings in this case are initiated rightly so by the AO u/s 147(a) of the Act;
++ the only other requirement being whether the requirements of Section 147(a) of the Act, are satisfied on facts. In the decision (2002-TIOL-242-SC-IT) Commissioner of Income-tax v. Sun Engineering Works P. Ltd., the Apex Court pointed out that when the proceedings u/s 147 of the Act, are initiated, the proceedings are open only qua the item of underassessment. It makes no difference whether the assessment proceedings have become final on account of framing of the assesment u/s 143(3) of the Act, or on account of non-issue of proceedings u/s 143(2) of the Act, within the stipulated period. Thus, be it a case of income escaping assessment on account of Section 143(3) of the Act, proceedings coming to an end even without a proceeding or on account of the assessment proceedings made u/s 143 or 143(3) of the Act, the fact remains, the Revenue must have materials on hand, which must provide the reasonable nexus to the formation of opinion that income has escaped assessment for the purpose of assumption of jurisdiction u/s 147 of the Act. This issue is no longer res integra in the background of the decision of the Supreme Court in CIT vs. Kelvinator of India Ltd;
++ the Tribunal pointed out that based on the materials (which may include the accounts itself, the AO evidently has not scrutinised earlier), rightly the AO invoked the jurisdiction u/s 147 of the Act. Thus read in the context of the decision of the Apex Court in the case of CIT vs. Kelvinator of India Ltd. (2010-TIOL-06-SC-IT), the proceedings u/s 147 are rightly initiated.
The assessee company derives income from sub lease of rental properties, maintenance charges, interest income being interest on deposits, A.C. service charges and miscellaneous income. The assessee had shown the receipts from leasing out of property etc, as income from business by claiming expenses towards salaries, wages, bonus, administrative expenses etc., for the relevant AYs. The assessment for the AYs 2003-04, 2006-07 and 2008-09 were taken up for scrutiny, the AO held that the rental income by way of sub-lease of "Annasalai property" and "Kottivakkam property" were assessable as "income from house property". Consequently, the AO disallowed the expenses claimed and allowed deductions u/s 24 of the Act as per permissible under law.
The CIT (A) held that the income from sub-lease of the space allotted in the Anna Salai property and the lease rent in respect of factory premises rented out along with machinery and equipment at Kottivakkam are assessable as "income from house property". As regards the rental income from Anna Salai property, the CIT(A) held that it had been taken on lease at a concessional rent from the developer of the building in the capacity of the owner of the land and the lease was for 33 years, renewable once in five years, the assessee was deemed to be the owner of the superstructure taken on lease from the developer and hence the income from property subleased to various tenants for office premises was assessable as "income from house property".
In respect of the Kottivakkam property, the CIT (A) held that the factory premises along with machinery and equipment was leased out from September 1993 and what is leased out, is essentially a factory building with furniture and fixtures and therefore, the lease rent is assessable as "income from house property". As regards the levy of interest u/s 234D Act on the completion of assessment u/s 143(3) of the Act, the CIT (A) confirmed the levy of interest, accordingly, the appeal was dismissed.
Apart from the above reasons, the CIT (A) relied on the decision of the Division Bench of this Court in the case of CIT vs. Chennai Properties and Investments Ltd. (2008-TIOL-462-HC-MAD-IT), assessed the income for the relevant AY under the head of "income from house property". The additions claimed for the properties during the relevant AY were rejected and dismissed the appeal filed by the assessee.
The Tribunal dismissed the appeals of the assessee filed for the AY 2003-04, by order dated 22.09.2006 following the decision of the Division Bench of this Court in the case of Chennai Properties and Investments Ltd. Following the said order, the appeals in respect of the AYs 2004-05, 2006-07 and 2008-09 were also dismissed.
For AY 2002-03, the return was processed u/s 143(1) of the Act and intimation issued to the assessee. The AO observed that perusal of records showed that the assessee company mainly derived income from lease rentals of properties, maintenance charges, interest, income on interest receipts and deposits, A.C., service charges and miscellaneous income. For the AY 2002-03, the assessee company admitted total receipts of Rs.1,71,60,691/- from the above sources as "business income" and claimed expenses under various heads like salary, wages, bonus etc., to the tune of Rs.1,48,49,883/-. The AO opined that the source of income are of the nature of "house property income" and "income from other sources" and in the absence of any income from business, the expenses claimed under various heads relating to business, are not allowable expenditure under the "income from house property" and "other sources" and therefore, proceedings were initiated u/s 147 of the Act and notice u/s 148 of the Act, was served on the assessee. The assessment was completed in similar manner as in above AYs.
