G.R. Commercial Pvt. Ltd.,, New Delhi vs Assessee

This appeal by the assessee has been preferred against the order of the

CIT(A)-V, New Delhi dated 21.11.2012 in Appeal No.41/11-12 for AY 2006-

07.

2. The grounds raised by the assessee read as under:-

"1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in holding that income earned from exploitation of commercial space has to be assessed under the

1 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

head 'Income from House Property' instead of under the head 'Profits and Gains of Business & Profession' and had incorrectly and unjustifiably upheld the said action of Ld. AO.

2. On the facts and in the circumstances of the case and in law, the ld. CIT ( A) erred in upholding the disallowance of following expenses claimed in the profit and loss account on account of:-

[In Rs.]

i) Accounting charges 30,000.00

Ii) Bank Charges 1468.08

iii) General expenses 25,680.00

IV) Telephone Expenses 3,600.00

v) Preoperative expenses written off 2,400.00

vi) Staff welfare 8,695.00

vii) Lease rent expenses 66448.00

Viii) Maintenance Charges 85,208.00

ix) Printing & Stationery 6,090.00

x) Remuneration to Director 2, 88,000.00

xi) Salary 1,80,000.00

xii) Depreciation 2,50,781.00

without assigning any reasons, especially when aforesaid expenses were incurred wholly and exclusively for the purpose of business of the company and in order to maintain its status.

3. That the Ld. CIT(A) erred on both facts and in law in confirming the action of the Ld. AO, in not allowing the set off of brought forward assessed business losses of earlier years without appreciating that the said disallowance is not supported by any cogent reason or any material on record.

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4. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in rejecting application under rule 46A of the I'T Rules, 1962 and ignoring the documents forming part of the assessment records.

5. On the facts and in the circumstances of the case and in law, the ld. CIT ( A) erred in considering letter dated 22.8.2008 filed by Shri Sanjeev Bhardwaj, who was never authorized by the assessee company to file such a letter. In this connection an affidavit executed by director of the appellant company Smt. Sonali Abuja is enclosed.

6. That on the facts & in law, the Ld. CIT (A) grossly erred in confirming the interest charged by the Ld. AO under section 234 B of the Income Tax Act, 1961.

7. That on the facts & in law, the Ld. CIT (A) grossly erred in confirming initiation of penalty proceedings u/s 271 (1)( c) of the Income Tax Act, 1961 by Ld. A.O"

3. Briefly stated the facts giving rise to this appeal are that the assessee filed

E-return on 30.11.2006 declaring an income of Rs.2,45,851/- for AY 2006-07.

Subsequently a paper return was also filed on 8.12.2006 after setting off of

brought forward business loss of Rs.7,67,190. The assessee has shown income

from its property located at sector 18, Noida under the head of "profit and gains

of business and profession" but the AO treated the same as "income from house

property". The first contention of the assessee is that the AO wrongly treated

the said income under the head of income from house property without any

cogent reasons and merely relying on letter dated 22.8.2008 purported to be filed

by Shri Sanjeev Bhardwaj. As per allegation of the company, Shri Bhardwaj

was never authorised by the assessee company to file such a letter. The AO

3 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

finalised the assessment by treating the receipts of rent as income from house

property and after allowing 30% for repair and maintenance along with audit

and filing fee, the assessment was framed at net taxable income of Rs.

13,67,361. The AO disallowed all other expenses mentioned in ground no. 2 of

the assessee in this appeal. The aggrieved assessee preferred an appeal before

the CIT(A) which was also dismissed by passing the impugned order. Now, the

empty handed assessee is before this Tribunal in this second appeal with the

ground as reproduced hereinabove.

Ground No.4

4. Next issue for our consideration is rejection of application of the assessee

filed under Rule 46A of the Income Tax Rules 1962. From careful

consideration of impugned order, we note that the CIT(A) rejected said

application of the assessee with following observations and conclusion:-

"3. During appeal proceedings, the appellant has filed an application under Rule 46A and has requested for admission of additional evidence which is copy of all the returns already on record, certificate of incorporation, objects of the company. The reason for submitting the application under rule 46A has been stated to be "The AO has not allowed any opportunity of hearing to produce the evidence which was though referred by Mr. Mirola i.e. assessment records of earlier years. The AO had also not asked to produce the same. In view of this it was found necessary to file all the returns already on record, certificate of incorporation, objects of the company, board's resolution in order to appreciate the facts and circumstances of the case. Though these documents are part of earlier assessment record but in order to avoid any controversy and also because these documents were not filed during the course of assessment 4 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

proceedings it was found necessary to make application u/r 46A of the IT Rules along with a duplicate copy of the evidence. It is humbly requested since appellant was prevented by sufficient cause from producing such evidence relevant to grounds of appeal and also because AO has not provided sufficient opportunity to the appellant to adduce evidence relevant to grounds of appeal. Due to this the appellant's case is covered under clause 'c' & clause 'd' of rule 46Aof the IT rules."

The application was referred to the AO for his comments. The AO resisted the admission of additional evidence on the ground that the appellant's case does not fall under any of the clauses mentioned in Rule 46A of the I.T. Rules. A perusal of the record of proceedings (note sheet) shows that the appellant was given reasonable opportunity by the AO during proceedings before him. Therefore the appellant case does not fall under any of the clauses mention u/r 46A. Therefore, the additional evidence is not admitted and the application u/r 46A is rejected."

5. Ld. counsel of the assessee submitted that all the returns of earlier years

on record of the Revenue, certificate of incorporation, objects of the company

relevant board resolution were part of assessment records of earlier years but in

order to avoid any controversy, the assessee filed the same under application u/r

46A of the Rules. It was also contended that during the assessment proceedings,

the assessee was prevented by sufficient cause from producing the same as the

AO was not allowed due opportunity of hearing, hence, the issue falls under

clause (c) and (d) of Rule 465A of the Rules and the CIT(A) was totally

unjustified in disallowing the same.

6. Ld. DR replied that the AO provided due opportunity of hearing to the

assessee, hence, the case of the assessee does not fall under any of the clauses of

Rule 46A of the Rules. Ld. DR supported the action of the CIT(A) in this regard

5 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

and submitted that the assessee is not entitled to file any additional evidence

before the CIT(A) except one or more conditions/circumstances mentioned in

Rule 46A are fulfilled.

7. In the present case, the assessee has not placed any sufficient reason

which prevented it in filing documents/evidence during assessment proceedings

which was filed subsequently before CIT(A) as additional evidence under Rule

46A. The assessee was given due opportunity of hearing before the AO, hence

the AO rightly objected to the admission of additional evidence and the CIT(A)

was quite justified in rejecting the same. Hence, ground no. 4 of the assessee is

dismissed.

Ground No. 5

8. We have heard arguments of both the sides and carefully perused the

relevant material placed on record. At the very outset, ld. counsel of the assessee

vehemently contended that Shri Sanjeev Bhardwaj was never authorised by the

assessee company to file any letter either on 22.8.2008 or any other date

considering that the receipts from rent from the property located in Sector 18,

Noida may be treated as income from house property. Ld. counsel has drawn

our attention towards affidavit dated 14.1.2013 of Director of the assessee

company Smt. Sonali Ahuja and submitted that while the income of the assessee

company was regularly treated as business income during all preceding

assessment years viz. from 2001-02 to 2005-06, then there was no question of 6 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

making such request on 22.8.2008 which was picked up by the AO for treating

the income as income from house property instead of profits and gains of

business and profession. On this issue, ld. DR submitted that a letter was

submitted on 22.8.2008 before the AO by the AR Shri Sanjeev Bhardwaj who

subsequently attended the assessment proceedings, therefore, the AO was

correct in treating the rental receipts as income from house property.

9. On careful consideration of above submissions, firstly, we note that from

bare reading of assessment order para 2 at page 3, we note that the AO noted

that in response to reply/show cause letter, AR of the assessee company filed a

letter dated 22.8.2008 agreeing that the income of the assessee from rent may be

treated as income from house property. The Director of the assessee company

Smt. Sonali Ahuja has filed an affidavit controverting and disputing this letter

which is on record before us and this affidavit has not been rebutted by the

Revenue by filing any affidavit or any other details before us. On careful

consideration of rival contentions of both the parties on this issue, we are of

view that if the rental income of the assessee company was being assessed as

profits and gains of business and profession during the earlier assessment year,

then in an ordinary course of action, the company would not agree to treat the

same as income from house property instead of business income. From first

para of the assessment order, we note that originally Shri M.K. Nirola, CA was

attending the proceedings and the appearance of Shri Sanjeev Bhargava, CA has

7 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

been noted by the AO subsequently, who purportedly filed impugned letter

dated 22.8.2008 accepting the stand of the AO. In this situation, in view of

unrebutted affidavit of the Director of assessee company and other facts and

circumstances, we hold that the AO is not allowed to treat the rental receipts of

the assessee company as income from house property without considering and

ignoring the other relevant facts and circumstances only on the basis of letter

dated 22.8.2008 which was not field on the instructions of the assessee.

Therefore, we are inclined to accept the contention of the assessee that the letter

dated 22.8.2008 cannot be held as filed on behalf of the assessee and on the

instruction of the assessee company. The conclusion of the AO cannot be held

as sustainable in treating the rental receipts of the assessee company as income

from house property instead of business income, as claimed by the assessee only

on the basis of impugned letter dated 22.8.2008 which was not filed on the

instructions of the assessee company in view of our foregoing discussion.

