Whether when particular asset is not included in definition of 'assets', but rental income from said asset has been offered as income from house property, same can be treated as income from business

THE issues before the Bench are - Whether when the AO has reopened the assessment on the basis of cogent evidences on record, no fault can be found with such reopening; Whether the assessment can be reopened merely on the basis of audit objections and Whether when a particular asset is not included in the definition of 'assets', and the rental income from letting out of the said properties has been offered by the assessee as income from house property, the same can be considered as income from business. And the verdict goes against the assessee.

Facts of the case

A) Assessee is a company. It had for the AYs 2005-06 and 2006-07, not filed any return of net wealth u/s 14(1). During assessment, the AO noted that the assessee had received rental income by letting out its business premises. The AO also noted that the premises let out by the

assessee were taxable assets under the provisions of the Act. He, therefore, re-opened the assessments for the two years after recording reasons to the above effect. In response, the assessee filed the return declaring net wealth of Rs.25,000/ for each of the years and submitted that net wealth being below taxable limit there was no tax liability. The assessee also asked for copies of reasons recorded which were given by the AO. The assessee challenged the re-opening of the assessment by the AO and submitted before CWT(A) that the assessment had been re-opened on the basis of audit objection and, therefore, re-opening was not valid. CWT(A) however noted that in the reasons recorded there was no mention of audit objections. CWT(A) further observed that the assessee did not produce any further evidence to show that the AO had received any audit query in this regard. The AO had re-opened the assessment on the basis of information/material available on record and re-opening was therefore valid. CWT(A), therefore, dismissed the ground raised by the assessee.

B) The second dispute which was also identical in both the years was regarding taxability of business premises owned by the assessee under the Wealth Tax Act. During assessment, the AO asked the assessee to explain as to why the taxable wealth should not be computed by including value of let out premises. The assessee contended that it owned shops/offices unit in Devvrata Premises which were also used by the assessee for carrying on of own business but later when the business activities were reduced, these were let out. It was also submitted that the premises under consideration were covered by exclusion provided in section 2(ea)(iv) as premises were in the nature of commercial property. The AO however did not accept the contentions raised and observed that the premises under consideration were not occupied by the assessee for the purpose of its business. It was also not a commercial establishment or complex. Therefore, the premises were not covered by the exclusions provided u/s 2(ea)(i). The AO further observed that shop establishment certificate did not prove that the premises were a commercial complex. The AO further observed that the decision of the Tribunal cited by the assessee had not become final. He, therefore assessed the premises to Wealth Tax value of which was determined u/r. 3 of Schdule-III at Rs.1,43,91,413/- which was added to the net worth. On appeal before CWT(A), AR submitted that property had been let out as commercial property and lessee was using the same for the purpose of its business. The property was, therefore covered by the exclusions provided u/s 2(ea)(v). The assessee placed reliance on the decision of the Tribunal in the case of Satvinder Singh. CWT(A) however did not accept the contentions raised. CWT(A) observed that the perusal of leave and license agreement showed that the premises had been let out for office purposes and it was not the business of the assessee. The property was not in the occupation of the assessee for the purpose of business. It was also not in the nature of commercial establishment or complex. CWT(A), therefore upheld the order of AO assessing the premises to net wealth.

Before Tribunal, the AR had submitted that in view of the amendment by Finance Act, (2) 1996, the commercial buildings which were not used by the assessee in its business or profession other than business of letting out of the property were taxable to net worth. In this case, the assessee had let out the premises as part of his business and, therefore, these were exempt from the wealth tax. Reliance was placed on the decision of HC of Karnataka in the case of CIT, Hubli, JCWT Assessment vs. Shankarnarayana Industries & Plantations (P.) Ltd. in which it was held that commercial assets used by the assessee in the business of letting out of properties could be treated as an “asset” under the Act. The AR pointed out that the object clause of the assessee in MOA included purchases and lease of properties. Therefore, it was submitted that letting out of properties was business of the assessee. It was accordingly urged that the claim of the assessee for exemption of premises from Wealth tax should be allowed. The DR, on the other hand, submitted that the assessee had returned the rentable income under the head “house property income” which had been accepted by the department and, therefore, it can not be argued by the assessee that it was in the business of letting out of the properties.

Held that:

A) ++ the dispute raised is regarding legal validity of re-opening of the assessment. There is no dispute that the assessee for the relevant years had not filed any return of wealth u/s 14A(1). It is also not in dispute that the assessee owned certain premises which had been let out on rent. Based on such material, AO had formed the belief that the assessee had taxable assets u/s 2(ea). Forming of such belief on the basis of material available in our view is quite reasonable and therefore, re-opening of the assessment can not be considered as illegal. We accordingly uphold the legal validity of re-opening of the assessment and dismiss the ground raised by the assessee for both the years;

B) ++ the dispute is regarding assessability of the premises let out by the assessee on rental basis under Wealth tax Act. The term “assets” has been defined under section 2(ea) of the Wealth tax Act. The provisions were amended by the Finance Act 1996 w.e.f. AY 1997-98 as per which commercial buildings which are not occupied by the assessee for the purpose of business or profession other than business of letting out properties are taxable under Wealth tax Act. In this case the premises were not occupied by the assessee for the purpose of business or profession. The rental income from letting out of the properties had been offered by the assessee as income from house property which has also been accepted by the department. Therefore, letting out of properties cannot be considered as business of the assessee. The premises could also not be considered as commercial establishment or commercial complex. Therefore, in our view these premises were not covered by exclusions provided u/s 2(ea)(i). We, therefore, see no infirmity in the order of CWT(A) in upholding the taxability of these premises under the Wealth tax Act. Orders of CWT(A) are, therefore, upheld.