On further appeal by the assessee, High Court held that,
++ in the case of CIT vs. Chennai Properties and Investments Ltd. (2008-TIOL-462-HC-MAD-IT), the question of law formulated was whether the Tribunal was right in holding that the amenity charges received in respect of let out property should be treated as "income from other sources". The Division Bench of this Court while dismissing the appeal took note of the decision in the case of Tarapore and Co. v. CIT reported in [2003] 259 ITR 389 (Mad) wherein it was held that the actual rent received by the assessee would constitute the basis for determining the annual value and it was that value which would have to form the basis for determining income from "house property" and for allowing the deduction from income from "house property" to the extent permitted under the other provisions of the Income-tax Act. In making such computation, there was no provision to add other amounts received by the owner of the building and held that the Tribunal was right in holding that the receipts from service charges were liable to be assessed as income from other sources and not "income from house property";
++ in the case on hand, the AO, Commissioner (Appeals) as well as the Tribunal have recorded a factual finding that the assessee closed down the manufacturing business with no evidence of revival and the income from the land and building has to be treated as "income from house property";
++ in respect of the "Kottivakkam Property" for the AY 2003-04, the AO recorded a finding that the assessee company has leased out the factory premises and equipments in the "Kottivakkam Property" to Mr.Ranjith Prathap and his associates and is deriving lease rental therefrom. From the copy of the rental lease agreement dated 16.08.2003, it is seen that the property which has been leased, is vacant land measuring about 25503sq.ft. No other document has been produced to show that the lease was in respect of the factory building, machinery and equipment. Therefore, to this extent, the AO has to examine to ascertain as to whether the lease was together with building, machinery and equipment. In respect of the other findings of the Tribunal, the assessee has not made out a case for interference;
++ coming to the next issue regarding the Anna Salai property, the undisputed facts are that the assessee was the owner of the land and entered into agreements dated 09.10.1981 and 21.06.2000 with M/s.Vira Properties (Madras) Private Ltd., for development and construction. As per the agreement dated 09.10.1981, the assessee was paid a ground rent of Rs.16.25 lakhs per annum, 91200sq.ft., of office space to be made available by the lessor, which was sublet by the assessee resulting in rental income. The assessee claimed that it is its business activity and therefore, the nature of receipt is different from what is contemplated u/s 22 of the Act. Further, the assessee claimed that they are not the owners of the building and it belongs to the developer and the assessee is only a lessee of the building and sublease the property taken on lease at higher rent, as its business activity. It is to be noted that the lease entered into by the assessee with the M/s.Vira Properties is for 33 years with option for five times consecutive renewals of the same for similar period with the right to sub-let and sublease;
++ section 27 (iiib) of Act defines 'Owner of house property', for the purposes of Sections 22 to 26 of the Act, as a person, who acquires any rights excluding rights by way of lease from month to month or for a period not exceeding one year in respect of any building or part thereof, by virtue of any transaction as referred in clause (f) of Section 269UA of the Act [which defines transfer in the relation to any immovable property to mean transfer of such property by way of lease for a term of not less than 12 years], shall be deemed to be the owner of that building or part thereof. The rental lease agreement dated 06.05.2002, is a sublease agreement between the assessee and M/s.J&B Software India Pvt., Ltd., from which it is seen that the lease deed dated 09.10.1981, entered into between the assessee and M/s.Vira Properties in respect of the Anna Salai property is for a period of 33 years with option of five times consecutive renewals of the same for the similar period;
++ the Finance Act 1987, which came into effect from 01.04.1988, enlarged the definition of 'owner' so as to include persons, who acquire rights in or with respect of any building or part thereof by virtue of transaction, falling u/s 269UA (f) of the Act, by doing anything, which has effect of transferring to or enabling their enjoyment of such property by him, the exclusion being month to month lease or lease for less than one year. In the assessee's case the lease is for 33 years with renewals for five consecutive times for the same period and the assessee would squarely fall within the definition of 'deemed to be the owner of house property' as defined u/s 27(iiib) of the Act;
++ the Supreme Court in the case of CIT v. P. V. S. Beedies Pvt. Ltd. (2002-TIOL-895-SC-IT) among other things held that where all the assets of the business are let out, the period for which the assets are let out is a relevant factor to find out whether the intention of the assessee is to go out of business altogether or to come back or to restart the same and if the business never started or has started but ceased with no intention to be resumed, the assets also will cease to be business assets and the transaction will only be exploitation of property by an owner thereof, but not exploitation of business assets;
++ in case of Sultan Brothers P. Ltd. v. CIT (2002-TIOL-925-SC-IT-CB), the Supreme Court held that before invoking Section 22 of the Act, for the purpose of assessing the rental income as "income from the house property", the Revenue authorities must go into the question whether there was any exploitation of the property by their owner by giving it away for rent, before assessing such rental income as 'income from house property';