Accordingly, ground no. 5 of the assessee is allowed.

Ground No.1

10. Apropos ground no.1, the ld. counsel of the asessee submitted that the AO

treated rental receipts of the company as income from house property only on

the sole basis of a letter dated 22.8.2008 which was not filed on the instructions

of the assessee and the AO did not consider the treatment given by the assessee

and accepted by the revenue in earlier assessment yeas and other relevant facts.

8 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Ld. counsel vehemently contended that the CIT(A) rejected additional evidence

of the assessee and upheld the conclusion of the AO only on the basis of wrong

observations of the AO which were not sustainable in law and on the facts of

the case.

11. Ld. DR replied that the AO had no option but to accept the admission

letter of the assessee which was filed on 22.8.2008 and the CIT(A) had no

alternative except to go with the conclusion of the AO which was supported by

the assessee's letter accepting the stand and action of the AO. However, the ld.

DR fairly accepted that the lower authorities did not consider the other relevant

facts and circumstances while adjudicating this issue except impugned letter

dated 22.8.2008 purported to be filed by the AR. The ld. DR placed reliance

on the judgment of Hon'ble Supreme Court in the case of Rajasthan

Warehousing Corp. (2000) 242 ITR 450 (SC), S.G. Mercantle Corpn. Ltd.

vs CIT (1972) ITR 700 (SC), East India Housing & Land Dev. Trust vs CIT

(1961) 42 ITR 49 (SC) and the order of the Special Bench of ITAT Delhi in

Atma Ram Properties Pvt. Ltd. vs JCIT (2006) 102TTJ (SB) (Del) 345.

12. The ld. counsel of the assessee placed rejoinder to the contentions of the

ld. DR and submitted that when objects of the company include activities of

letting properties and exploiting income therefrom, then the AO cannot treat the

rental income as income from house property especially when the revenue had

already accepted the same as business income during earlier AY from 2001-02

9 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

to 2004-05 and subsequent assessment years 2007-08 and 2011-12. Ld. counsel

has also drawn our attention towards year-wise chart containing details of rental

income and business income and copy of the assessment order passed u/s 143(3)

of the Act for AY 2011-12 wherein the rental income and profit on sale of

property have been treated as business income. Ld. counsel has placed reliance

on the following judgments of Hon'ble Supreme Court and Hon'ble Gujarat

High Court:-

1. Commissioner of income Tax Vs. Calcutta National Bank [1959],37 ITR 171 (SC)

2. Universal Plast Vs Commissioner of Income Tax [1999] 103 Taxman 493 (SC).

3. Commissioner of Income Tax vs. New India Ind. Ltd.[1993] 201 ITR 208 (Gujarat).

13. On careful consideration of above submissions, we are of the opinion that

the authorities below treated the rental receipts of the assessee as "income from

house property" rejecting the claim of the assessee only on the sole basis of

letter dated 22.8.2008 without considering other relevant facts and

circumstances of the case as well as acceptance of the revenue in earlier and

subsequent years. Since by the earlier part of the order on ground no. 5, we

have held that the said letter dated 22.8.2008 was not filed on behalf and on the

instructions of the assessee and hence, basis of the action of the AO is not

sustainable. At the same time, when we consider the conclusion of the

authorities below we find it appropriate to consider facts of present case under

10 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

which the assessee earned impugned rental income. Then it would suffice to

consider the applicability of the ratio of the judgments and order as relied by

both the parties.

14. As per para 2 page 2 of written submissions/synopsis filed by the assessee

before us narrated facts leading to impugned rental income which reads as

under:-

"2. In terms of the aforesaid objects, the assessee purchased shop in sector 18, Noida in the period relevant to the AY 2001-02 and used it for the purpose of business. The appellant has earned commission income in the first year itself amounting to Rs.66,710/- and claimed depreciation on its shop opened at Sector -18, Noida. The assessee filed return for the AY 2001-02 declaring loss of 63,180/- after claiming depreciation, inter alia, on amount invested in shop. For the AY 2002-03, the assessee filed return declaring loss of Rs.2,05,553/- and for the AY 2003- 04, the assessee filed return declaring loss of Rs. 1,03,106/- . On 14-01-2003 the board of directors in the meeting held at its registered office analyzed that in spite of their best efforts in almost two years they are unable to earn income while they were incurring losses for the last three years it is necessary to exploit their commercial space available at its Noida office by letting out same temporally till the company gets sufficient profits from its main business activities. This would reduce burden of expenditure and also reduce the losses suffered by the company in the last three years. (page 113) In this year i.e. AY 2003-04, the assessee let out its shop and reflected rent of Rs.90,000/-. In the AY 2004-05, the assessee reflected loss of Rs.5,04,985/- and rental income of shop was shown at Rs.9,50,460/-. The assessee also purchased another shop in this year. In the AY 2005-06, the assessee declared income of Rs.2,38,868/- in terms of provisions of sec. 115JB of the Act. These returns for the AYs 2001-02 to 2005-06, were accepted u/s 143(1) of the Income tax Act, 1961 [hereinafter referred to as the 'Act']."

(Emphasis supplied by us by underlining).

11 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

15. In view of above narrated facts submitted by the assessee, we note that the

assessee company purchased a shop at Sector 18, Noida in the beginning of the

business operations i.e. during AY 2001-02 and earned commission income of

Rs.66,710 and submitted return declaring negative income (loss) of Rs.63,180

after claiming depreciation, inter alia, on the amount invested on shop. For AY

2002-03 the assessee filed return declaring loss of Rs.2,05,553 and for AY

2003-04 the assessee field return declaring loss of Rs.1,03,106. The assessee

further submitted that in the board meeting held on 14.1.2003 analysed the

working results of the company and noticed that in spite of best efforts in almost

two years they are unable to earn income while they were continuously incurring

losses for the last consecutive three years. It was also decided by the Board of

directors of the assessee that it is necessary to exploit their commercial space

available at its Noida office by letting out the same temporarily till company

gets sufficient profits from its main business activities which would further

reduce burden of expenditure and losses of last three years.

16 . On careful consideration of the written submissions of the assessee in para

2 at page 2, as reproduced hereinabove, we note that the assessee company was

formed with the main object of earning commission income from property

transactions and it has earned commission income of Rs.66,710 in AY 2001-02,

the first year of business. Subsequently, in AY 2002-03, there was neither any

business income nor any rental income for the assessee company. Subsequently,

12 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

in AY 2003-04 and 2004-05, the gross rental income was Rs.90,000 and

Rs.9,50,600 respectively and there was no business income from commission.

In the AY 2005-06, there was rental income of Rs.17,88,000 and there was no

commission income during this period. In the year under consideration i.e. AY

2006-07, the assessee earned gross rental income of Rs.19,75,500 and there was

no business income during this period.

17. Under above noted facts and circumstances and as per year wise detail of

gross rental income and gross business income submitted by the assessee, we

clearly observe that the assessee company earned commission income from

property transaction of Rs.66,710 only in AY 2001-02 and in the subsequent AY

from 2002-03 to 2006-07, there was no business income either from commission

of property transaction or from any other business activity. When we consider

the written submissions of the assessee in para 2, we clearly observe that the

assessee company purchased a shop at sector 18, Noida in the first year of

business operation during AY 2001-02 and the same was first time let out as per

decision of Board of Directors meeting held on 14.1.2003 i.e. at the fag end of

the financial period and there was a gross rental income of Rs.90,000 only in

AY 2003-04. As per written submissions in para 2 of the assessee company, it

is amply clear that in the initial 2-3 years, there was no rental income for the

assessee company and there was no activity to earn business income but in the

board meeting dated 14.1.2003 when the financial results of the company were

13 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

analysed, it was noticed that in spite of best efforts in almost two years, the

company was unable to earn income and there were continuous losses for the

last consecutive three years, therefore, it was decided by the Board of Directors

that it is necessary to exploit their commercial space by letting out the same

temporarily till company gets sufficient profits from its main business activity

which would further reduce burden of expenditure and losses of last three years.

18. On logical analysis of above submissions, it can safely be presumed that

the assessee company was formed with the main object of earning income from

property transactions in the form of commission and profits etc. In the first

three years of business, the assessee company did not earn any amount from

rental income and at the fag end of third financial year 2002-03 relevant to AY

2003-04, the Board of Directors of the assessee company decided to let out shop

in sector 18, Noida available with the assessee company by temporarily letting

out the same till the company gets sufficient profits from its main business

activity. On the basis of foregoing discussion of facts and circumstances, we are

inclined to hold that the assessee company was started with the main object of

earning profits from property transaction in the form of commission and profits

but despite sufficient efforts, no business income could be earned from AY

2002-03 to 2008-09 including AY under consideration 2006-07.

19. Now, we proceed to consider the ratio of the judgments relied by both

the sides. In the case of CIT vs Calcutta National Bank Ltd. (supra), the

14 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Hon'ble Supreme Court held that the realisation of rental income by the

assessee was in the course of its business in prosecution of one of its objects in

its memorandum and was liable to be included in its business profits and was

assessable to tax as business profit. In this case, the bank owned a six-storeyed

building where its office was located at ground floor and part of sixth floor and

rest of the building was let out to tenants on rent. In this situation, the rental

receipts were treated as business income. In the extant case, the assessee only

earned rental income which was not primary activity, hence, facts of the

present case are distinguishable from that case. In our humble understanding,

benefit of the ratio of this decision is not available for the assessee as the facts

of the present case are distinguishable from that case.

20. In the judgement of Universal Plast Ltd. vs CIT (supra), it was decided

that where the assessee is engaged in the business of giving cotton stopped its

business and let out godowns and also separated machinery and let out pressing

factory to a metal pressing factory, rental income derived therefrom could not

be assessed as business income. In view of above, we respectfully note that

benefit of the ratio of this judgment is not available for the assessee.

21. In the case of CIT vs New India Insurance Ltd. (supra), ld. counsel of the

assessee has stressed upon the dictum that so long as the commercial asset is

capable of being exploited as such, its income is business income irrespective

of the manner in which the asset is exploited by the owner of the business. The

15 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

assessee is entitled to exploit it to his best advantage and he may do so either

by using it for himself personally or by letting it out to someone else.

22. When we consider the ratio of the judgements as relied by the ld. DR

and authorities below, we find that similar issue was considered and decided by

the ITAT Delhi Special Bench in the case of Atma Ram Properties (P) Ltd. vs

CIT(supra) and we note that it was held that rental income derived by the

assessee company by letting out a property simplicitor was chargeable to tax

under the head "income from house property" and not as business income

irrespective of the fact that the assessee company was doing business of

acquiring, developing and selling properties as the rental income was received

by it because of ownership of the property and not by exploitation of property

by way of complex commercial activity. The relevant operative part of this

order of Special Bench reads as follows:-

"25. While citing various case laws in support of the Revenue's case that the rental income received by the assessee- company in the present case is chargeable to tax under the head "Income from house property", the learned Departmental Representative has heavily relied on the decision of Hon'ble Madras High Court in the case of CIT vs. Chennai Properties & Investments Ltd. (supra). In the said decision, Hon'ble Madras High Court has discussed and analyzed various decisions of the different High Courts as well as that of Hon'ble Supreme Court available on the issue. On a careful perusal of the said decision of Hon'ble Madras High Court cited by the learned Departmental Representative and keeping in view the various judicial pronouncements discussed above, the legal position which emerges can be summarised as follows. If in the given case, the assessee is found to be the owner property and rental

16 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

income is earned by him by letting out predominantly the said property, such rental income will be assessable under the head "Income from house property" and not "Profits and gains of business or profession". What is let out should be predominantly the said property inasmuch as the rental income should be from the bare letting of the tenements or from letting accompanied by incidental services or facilities. The subject hired out should not be a complex one and the income obtained should not be so much because of the facilities and services rendered than because of their letting of the tenements. If such a situation is found to be obtained, the other aspects such as nature of the property being commercial/business asset, etc. in the hands of the assessee as well as nature of the business of the assessee do not change the character of the income and the rental income does not become income from trade or business.

26. In the present case, the subject property let out by the assessee-company was undisputedly owned by it and it was a case of bare letting of tenement and the subject hired out was not a complex one. It was thus a case of letting out of a property owned by the assessee simplicitor and not a case of exploitation of the property by way of complex commercial activity. The rental income earned from the said property thus was chargeable to tax under the head "Income from house property" and not under the head "Profits and gains of business or profession" as claimed by the assessee. As such, considering all the facts of the case and keeping in view the legal position emanating from the various judicial pronouncements discussed hereinabove, we hold that the rental income received by the assessee in the year under consideration was assessable to tax under the head "Income from house property" and not under the head "Profits and gains of business". Accordingly, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee."

23. The issue involved in present case is also of treatment of rental receipts

either as income from house receipts either as income from house property or

as business income. The ld. counsel of the assessee has firstly supported the

case of the assessee on the principle of consistency and submitted that the

17 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

rental income was assessed from AY 2003-04 to AY 2005-06 as business

income and in the similar set of facts and circumstances, the same was assessed

as income from house property in AY 2006-07 without any change in the facts

and circumstances and without any justified and reasonable basis. Thus, ld.

counsel of the assessee vehemently contended that the revenue authorities

should respect principle of consistency in the taxation matters which have not

been followed in the present case.

24. Ld. DR submitted that as per written submissions of the assessee,

undisputedly and admittedly, the return of assessee company was processed u/s

143(1) of the Act right from first assessment year 2001-02 to 2005-06 without

taking any view by the AO by following a mechanical process and AY 2006-

07 was the first AY wherein the case was selected for scrutiny and after due

application of mind to the facts and circumstances of the case, the AO took a

correct view that the rental income of the assessee was to be assessed as

"income from house property" instead of "Business income" as declared by the

assessee in its return of income.

25. Ld counsel of the assessee placed a rejoinder on this issue and submitted

that the AO treated the rental receipts as income from house property on the

basis of letter dated 22.8.2008 which was neither filed by the assessee nor the

same was filed on the instructions of the assessee, therefore, the income

derived from rent should be treated as business income.

18 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

26. On careful consideration of above submissions, at the very outset, we are

of the view that the principle of consistency cannot be applied to the

assessment order which was passed u/s 143(1) of the Act because under this

provision, the assessment is framed in a mechanical manner by accepting the

return of income filed by the assessee without taking any view on a particular

issue or treatment of income under a specific head. Hence, application of

principle of consistency cannot be pressed in the present case.

27. At the cost of repetition, we may point out that the revenue authorities

have not disputed this fact that the assessee company was incorporated on

12.12.2000 with a number of objects including as follows:-

"to build, construct, establish, own, purchase, sell, take on lease or exchange or otherwise acquire, hold, maintain and manage industrial, commercial or residential buildings, apartment houses, hotels, motels, hostels, restaurants and to let, sublet, give on lease or otherwise permit to use and occupation for rent or hire charges and to provide for the tenants and occupiers thereof all or any of the conveniences commonly provided in residential, commercial and industrial quarters."

28. In view of above, the assessee company was incorporated with the main

object to build, construct, establish, own, purchase, sell, take on lease or

exchange or otherwise acquire, hold, maintain and manage industrial,

commercial or residential buildings, apartment houses, hotels, motels, hostels

and restaurants. As per objects of the assessee company, besides aforesaid

main objects, the letting and sub-letting of property was also the object of the

assessee company. When we proceed to evaluate and analyse the business 19 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

activities of the assessee company, in view of aforesaid main and other objects,

we note that the assessee company earned commission income of Rs.66,710 in

AY 2001-02 and there is no business income from AY 2002-03 to 2008-09. If

we consider the rental income of the assessee company, we note that there was

no rental income during AY 2001-02 and 2002-03 and in AY 2002-03, the

assessee company earned rental income of Rs.90,000 as per Board of Directors

decision dated 14.1.2003 at the fag end of the financial period when on the

logical analysis of the financial results of the assessee company, it was found

that despite several efforts, the assessee company could not earn any money

from the main business activities and therefore it was decided to rent out

property at Noida Sector 18 which was purchased in AY 2001-02 viz. in the

first year of incorporation of the assessee company, temporarily till the

company gets sufficient profits from its main business activity with the

intention to reduce burden of expenditure and losses suffered by the assessee

company in the preceding three financial years.

29. In this situation, it is amply clear that the assessee company did not

undertake any business activity as per main objects of the company in the first

three financial periods, except commission income of Rs.66,710 in AY 2001-

02. We further clearly observe that rental income of Rs.90,000 was earned

during FY 2002-03 relevant to AY 2003-04 as per Board of Directors' decision

dated 14.1.2003 in pursuance to which was the shop at Sector 18, Noida was

20 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

let out temporarily till the company gets sufficient profits from its main

business activity which would further reduce burden of expenditure and losses.

In this situation and totality of the facts and circumstances, we have no

hesitation to hold that the assessee company was formed with the main object

of property business and earning income from property transactions in the form

of commission and profits etc. but when the company could not perform well

in its main objects, then at the end of third FY 2002-03, it was decided by the

Board of Directors of the company that the said shop purchased in the first year

of business operations 2001-02 relevant to AY 2001-02 should be let out

temporarily till company gets sufficient profits from its main business

activities.

30. With this background and aforenoted facts and circumstances, we

respectfully take cognizance of recent decision of Hon'ble Supreme Court in

the case of Chennai Properties and Investments Ltd. vs CIT (2015) 373

ITR 673 (SC) wherein after considering all previous judgments of Hon'ble

Supreme Court including dicta of the judgments of Hon'ble Apex Court in

the case of East India Housing and Land Development Trust Ltd. vs CIT

(1961) 42 ITR 49(SC), decision of Hon'ble constitutional bench to

Supreme Court in the case of Sultan Brothers (P) Ltd. vs CIT (1964) 51

ITR 353 (SC) and also ratio of the decision of Hon'ble Supreme Court in

21 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

the case of Karanpura Development Co. Ltd. vs CIT (1962) 44 ITR 362

(SC), their lordships held as follows:-

"The Memorandum of Association of the appellant- company which is placed on record mentions main objects as well as incidental or ancillary objects in clause III. (A) and (B) respectively. The main object of the appellant company is to acquire and hold the properties known as "Chennai House" and "Firhavin Estate" both in Chennai and to let out those properties as well as make advances upon the security of lands and buildings or other properties or any interest therein. What we emphasise is that holding the aforesaid properties and earning income by letting out those properties is the main objective of the company. It may further be recorded that in the return that was filed, the entire income which accrued and was assessed in the said return was from letting out of these properties. It is so recorded and accepted by the assessing officer himself in his order.