++ in the case of East India Housing and Land Development Trust Ltd. v. CIT (2002-TIOL-420-SC-IT), when the rental income falls within the specific head of "income from house property", the mere fact of the assessee having business in letting out the property as stated in its memorandum, by itself, will not conclusively point out that the income is nothing but business income;
++ as regards the question on the assessment under proper head of income useful reference could be made to the recent decision of the Division Bench of this Court in Commissioner of Income-Tax vs. Ideal Garden Complex P. Ltd., [2012] 340 ITR 609 (Mad). The Division Bench held that whether a particular letting was business had to be decided in the circumstances of each case and each case has to be looked at from a businessman's point of view and before invoking Section 22 of the Act, for the purpose of assessing the rental income as an "income from house property", the Revenue authorities must go into the question whether there was any exploitation of the property by its owner by giving it away for rent. It was further held that the transactions being in the nature of exploitation of the property by the assessee and not by way of exploitation of business asset, the contention of the assessee could not be accepted. Further, mere fact of the assessee having business in letting out the property as stated in the memorandum by itself will not conclusively point out that the income is nothing, but 'business income';
++ thus, by applying the decision of this Court in the case of CIT vs. Ideal Garden Complex, to the facts as found by the AO that the assessee company has stopped its business activities long back and is not carrying out any other business activity and the assessee has parted with the commercial assets and confined solely to receive some income by virtue of ownership thereof by lease or otherwise and the act of leasing was the outcome of the assessee's decision to get out of the business, we accept the case of the Revenue that the income receipt from letting out of the property was rightly assessed by the AO as "income from house property". It was made clear that in so far as the 'Kottivakkam Property', it was submitted that the written down value of the machinery was only Rs.6,777/-, however, we have remitted the same to the AO to verify the aspect whether the lease was together with machinery and equipments;
++ in the result, the assessment of the income in respect of the Anna Salai property as 'income from house property' is affirmed. Insofar as the income from Kottivakkam property for the AY 2003-04, the matter is remanded to the AO to consider the entire materials for the purpose of ascertaining as to whether the lease of the Kottivakkam property, was together with plant and machinery;
++ in respect of AY 2002-03, we now proceed to consider the contention of the assessee that the reopening of assessment u/s 147 of the Act, is without jurisdiction and illegal. In terms of the Section 147 of the Act, if the AO has reason to believe (substituted with effect from 01.04.1989) that any income chargeable to tax has escaped assessment for any AY, he may, subject to the provisions of the Section 148 to 153 of the Act, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings u/s 147 of the Act. The proviso stipulates a period of limitation of four years from the end of the relevant AY unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return or in response to a notice issued u/s 142(1) or Section 148 of the Act, or to disclose fully and truly all material facts necessary for his assessment for that AY. Explanation 1 states that production before the AO of account books or other evidence from which material evidence could, with due diligence, have been discovered by the AO will not necessarily amount to disclosure within the meaning of the proviso. The word "reason to believe" suggest that the belief must be that of an honest and reasonable person based upon reasonable grounds and that the AO may act on direct or circumstantial evidence, but not on mere suspicion;
++ the Supreme Court in the case of Indian Ideal Corporation vs. ITO reported in [1986] 159 ITR 956 (SC), held that reason to believe is not the same thing as reason to suspect. Therefore, the AO has to act based on information secured by him that there is a case for reopening of assessment u/s 147 of the Act;
++ it is equally a well settled proposition that change of opinion does not give jurisdiction to reassess. As laid down by the Supreme Court in the case of ITO vs. Lakhmani Mewal Das (2002-TIOL-823-SC-IT) the material on record should be such as to lead to the inference that income has escaped assessment and there should be a rational connection, direct nexus or live link between the material and the belief;
++ as per the scheme introduced in Section 143(1) of the Act, a provision has been made that where a return is filed u/s 139 or in response to a notice u/s 142(1) of the Act and any tax or refund was found due on the basis of such return after adjustment of tax deducted at source, any advance tax or any amount paid otherwise by way of tax or interest, an intimation is to be sent, without prejudice to the provisions of the Section 143(2) of the Act, to the assessee specifying the sum so payable and such intimation is deemed to be a notice of demand issued u/s 156 of the Act;
++ u/s 143(1)(a) of the Act, the permissible adjustments are, (a) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (b) loss carried forward, deduction, allowance or relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (c) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/allowed/ disallowed.