It transpires that the return of a total income of Rs.244030 was filed for the assessment year in question that is assessment year 1983-1984 and the entire income was through letting out of the aforesaid two properties namely, "Chennai House" and "Firhavin Estate". Thus, there is no other income of the assessee except the income from letting out of these two properties. We have to decide the issue keeping in mind the aforesaid aspects.

With this background, we first refer to the judgment of this Court in East India Housing and Land Development Trust Ltd.'s case which has been relied upon by the High Court. That was a case where the company was incorporated with the object of buying and developing landed properties and promoting and developing markets. Thus, the main objective of the company was to develop the landed properties into markets. It so happened that some shops and stalls, which were developed by it, had been rented out and income was derived from the renting of the said shops and stalls. In those facts, the question arose for consideration was: whether the rental income that is received was to be treated as income from the house property or the income from the business. This court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the 22 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

company and took note of the fact that letting out of the property was not the object of the company at all. The court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties.

Before we refer to the Constitution Bench judgment in the case of Sultan Brothers (P) Ltd., we would be well advised to discuss the law laid down authoritatively and succinctly by this Court in 'Karanpura Development Co. Ltd. v. Commissioner of Income Tax, West Bengal' [44 ITR 362 (SC)]. That was also a case where the company, which was the assessee, was formed with the object, inter alia, of acquiring and disposing of the underground coal mining rights in certain coal fields and it had restricted its activities to acquiring coal mining leases over large areas, developing them as coal fields and then sub-leasing them to collieries and other companies. Thus, in the said case, the leasing out of the coal fields to the collieries and other companies was the business of the assessee. The income which was received from letting out of those mining leases was shown as business income. Department took the position that it is to be treated as income from the house property. It would be thus, clear that in similar circumstances, identical issue arose before the Court. This Court first discussed the scheme of the Income Tax Act and particularly six heads under which income can be categorised / classified. It was pointed out that before income, profits or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense exclusive of one another and income which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of land or leases but the nature of the activity of the assessee and the nature of the operations in relation to them. It was highlighted and stressed that the objects of the company must also be kept in view to interpret the activities. In support of the aforesaid proposition, number of judgments of other jurisdictions, i.e. Privy Counsel, House of Lords in England and US Courts were taken note of. The position in law, ultimately, is summed up in the following words: -

"As has been already pointed out in connection with the other two cases where there is a letting out of premises and

23 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

collection of rents the assessment on property basis may be correct but not so, where the letting or sub-letting is part of a trading operation. The diving line is difficult to find; but in the case of a company with its professed objects and the manner of its activities and the nature of its dealings with its property, it is possible to say on which side the operations fall and to what head the income is to be assigned."

After applying the aforesaid principle to the facts, which were there before the Court, it came to the conclusion that income had to be treated as income from business and not as income from house property. We are of the opinion that the aforesaid judgment in Karanpura Development Co. Ltd.'s case squarely applies to the facts of the present case.

No doubt in Sultan Brothers (P) Ltd.'s case, Constitution Bench judgment of this Court has clarified that merely an entry in the object clause showing a particular object would not be the determinative factor to arrive at an conclusion whether the income is to be treated as income from business and such a question would depend upon the circumstances of each case, viz., whether a particular business is letting or not. This is so stated in the following words: -

"We think each case has to be looked at from a businessman's point of view to find out whether the letting was the doing of a business or the exploitation of his property by an owner. We do not further think that a thing can by its very nature be a commercial asset. A commercial asset is only an asset used in a business and nothing else, and business may be carried on with practically all things. Therefore, it is not possible to say that a particular activity is business because it is concerned with an asset with which trade is commonly carried on. We find nothing in the cases referred, to support the proposition that certain assets are commercial assets in their very nature."

We are conscious of the aforesaid dicta laid down in the Constitution Bench judgment. It is for this reason, we have, at the beginning of this judgment, stated the circumstances of the present case from which we arrive at irresistible conclusion that in this case, letting of the properties is in fact is the business of the assessee. The assessee therefore, rightly disclosed the income under the Head Income from Business. It cannot be treated as 'income from the house property'. We, accordingly, allow this

24 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

appeal and set aside the judgment of the High Court and restore that of the Income Tax Appellate Tribunal."

31. On careful and vigilant reading of above judgment of Hon'ble Supreme

Court, we respectfully note that in the case of Chennai Properties Investment

Ltd. vs CIT, the Memorandum of Association of the assessee company

mentions main objects as well as incidental or ancillary objects and as per the

Memorandum, the main object of the assessee was to acquire and hold

properties known as "Chennai House" and "Firhavin Estate" both in Chennai

and to let out these properties as well as make advances upon the security of

lands and buildings or other properties or any interest therein. Therefore, after

considering dicta laid down by constitutional bench of the apex court, in the

case of Sultan Brothers (P) Ltd. (supra), it was held that letting of property, in

fact was the main business of the assessee and, therefore, the assessee

rationally disclosed the rental income under the head of income from business

and the same cannot be treated as income from house property.

32. At the same time, we respectfully refer to the ratio of the decision of the

constitution bench of the Hon'ble apex court in the case of Sultan Brothers Pvt.

Ltd. vs CIT (supra) wherein it was held that merely an entry in the objects

clause showing a particular object would not be a determining factor to arrive

at a conclusion where the income is to be treated as income from business and

such a question would depend upon the circumstances of each case and whether

a particular business is letting or not. The Hon'ble Supreme Court in the judgment of

25 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Chennai Properties and Investments Ltd. vs CIT (supra) have given a

demarcation line and enlightened us by providing a proposition that where the

main object of the assessee company is to acquire and hold properties and to let

out those properties, then the rental income had to be treated as income from

business and not as income from house property. The Hon'ble apex court after

considering the dicta laid down by its constitution bench in the case of Sultan

Brothers (supra) arrived at an irresistible conclusion that in view of main object

of the assessee company, the rental income from letting of property is the

business income of the assessee.

33. As we have already noted that in the judgment of Sultan Brothers

(supra), the Hon'ble apex court categorically held that merely an entry in the

object clause showing a particular object would not be the determinative factor

to arrive at a conclusion whether the income is to be treated as income from

business and such a question would depend upon the circumstances of each

case. In the light of above ratio if we analyse the totality of the facts and

circumstances of the present case, we have no hesitation to hold that the main

object of the present assesssee company was not to earn rental income from

letting of property which was purchased in FY 2001-02 and let out in FY 2002-

03 temporarily till the company gets sufficient profits from its main business

activity with cautious decision of Board of Directors of the company dated

14.1.2003 with the intention to reduce burden of expenditure and losses

26 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

suffered by the assessee company right from its incorporation during preceding

three years. The present case clearly falls on all four corners within the dicta of

the constitutional bench of Hon'ble apex court in the case of Sultan Brothers

Ltd. vs CIT (supra) as the assessee company let out the shop situated at Sector

18, Noida not as per main objects of the assessee company and the same was

let out in the third year of business operations temporarily when the assessee

company could not earn income from its main object in spite of their best

efforts. At this juncture, the ratio of the decision of Hon'ble Special Bench,

ITAT, Delhi in the case of Atma Ram Properties (P) Ltd. also supports the case

of the revenue wherein it was held that rental income derived by assessee

company of letting out property simplicitor was chargeable to tax under the

head income from house property and not as business income irrespective of

the fact that the assessee company was doing business of acquiring, developing

and selling properties because the rental income accrued to the assessee

company only because of ownership of the property and not by exploitation of

rented property by way of complex commercial activity.

34. On the basis of foregoing discussion, we are inclined to hold that the

view taken by the AO and upheld by the CIT(A) is quite justified and

reasonable. We are unable to see any infirmity, perversity or any other reason

to interfere with the same. Accordingly, ground no. 1 of the assessee company

is dismissed.

27 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Ground No. 2

35. Apropos ground no.2, ld. counsel of the assessee submitted that CIT(A)

erred in upholding the disallowance of expenses claimed in the profit and loss

account on account of accounting charges, bank charges, general expenses,

telephone expenses, preoperative expenses written off, staff welfare, lease rent

expenses, maintenance charges, printing and stationery, remuneration to

Director, salary and remuneration without assigning any reasons, specially

when the aforesaid expenses were incurred wholly and exclusively for the

purpose of business of the company nor maintained its status and legal

existence. To support our contentions, ld. counsel of the assessee has placed

reliance on the ratio of following decisions of Hon'ble Supreme Court,

Hon'ble Calcutta High Court, Hon'ble Allahabad High Court and ITAT Delhi

and Mumbai Benches:-

4. Commissioner of Income Tax vs. Rajendra Prasad Moody [1978 115 ITR 519(SC).

5. Commissioner of Income Tax vs Ganga Properties Ltd. [1992] 62 Taxman 285 (Cal)

6. CIT vs New Savan Sugar & Gur Refining Co. Ltd. (1991) 55 Taxman 189 (Cal)

7. CIT vs Rampur Timber & Turnery Co. Ltd [1981] 6 Taxman 241 (ALL.).

8. Income Tax Officer vs Mokul Finance (P)Ltd. [2007]110 TTJ Delhi

9. M/s Vatsalya Enterprises Pvt. Ltd vs Asstt Commissioner of Income Tax {ITA no 6552/2011 decided on 28.01.2013 by ITAT Mumbai 'F' Bench}

28 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

36. Replying to the above, ld. DR supported the action of the AO and the

CIT(A) and contended that the only income of the assessee company was

computed and assessed under the head of income from house property and

there was no other business activity during the financial year under

consideration, therefore, the expenses claimed by the assessee in the profit and

loss account were rightly disallowed by the AO. Ld. DR also submitted that

the AO took a reasonable approach in allowing claim of audit fee and filing fee

to the assessee. Supporting the impugned order, ld. DR submitted that the first

appellate authority was right and correct in upholding the disallowance made

by the AO.

37. On careful consideration of above submissions, at the very outset, we

respectfully take cognizance of the ratio of the decision of Hon'ble Apex Court

in the case of CIT vs Rajendra Prasad Moody (supra) and judgment of Hon'ble

Calcutta High Court in the case of CIT vs Ganga Properties Ltd. which were

referred and followed by ITAT 'F' Bench Mumbai in the case of M/s Vatsalya

Enterprises Ltd. vs ACIT (supra) and it was held that the expenses claimed by

the assessee mostly pertained to carrying out of various operations and

activities carried on by the assessee company which are necessary for

maintaining a corporate establishment and which are inextricably linked with

the business activities of the assessee. The relevant operative part of the order

of the Tribunal reads as under:-

29 ITA No. 273/D/2013 & 1134/D/2013

Asstt. Years: 2006-07 & 2005-06

"9. Now, the issue before us is whether or not the expenditure claimed by the assessee under various heads for sums aggregating to Rs. 6,87,626, can be allowed? The Assessing Officer has disallowed these expenses but did not make any separate addition on the ground that he has disallowed the business loss. The learned Commissioner (Appeals) has partly allowed some expenses on the ground that the assessee has to maintain its corporate status and has to discharge certain legal obligations. The details of expenses allowed by him and finally sustained by him have already been incorporated in the forgoing paragraphs. The assessee is a corporate entity and the expenditure which have been mainly incurred are for carrying out investment activities and letting out of the property. The assessee has also made advance with a view to engage in real estate development. For carrying out all the activities, it has to maintain its establishment for complying with various statutory obligations and the operations of the company even if the assessee is having income under the different heads. Even under the head "Income From Other Sources", the expenditure incurred by the company has to be allowed. Looking to the nature of expenses claimed by the assessee, it is seen that most of these expenses pertain to normal operation of the company and for carrying out various activities as per its object clause in MoU.

The Hon'ble Supreme Court in CIT vs Raghunandan Prasad Moody, [1978] 115 ITR 519 (SC), while interpreting the allowability of expenditure under section 57(iii), observed as under:-

"4. What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. Sec. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is n fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of' the expenditure. It may be

30 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

pointed out that an identical views was taken by this Court in Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC) :

TC41R.491, where interpreting the corresponding provision in s. 12(2) of the Indian IT Act, 1922, which was ipsissima verba in the same terms as s. 57(iii), Bosc J., speaking on behalf of the Court, observed:

"It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned."

It is indeed difficult to see how, after this observation of the Court there can be any scope for controversy in regard to the interpretation of s. 57(iii). It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a particular assessment year, but if there is some income, howsoever small or meagre, the expenditure would be eligible for deduction. This means that in a case where the expenditure is Rs. 1,000, if there is income of even Re. 1, the expenditure would be deductible and there would be resulting loss of Rs. 999 under the head "Income from other sources". But if there is no income, then, on the argument of the Revenue, the expenditure would have to be ignored as it would not be liable to be deducted. This would indeed be a strange and highly anomalous result and it is difficult to believe that the legislature could have ever intended to produce such illogicality. Moreover, it must be remembered that when a profit and loss account is cast in respect of any source of income, what is allowed by the statute as proper expenditure would be debited as an outgoing and income would be credited as a receipt and the resulting income or loss would be determined. It would make no difference to this process whether the expenditure is X or Y or nil; whatever is the proper expenditure allowed by the statute would be debited. Equally, it would make no difference whether there is any income and if so, what, since whatever it be, X or Y or nil, would be credited. And the ultimate income or loss would be found. We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of s. 57(iii) cannot be different. The deduction of

31 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income.

It is true that the language of s. 37(1) is a little wider than that of s. 57(iii), but we do not see how that can make any difference in the true interpretation of s. 57(iii). The language of s. 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that s. 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language.

This view which we are taking is clearly supported by the observations of Lord Thankerton in Huges vs. Bank of New Zealand (1938) 6 ITR 636 (HL) TC16R.381, where the learned Law Lord said.' "Expenditure in course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. "

10. Further, the Calcutta High Court in Ganga Properties Ltd. (supra), relying upon the judgment of Allahabad High Court in CIT vs Rampur Timber, [1981] 129 ITR 58 (All.), observed and held as under:-

"In our view, a limited company, even if it does not carry on business but it derives income from "other sources" has to maintain its establishment for complying with statutory obligations so long it is in operation and its name is not struck off the register or unless the company is dissolved which means cessation of all corporate activities of the company for all practical purposes. So long as it is in operation, it has to maintain its status as a company and it has to discharge certain legal obligations and, for that purpose, it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is prominently a reasonable conclusion. We have considered a similar case in IT. Ref. No. 360 of 1979 [CIT vs. New Savan Sugar and Gur Refining Co. Ltd (1990) 185 ITR 564 (Ca I)], where the judgment was delivered on 18th April,

32 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

1989. For the reasons aforesaid, we are of the view that the Tribunal was justified in allowing the expenditure. The third question is, therefore, answered in the affirmative and in favour of the assessee. "

11. If we apply the aforesaid ratio laid down by the Hon'ble Supreme Court and Calcutta High Court on the facts of the present case, then, except for the amount claimed under the head "Depreciation on Motorcar & Computer", all other expenses listed above in foregoing paragraphs, are to be allowed, as these expenses mostly pertain to carrying out of various operations and activities carried on by the assessee company, which are necessary for maintaining a corporate establishment and are intricably linked for earning of the income under various heads, as shown by the assessee".

38. While we consider the assessment order as well as the appellate order,

we note that the ratio of the relevant decisions of Hon'ble Supreme Court

(supra) and Hon'ble Calcutta High Court and other judgments has not been

considered by the AO and all the expenses claimed by the assessee in the Profit

and loss account except audit fees and filing fees have been disallowed at the

threshold without any further examination and verification about the

genuineness of the claim as per relevant provisions of the Act. In this situation,

respectfully following the ratio of the judgments of Hon'ble Supreme Court in

the case of CIT vs Rajendra Prasad Moody (supra), we hold that it is not

necessary that any income should, in fact, have been earned as a result of

expenditure and expenses incurred by the assessee to maintain its corporate and

legal existence cannot be disallowed merely because no income has been

earned as a result of activities conducted and expenditure incurred by the

assessee company during the relevant period. With the above proposition, the

33 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

issue of allowability of expenditure claimed by the assessee in the Profit and

loss account, which were disallowed by the AO and upheld by the CIT(A), is

restored to the file of AO for proper examination and verification after

affording due opportunity of hearing for the assessee and without being

prejudiced or influenced with the earlier assessment and impugned order on

this issue. Accordingly, ground no. 2 of the assessee is deemed to be allowed

for statistical purposes.

Ground No.3

39. Apropos ground no.3, ld counsel of the assessee submitted that the

CIT(A) erred on both facts and in law in confirming the action of the Ld. AO,

in not allowing the set off of brought forward assessed business losses of

earlier years without appreciating that the said disallowance is not supported by

any cogent reason or any material on record. Ld. DR replied that when the

assessee company is making false claims and there was no business income of

the assessee company, then the AO was correct in not allowing the set off of

brought forward assessed business losses of preceding assessment years and

the same was rightly confirmed by the CIT(A).

40. On careful consideration of above submissions, from the operative part

of the assessment order, we note that the AO has noted that a similar situation

prevails in the assessee's computation of income for the earlier years on

account of which the assessee had claimed brought forward losses, therefore, 34 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

benefit of brought forward losses was not given to the assessee. During the

first appellate proceedings, the issue of brought forward losses was dismissed

by the CIT(A) by holding that business loss cannot be set off against the

income from house property.

41. Since by the earlier part of this order on ground no. 1, we have held that

the rental income of the assessee company deserves to be treated as income

from house property instead of business income as claimed by the assessee,

therefore, business loss cannot be set off against the income from house

property and conclusion of the CIT(A) was correct on this issue. However, we

further make it clear that the AO is empowered to provide proper treatment to

the brought forward losses as per relevant provisions of the Act in the present

AY 2006-07 and also in the subsequent assessment years. Accordingly,

ground no. 3 of the assessee is dismissed with the aforesaid directions of the

AO to provide proper, reasonable and justified treatment to the same in

accordance with law and relevant provisions of the Act.

Ground No.6

42. Since the main issue of the assessee has been restored to the file of AO

and ground no. 6 of the assessee pertaining to interest u/s 234B of the Act

being consequential in nature is also restored to the file of AO for a fresh

adjudication as per reassessment order, accordingly, ground no. 6 of the

revenue is also restored to the file of AO.

35 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Ground No.7

43. Ground No. 7 challenging initiation of penalty proceedings u/s 271(1)(c)

of the Act is premature and we dismiss the same without any adjudication.

44. In the result, the appeal of the assessee is deemed to be partly allowed

for statistical purposes as indicated above.

ITA No.1134/Del/2013 for AY 2005-06

45. This appeal by the assessee has been directed against the order of the

CIT(A)-VIII, New Delhi dated 19.12.2012 in Appeal No.231/2011-12 for AY

2005-06.