++ The corrections which were allowed, are errors apparent on the basis of the documents accompanying the return. It is clear from the statutory provisions that the AO has no authority to make adjustments or adjudicate upon any debatable issues. In other words, the AO has no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief;
++ in terms of Section 143(1) of the Act, return made u/s 139 of the Act is "processed" in accordance with clause (a) of Section 143(1) of the Act, total income or loss "computed" after adjustments provided for under sub clause (i) & (ii) of clause (a) in Section 143(1) of the Act and in terms of clause (b) tax and interest, if any, is "computed" on the basis of total income computed under clause (a). Thereafter, as per clause (c) of Section 143(1) of the Act, the sum payable is assessed or amount refunded is determined. This is "intimated" to assessee as per clause (d), if there is refund permitted under clause (c), then it should be granted as per clause (e) of Section 143(1) of the Act;
++ while making an assessment, the AO is free to make any addition after grant of opportunity to the assessee by making adjustments under the first proviso to section 143(1)(a) of the Act, no addition which is impermissible by the information given in the return could be made by the AO. This is so because no opportunity is afforded to the assessee u/s 143(1)(a) of the Act, and the AO merely proceeds to accept the return and making permissible adjustments only. Thus an assessment u/s 143(3) of the Act, is based on a different methodology which has to be borne in mind while considering the scope, purpose, ambit and import of Section 147 of the Act;
++ as held by the Supreme Court, the acknowledgment is not done by any AO, but mostly by ministerial staff and it can hardly be said that any assessment is done therein by them. Therefore, as per the scheme u/s 143(1)(a) of the Act, the same cannot be treated as an order of assessment in the true sense of its term it being a summary procedure. The intimation u/s 143(1)(a) of the Act, is deemed to be a notice of demand u/s 156 of the Act, for the purpose of facilitating the machinery provisions relating to recovery of tax. Thus, the purpose of such intimation is only for recovery of the tax and no other expansive meaning can be given to such deeming provision. Therefore, the Supreme Court held that there being no assessment u/s 143(1)(a) of the Act, the question of change of opinion, as contended, does not arise;
++ the Division Bench of this Court in the cases of WCI (Madras) (P) Ltd. v. Assistant Commissioner of Income-tax (2009-TIOL-423-HC-MAD-IT), and Commissioner of Income-tax v. Ravindran Prabhakar reported in [2010] 326 ITR 363, held that there was only processing u/s 143(1) of the Act, such intimation cannot be treated as assessment order and reassessment was held to be valid in such cases and hence the argument of change of opinion would not apply. As held by the Supreme Court in the case of Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd. (2007-TIOL-95-SC-IT), the legislative intent is very clear from the use of the word 'intimation' as substituted for 'assessment' that two different concepts emerged;
++ section 147 of the Act, authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any AY has escaped assessment. As held by the Supreme Court in the case of CIT vs. Kelvinator of India Ltd., (2010-TIOL-06-SC-IT), the word 'reason' in the phrase 'reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The function of the AO is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers;
++ if the ingredients of Section 147 of the Act, are satisfied above, the AO is empowered to initiate proceedings, even though no proceedings were taken u/s 143(3) of the Act, and the AO is empowered to initiate reassessment proceedings even when intimation u/s 143(1) of the Act, has been issued. Thus, in a case where there is no regular assessment and consequently no inquiry is held, proceedings in this case are initiated rightly so by the AO u/s 147(a) of the Act;
++ the only other requirement being whether the requirements of Section 147(a) of the Act, are satisfied on facts. In the decision (2002-TIOL-242-SC-IT) Commissioner of Income-tax v. Sun Engineering Works P. Ltd., the Apex Court pointed out that when the proceedings u/s 147 of the Act, are initiated, the proceedings are open only qua the item of underassessment. It makes no difference whether the assessment proceedings have become final on account of framing of the assesment u/s 143(3) of the Act, or on account of non-issue of proceedings u/s 143(2) of the Act, within the stipulated period. Thus, be it a case of income escaping assessment on account of Section 143(3) of the Act, proceedings coming to an end even without a proceeding or on account of the assessment proceedings made u/s 143 or 143(3) of the Act, the fact remains, the Revenue must have materials on hand, which must provide the reasonable nexus to the formation of opinion that income has escaped assessment for the purpose of assumption of jurisdiction u/s 147 of the Act. This issue is no longer res integra in the background of the decision of the Supreme Court in CIT vs. Kelvinator of India Ltd;
++ the Tribunal pointed out that based on the materials (which may include the accounts itself, the AO evidently has not scrutinised earlier), rightly the AO invoked the jurisdiction u/s 147 of the Act. Thus read in the context of the decision of the Apex Court in the case of CIT vs. Kelvinator of India Ltd. (2010-TIOL-06-SC-IT), the proceedings u/s 147 are rightly initiated.
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