Application of assessee for admission of additional grounds of appeal

45.1 We have heard arguments of both the sides and carefully perused the

relevant material placed on record. Ld. counsel of the assessee placing reliance

on several judgements of Hon'ble Supreme Court and Hon'ble High Court

including judgment in the case of NTPC vs CIT (1998) 229 ITR 383 (SC)

submitted that the additional grounds raised by the assessee are purely legal

grounds which could not be taken before CIT(A) for want of proper legal

advice, therefore, the same may kindly be admitted for adjudication. Ld. DR

submitted that when the assessee did not raise these legal objections/grounds

before the CIT(A), then the same cannot be raised during second appellate

proceedings before the Tribunal.

36 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

45.2 On careful consideration of above submissions and perusal of additional

ground raised by the assessee, we observe that in these grounds, the assessee is

placing its objection regarding availability of assumption of jurisdiction for

initiation of proceedings and issuance of notice u/s 147/148 of the Act. The

assessee also wants to challenge the reassessment proceedings on the ground of

section 149(1)(b) of the Act. In view of judgment of Hon'ble Supreme Court in

the case of NTPC vs CIT (supra), the Tribunal should not be prevented from

considering the question of law arising in assessment proceedings, although not

raised earlier. It was further held that the view that the Tribunal is confined

only to issues arising out of the appeal before the CIT(A) is too narrow a view

to take regarding powers of the Tribunal. Since grounds/objections raised by

the assessee by way of additional grounds are purely legal objections which

could not be raised during first appellate proceedings before the CIT(A) but the

assessee is not prevented to raise the same before the Tribunal. Under above

noted facts and circumstances, respectfully following the decision of Hon'ble

Supreme Court in the case of NTPC vs CIT (supra), additional grounds of the

assessee are admitted for adjudication which read as under:-

"1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in not appreciating that the order passed by the Assessing Officer u/s 143(3) of the Income tax Act, 1961 is without jurisdiction and bad in law as the jurisdiction u/s 147 is vitiated.

2. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in not appreciating that the order

37 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

passed by the Assessing Officer u/s 143(3) of the Income tax Act, 1961 is without jurisdiction and bad in law as the AO did not even communicate reasons for issuance of notice u/s 148 of the Act.

4. The ld. CIT(A) failed to appreciate that proceedings u/s 147 cannot be based on conjectures and that the reopening has to be based on some tangible material, something that can be regarded as having a live link/close nexus with the circumstances relied upon for formation of belief.

4. On the facts and in the circumstances of the case, the Ld.CIT(A) erred in confirming the initiation of proceedings under Section 148 of the Income Tax Act, 1961 and therefore the assessment made thereon is bad in law and must be quashed.

5. On the facts and in the circumstances of the case, the reassessment proceedings are barred by limitation in as much as the reasons for reopening have not been supplied to the appellant before the expiry of six years from the end of the relevant Assessment Year, which is beyond the period prescribed under Section 149( 1) (b) of the Income Tax Act, 1961."

45.3 Along with original appeal, the assessee raised six grounds which read as

under:-

"1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in not appreciating that the order passed by the Assessing Officer u/s 143(3) of the Income tax Act, 1961 is without jurisdiction and bad in law as the jurisdiction u/s 147 is vitiated.

2. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in not appreciating that the order passed by the Assessing Officer u/s 143(3) of the Income tax Act, 1961 is without jurisdiction and bad in law as the AO did not communicate reasons for issuance of notice u/s 148 of the Act.

3. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in holding that income earned from exploitation of commercial space has to be assessed under the head 'Income from House Property' instead of under the head

38 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

'Profits and Gains of Business & Profession' and had incorrectly and unjustifiably upheld the said action of Ld. AO.

4. On the facts and in the circumstances of the case and in law, the ld. CIT( A) erred in upholding the disallowance of following expenses claimed in the profit and loss account on account of:-

[In Rs.]

i) Accounting charges 24,000.00

ii) Bank Charges 20,984.08

iii) General expenses 56,620.00

iv) Telephone Expenses 17,747.00

v) Preoperative expenses written off 2,400.00

vi) Travelling & conveyance 57,900.00

vii) Lease rent expenses 49,010.00

viii) Maintenance Charges 85,140.00

ix) Printing & Stationery 4,280.00

x) Remuneration to Director 3,60,000.00

xi) Salary 1,77,350.00

xii) Depreciation 2,86,646.00

xiii) Interest on loans 4,87,369.00

xiv) Legal fees 36,000.00

without assigning any reasons, especially when aforesaid expenses were incurred wholly and exclusively for the purpose of business of the company and in order to maintain its status.

5. That on the facts and in law, the ld. CIT(A) grossly erred in confirming the interest charged by the ld. AO under section 234B of the Income Tax Act, 1961.

6. That on the facts and in law, the ld. CIT(A) grossly erred in confirming initiation of penalty proceedings u/s 271(1)( c) of the Income Tax Act, 1961 by the ld. AO."

39 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Additional ground no. 1 to 5 and ground no. 1 & 2 of the assessee

46. Apropos aforesaid ground, we have heard arguments of both the sides and

carefully perused the relevant material placed on record. Ld. counsel of the

assessee reiterating its written submissions on ground no. 1 and 2 including

additional ground submitted that the AO in its order dated 27.11.2009 has not

whispered a word about the date when the proceedings u/s 147 of the Act were

initiated and when the reasons were recorded. Ld. counsel pointed out that in

the first para of impugned assessment order, the AO only records that

subsequently, proceedings u/s 147/148 of the Act were initiated and notice u/s

148 dated 20.9.2008 was issued for the following reasons. Ld. counsel further

submitted that the AO in response to notice u/s 148 of the Act did not supply a

copy of the reasons recorded before issuing notice u/s 148 of the Act even till

today viz. upto hearing before us despite oral request and written letter dated

30.1.2013 and 22.2.2013. Ld. counsel further pointed out that in terms of

judgment of Hon'ble Supreme Court in the case of GKN Driveshafts (India)

Ltd. vs ITO & Others (2003) 259 ITR 19 (SC), the AO is bound to furnish

reasons recorded before the issuance of notice. Therefore, in these

circumstances, completion of assessment u/s 143(3) of the Act is not in

accordance with law and, therefore, notice u/s 148 of the Act and all

reassessment proceedings need to be quashed. Ld. counsel also took us through

decision of Hon'ble Calcutta High Court in the case of Berger Paints India

40 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Ltd. vs ACIT & Ors. (2004) 266 ITR 462 (Cal.) and submitted that the

assessee is entitled to be supplied with the reasons in the event he challenges the

notice for reassessment; assessee is not stopped from challenging the impugned

notice after having submitted to the jurisdiction of the officer by filing returns.

46.1 Ld. counsel also pointed out that the reassessment proceedings are also

barred by limitation inasmuch as the reasons for reopening have not been

supplied to the assessee before expiry of six years from the end of relevant

assessment year which is beyond the period prescribed u/s 149(1)(b) of the Act. Ld. counsel also placed reliance on the decision of ITAT 'C' Bench, Bangalore

in the case of Shri G.N.Mohan Raju vs ITO dated 10.10.2014 in ITA No. 242 &

243/Bang/2013 for AY 2006-07 and 2007-08 and submitted that the AO did not

issue notice u/s 143(2) of the Act before picking up the assessment for scrutiny

and passing order u/s 143(3) r/w section 147 of the Act, therefore, entire

reassessment proceedings need to be quashed.

46.2 Replying to the above, ld. DR pointed out that the letter submitted by the

assessee asking to supply reasons recorded for reopening are dated 30.1.2013

and 20.2.2013 and the reassessment order u/s 143(3) r/w section 147 of the Act

was passed on 27.11.2009, therefore, these letters have been filed just to create a

41 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

legal issue in favour of the assessee. Ld. DR vehemently pointed out that as per

ratio of the decision of Hon'ble Supreme Court in the case of GKN Driveshafts

(India) Ltd. vs ITO & Others (supra) and decision of Hon'ble Calcutta High

Court in the case of Berger Paints India Ltd. vs ACIT & Ors. (supra),

undisputedly when a notice u/s 148 of the Act is issued, proper course of action

for the notice is to file the return and if he (assessee) so desires to seek reasons

for issuing the notice. Ld. DR further contended that if the assessee desires to

seek reasons for reissuance of notice, the AO is bound to furnish reasons for

reopening within a reasonable time but when the assessee is not making any

effort in this regard after receipt of notice and till completion of reassessment

proceedings, then it should be presumed that the assessee had already received

reasons recorded for reopening and he is not desirous to seek reasons from the

AO for issuing notice u/s 148 of the Act.

46.3 On careful consideration of above submissions, at the very outset, in our

humble understanding of the relevant provisions of the Act, there is no

mandatory provision for providing reasons recorded for reopening of assessment

u/s 147/148 of the Act to the assessee. However, as per ratio of the decision of

Hon'ble apex court in the case of Shri G.N.Mohan Raju vs ITO (supra) which

was also referred by Hon'ble Calcutta High Court in the case of Berger Paints

India Ltd. vs ACIT & Ors. (supra), it has been held that when a notice u/s 148 of

42 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

the Act is issued, a proper course of action for the notice (assessee) is to file the

return and if he so desires to seek reasons for issuing the notice u/s 148 of the

Act. When the assessee expresses his willingness or desire to seek reasons

before the AO, then the AO is bound to furnish reasons within a reasonable

time. The relevant operative part of the order of the Hon'ble Supreme Court in

the case of GKN Driveshafts (India) Ltd. vs ITO & Others (supra) which was

followed by Hon'ble Calcutta High Court in the case of Berger Paints India Ltd.

vs ACIT & Ors. (supra), at page 20 is being respectfully reproduced below:-

"We see no justifiable reason to interfere with the order under challenge. However, we clarify that when a notice under Section 148 of the Income tax Act is issued, the proper course of action for the noticee is to file return and if he so desires, to seek reasons for issuing notices. The assessing officer is bound to furnish reasons within a reasonable time. On receipt of reasons, the noticee is entitled to file objections to issuance of notice and the assessing officer is bound to dispose of the same by passing a speaking order. In the instant case, as the reasons have been disclosed in these proceedings, the assessing officer has to dispose of the objections, if filed, by passing a speaking Order before proceeding with the assessment in respect of the abovesaid five assessment years."

(Emphasis respectfully supplied by underlining) 46.4 In view of above, when we analyse the willingness and desire of the

assessee in the present case, we observe that the assessee was represented by

Shri M.K. Nirula, CA and AR of the assessee company right from the beginning

to the end of reassessment proceedings which were completed on 27.11.2009,

however, from the letters filed as Annexure 1 along with written submissions of

the assessee, it is clear that the assessee asked for the reasons of reopening much 43 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

later viz. on 30.1.2013 and 22.2.2013. In this situation, we respectfully hold that

in our humble understanding of the relevant provisions of the Act, the assessee

did not place his willingness or desire seeking copy of the reasons recorded for

initiation of proceedings u/s 147/148 of the Act after receipt of notice u/s 148 of

the Act until completion of reassessment proceedings. In view of above noted

facts and circumstances, we are of the considered view that in the given situation

when the assessee did not express his desire or willingness seeking copy of the

reasons recorded by the AO, then in this situation, in our humble understanding,

we respectfully hold that the benefit of the ratio of the decision of Hon'ble apex

court in the case of Shri G.N.Mohan Raju vs ITO (supra) and Hon'ble Calcutta

High Court in the case of Berger Paints India Ltd. vs ACIT & Ors. (supra) is not

available for the assessee and this legal issue raised by the assessee is jettisoned.

47. Now, we proceed to consider another legal contention of the assessee

placed in additional ground no. 5 that the reasons for reopening have not been

supplied to the assessee before expiry of six years from the end of relevant

assessment year which is beyond the period prescribed u/s 149(1)(b) of the Act.

Ld. counsel of the assessee submitted that in case reasons for reopening of the

assessment have not been supplied to the assessee before expiry of six years

from the end of relevant assessment year which is beyond the period prescribed

u/s 149(1)(b) of the Act, then reassessment proceedings are vitiated and deserve

44 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

to be quashed. Ld. DR submitted that as per provisions of section 149(1)(b) of

the Act, no notice u/s 148 shall be issued for the relevant assessment year if four

years but not more than six years have elapsed from the end of the relevant

assessment year unless the income chargeable to tax which has escaped

assessment amounts to or is likely to amount to rupees one lakh or more for that

period. Ld. DR pointed out that the present case is related to AY 2005-06 and

notice u/s 148 of the Act was issued to the assessee on 25.09.2008 which is very

well within the prescribed time limit u/s 149(1)(b) of the Act and the said

provision prescribes time limit for issuance of notice u/s 148 of the Act wherein

supply of reasons recorded is not a criteria or precondition.

47.1 On careful consideration of above submissions, we are of the considered

view that ground no. 5 of the assessee is devoid of merits as notice u/s 148 of the

Act in this case relevant to AY 2006-07 was issued on 25.9.2008 which is very

well within the prescribed time limit as per provisions of section 149(b) of the

Act. As we have already noted that the assessee did not place his wiliness or

desire before the AO after receipt of notice u/s 148 of the Act until completion

of reassessment proceedings on 27.11.2009, seeking copy of reasons recorded,

therefore, the assessee is not entitled for any benefit in this regard.

45 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

47.2 We further proceed to consider the proposition laid down by ITAT,

Bangalore 'C' Bench in the case of Shri G.N.Mohan Raju vs ITO (supra)

wherein it was held that if there was no valid issue of notice u/s 143(2) of the

Act and the assessments were done without following mandatory requirements

of the Act, then subsequent proceedings are invalid. The relevant operative part

of this order reads as under:-

"Once the original return filed by the assessee was subject to processing u/s 143(1) of the Act, the procedure of assessment pursuant to such a return, in our opinion came to an end, since AO did not issue any notice within the 6 months period mentioned in proviso to section 143(2)(ii). No doubt, if the www.taxguru.in ITA Nos.242& 243(Bang)2013 10 income has been understated or the income has escaped assessment, an AO is having the power to issue notice u/s 148 of the IT Act. Notice u/s 148 of the Act, issued to the assessee required it to file a return within 30 days from the date of service of such notice. There is no provision in the Act, which would allow an AO to treat the return which was already subject to a processing u/s 143(1) of the IT Act, as a return filed pursuant to a notice subsequently issued u/s 148 of the Act. However, once an assessee itself declare before the AO that his earlier return could be treated as filed pursuant to notice u/s 148 of the IT Act, three results can follow. Assessing Officer can either say no, this will not be accepted, you have to file a fresh return or he can say that 30 days time period being over I will not take cognizance of your request or he has to accept the request of the assessee and treat the earlier returns as one filed pursuant to the notice u/s 148 of the IT Act. In the former two scenarios, AO has to follow the procedure set out for a best of judgment assessment and cannot make an assessment under section 143(3). On the other hand, if the AO chose to accept assessee's request, he can indeed make an assessment under section 143(3). In the case before us, assessments were completed under section 143(3) read with section 147. Or in other words AO accepted the request of the assessee. This in turn makes it obligatory to issue notice u/s 143(2) after the request by the

46 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

assessee to treat his earlier return as filed in pursuance to notices u/s 148 of the IT Act was received. This request, in the given case, has been made only on 05-10-2010. Any issue www.taxguru.in ITA Nos.242& 243(Bang)2013 11 of notice prior to that date cannot be treated as a notice on a return filed by the assessee pursuant to a notice u/s 148 of the Act. Or in other words, there was no valid issue of notice u/s 143(2) of the IT Act, and the assessments were done without following the mandatory requirement u/s 143(2) of the IT Act. This in our opinion, render the subsequent proceedings all invalid. Learned CIT(A) had only adjudicated on a position where there was no service of notices u/s 143(2) of the IT Act. He had not dealt with the scenario, where notice was issued prior to the filing of return by the assessee. We therefore, quash the assessment done for the impugned assessment years. Since the appeals of the assessee are allowed on its ground 3, other grounds are not adjudicated."

47.3 In the light of aforesaid proposition if we analyse the facts and

circumstances of the present case, from the assessment order, we note that the

AO has mentioned compliance of statutory notice u/s 143(2) of the Act with

these observations:-

"Notice u/s 143 of the I.T. Act, 1961 issued on 25.09.2008 for re-assess the income of the said assessment year. In response of the notice the assessee has neither filed revised return nor stated that the same has been treated income of return and thereafter picked up for scrutiny. Statutory notice u/s 143(2) was issued in this case in response to which Shri M.K. Nirola, CA & AR of the assessee company attended the proceedings from time to time and filed the details asked for."

47 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

47.4 In view of above noted facts about reassessment order, it is vivid that the

notice u/s 148 of the Act was issued on 25.09.2008 for reassessment of income

of relevant AY 2005-06. We further observe that in response of the said notice

u/s 148 of the Act, the assessee had neither filed revised return nor stated that

the return already filed be treated income of return. Thereafter, the AO picked

up the case for scrutiny and a required statutory notice u/s 143(2) was issued and

in response to the said notice Shri M.K. Nirola, CA of the assessee company

attended the proceedings from time to time and filed the details asked by the

assessee. In this situation, when we consider the ratio laid down by ITAT

Bangalore Bench, we note that in the present case, the assessee had neither filed

revised return nor stated that the earlier return may be treated as income of

return in response to notice u/s 148 of the Act. In this situation as per ratio of

the order of ITAT, Bangalore (supra), the case of the present assessee falls

within the category where the AO had issued notice u/s 143(2) of the Act in the

very beginning of the reassessment proceedings and the assessee's

representative also attended the proceedings in pursuance thereto, therefore, we

decline to accept this legal contention of the ld. counsel of the assessee that there

was non-compliance of provisions of section 143(2) of the Act by the AO. We

respectfully hold that the benefit of decision of coordinate bench is not available

to the assessee as facts and circumstances of the case are dissimilar as the

assessee had neither filed any return nor requested the AO to treat the earlier

return as has been filed in pursuance to notice u/s 148 of the Act. 48 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

47.5 Ld. counsel of the assessee has also alleged that proceedings u/s 147 of

the Act cannot be based on conjectures and the reopening has to be based on

some tangible material, something that can be recorded as having a live

link/close nexus with the circumstances relied upon for formation of belief

before the AO. Ld counsel of the assessee submitted that when the same income

was treated as business income in the earlier assessment years right from 2001-

02 to 2005-06, then on similar set of facts and circumstances without any

deviation or change, the reopening u/s 147/148 of the Act would be change of

opinion on the same material and, therefore, issuance of notice u/s 147 of the

Act was not valid and without jurisdiction and bad in law as the jurisdiction u/s

147 of the Act is vitiated.

47.6 Ld. counsel of the assessee placed reliance on various decisions including

decision of Jurisdictional High Court of Delhi in the case of CIT vs Orient Craft

Ltd. in ITA No. 5555/Del/2012 decided on 12.12.2012 and submitted that there

is nothing in the language of section 147 of the Act to unshackle the AO from

the need to show "reason to believe". The fact that the intimation issued u/s

143(1) of the Act cannot be equated to assessment u/s 143(3) of the Act, lead to

the conclusion that the requirement of section 147 of the Act can be dispensed

with when the finality of intimation u/s 143(1) is sought to be disturbed. Ld.

counsel submitted that the assessment order passed for earlier assessment year

on the same facts and material cannot be disturbed subsequently by way of

49 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

invoking provisions of section 147/148 of the Act, therefore, issuance of notice

u/s 148 of the Act and reassessment proceedings should be quashed. 47.7 Replying to the above, ld. DR placed reliance on the decisions of Hon'ble

Supreme Court in the case of ACIT vs Rajan Jhaveri Stock Broker Pvt.

Ltd. (2001) 291 ITR 500(SC) and recent decision in the case of DCIT

vs Zuari Estate Development and.Investment Co. Pvt. Ltd. [2004] 373 ITR

661 (SC) and also on the decision of Full Bench of Hon'ble Jurisdictional High

Court of Delhi in the case of CIT vs Usha International Ltd. (2012) 348 ITR

485 (Del)(FB) and submitted that if the assessee's return was accepted u/s

143(1) of the Act in earlier four consecutive assessments and when the AO

invokes provisions of section 147/148 of the Act in view of subsequent

assessment order passed u/s 143(3) of the Act, then there was no question of

"change of opinion" inasmuch as while accepting the return u/s 143(1) of the

Act for earlier assessment years, no opinion was formed while processing return

under said provision of the Act and, therefore, on this basis, notice issued to the

assessee u/s 148 of the Act should be held as valid. Ld. DR vehemently

contended that order passed u/s 143(3) cannot be held as passed after forming an

opinion on a particular issue and therefore, allegation of 'change of opinion on

the same material' cannot be levelled against the AO because while accepting

return u/s 143(1) of the Act, the AO had no opportunity to form an opinion on

the material or details submitted by the assessee in the return of income.

50 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

47.8 Strongly supporting the action of the AO for issuance of notice and

initiation of reassessment proceedings u/s 147/148 of the Act, ld. DR lastly

submitted that the AO assumed valid jurisdiction for issuance of notice and

reopening of assessment that cannot be alleged as change of opinion because the

department had no opportunity to form any opinion during earlier assessment

year proceedings which were completed u/s 143(1) of the Act and hence on the

issue of rental income, the AO had reason to believe that the assessee had

wrongly placed gross rental receipt as business income instead of income from

house property which has escaped assessment.

47.9 On careful consideration of above submissions of both the sides and

careful perusal of the relevant material placed on record, inter alia reasons for

reopening assessment order and ratio of the orders and judgements relied by

both the sides, at the very outset, we note that undisputedly and admittedly, the

assessment was completed u/s 143(1) of the Act in the case of assessee from

commencement of its business i.e. AY 2001-02 to 2005-06 and the AO had no

opportunity to form any opinion about the taxable head of rental receipts of the

assessee company in those assessment years. The issue cropped up when the

AO took up the case of the assessee for AY 2006-07 for scrutiny and reached to

a conclusion that the gross rental receipts shown by the assessee deserve to be

treated as income from house property instead of business income as claimed

and declared by the assessee. In view of assessment order for AY 2006-07, the

51 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

assessee recorded reasons for initiation of reassessment proceedings and issued a

notice u/s 148 of the Act which was ended by passing the reassessment order u/s

143(3) r/w 147 on 27.11.2009.

48. At this juncture, it would be relevant and msot appropriate to consider the

ratio of the recent judgment of Hon'ble Supreme Court in the case of DCIT vs

Zuari Estate Development & Investment Co. Ltd. (supra) wherein their

Lordships speaking for Hon'ble Apex Court and after referring its earlier

judgment in the case of CIT vs Rajesh Jhaveri Stock Brokers (P) Ltd. (supra) at

page 664 held as follows:-

"After going through the detailed order passed by the High Court, we find that the main issue which is involved in this case is not at all addressed by the High Court. A contention was taken by the appellant-Department to the effect that since the assessee's return was accepted u/s 143(1) of the Income Tax Act, there was no question of "change of opinion" inasmuch as while accepting the return under the aforesaid provision, no opinion was formed and, therefore, on this basis, the notice issued was valid. We find that this aspect is squarely covered by the judgement of this court in Asstt.CIT vs Rajesh Jhaveri Stock Brokers Private Ltd. (2008) (14) SCC 208 in the following manner:

"In the scheme of things, as noted above, the intimation under section 143(1)(a) cannot be treated to be an order of assessment. The distinction is also well brought out by the statutory provisions as they stood at different points of time. Under section 143(l)(a) as it stood prior to April 1, 1989, the Assessing Officer had to pass an assessment order if he decided to accept the return, but under the amended provision, the requirement of passing of an assessment order has been dispensed with and instead an intimation is required to be sent. Various circulars sent by the Central Board of Direct Taxes spell out the intent of the Legislature, i.e., to minimize the 52 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

departmental work to scrutinize each and every return and to concentrate on selective scrutiny of returns. These aspects were highlighted by one of us (D. K. Jain J) in Apogee International Limited v. Union of India [(1996) 220 ITR 248]. It may be noted above that under the first proviso to the newly substituted section 143(1), with effect from June 1, 1999, except as provided in the provision itself, the acknowledgment of the return shall be deemed to be an intimation under section 143(1) where (a) either no sum is payable by the assessee, or (b) no refund is due to him. It is significant that the acknowledgment is not done by any Assessing Officer, but mostly by ministerial staff. Can it be said that any 'assessment' is done by them? The reply is an emphatic 'no'. The intimation under section 143(1)(a) was deemed to be a notice of demand under section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under section 143(1)(a), the question of change of opinion, as contended, does not arise."

48.1 Hence, as per ratio laid down by the Hon'ble apex court after considering

its earlier judgments in the case of CIT vs Rajesh Jhaveri Stock Broker (P) Ltd.,

(supra), DCIT vs Zuari Estate Development & Investment Co. Pvt. Ltd. (supra),

it is clear that when the original assessment in earlier assessment years was

completed u/s 143(1) of the Act, then there was no question of change of

opinion inasmuch as while accepting the return u/s 143(1) of the Act, no opinion

was formed by the AO and therefore, on this basis notice u/s 148 of the Act

cannot be held as invalid. Respectfully following the ratio of the decision of

Hon'ble Apex Court in the case of DCIT vs Zuari Estate Development and

Investment Co. Pvt. Ltd. (supra) and in the case of CIT vs Rajesh Jhaveri Stock

Broker (P) Ltd. and also the ratio laid down by the Hon'ble Full Bench of

53 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

Hon'ble Jurisdictional High Court of Delhi in the case of CIT vs Usha

International(supra), in the facts and circumstances of the present case, we hold

that the AO validly assumed jurisdiction for initiation of reassessment

proceedings u/s 147 of the Act and issuance of notice u/s 148 of the Act as there

was valid reason to believe that the income has escaped assessment on the issue

of treatment of rental income. Therefore, we decline to accept the legal

contention of the assessee that the reopening of assessment was not valid, void

ab initio and bad in law. Hence, on the basis of foregoing discussion, we hold

that the legal contentions raised by the assessee in additional grounds as well as

in the main ground no. 1 and 2 are not sustainable and hence, we dismiss the

same as being devoid of merits.

Ground no. 3, 4, 5 & 6

48.2 Since for AY 2006-07, we have decided similar issue involved in ground

nos. 3 to 6 and facts and circumstances of AY 2005-06 are similar to the facts of

AY 2006-07, therefore, without repeating the adjudication and conclusion, we

hold that our conclusion on ground no. 2, 3, 6 & 7 sof AY 2006-07 shall apply

mutatis mutandis for AY 2005-06. Accordingly, ground no. 3 of the assessee is

dismissed, ground no. 4 is restored to the file of AO for fresh adjudication,

ground no. 5 being consequential in nature is also restored to the file of AO for a

fresh adjudication as per reassessment order and ground no. 6 challenging the

54 ITA No. 273/D/2013 & 1134/D/2013 Asstt. Years: 2006-07 & 2005-06

initiation of penalty proceedings u/s 271(1)(c) of the Act being premature is

dismissed.

49. In the result, the appeal of the assessee in ITA No.273/D/2013 for AY

2006-07 is partly allowed on ground no. 2 & 3 for statistical purposes and partly

allowed on ground no. 5 and additional grounds and other remaining grounds

are dismissed. ITA No.1134/D/2013 for AY 2005-06for AY 2005-06 of the

assessee is deemed to be allowed for statistical purposes on ground no. 4 & 5

and dismissed on all remaining grounds.

Order pronounced in the open court on 28.7.2015.

Sd/- Sd/-

(R.S. SYAL) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER

DT. 28th JULY 2015 'GS'

Copy forwarded to:-

1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order

Asstt.Registrar

55