Vrundavan Enterprise, Surat V. The Pr. Commissioner of Income Tax,--1, Surat, Surat

ITA 101/SRT/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1542 (ITAT-SURAT)
• Duration Of Justice: 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 13-07-2022
• Assessment Year: 2017-2018
• Appeal Filed On: 28-04-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Revision of order; Opportunity of being heard; Principle of natural justice; Assessment record; Set aside
• Section: 263; 143(3); 142(1); 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JM & DR. A. L. SAINI, AM आयकर अपील सं./ITA No.101/SRT/2022 Assessment Year: (2017-18) (Physical Court Hearing) Vrundavan Enterprises, 88, Walkeshwar Society, Pedar Road, Mota Varachha, Surat-395101. Vs. The PCIT-1, Surat. èथायीलेखासं./जीआइआरसं./PAN/GIR No.: AAJFV 3110 H (Appellant) (Respondent) Assessee by Shri Hiren Vepari, CA Respondent by Shri H. P. Meena, CIT(DR) Date of Hearing 14/07/2022 Date of Pronouncement 06/10/2022 आदेश / O R D E R PER DR. A. L. SAINI, AM: By way of this appeal, the assessee has challenged correctness of the order dated 29.03.2022, passed by the Learned Principal Commissioner of Income Tax -1, Surat [in short “the ld. PCIT”] under section 263 of the Income Tax Act 1961. Grievances raised by the assessee are as follows. “(i) Assumption of jurisdiction: (1) The Principal Commissioner of Income-tax was not justified in assuming jurisdiction u/s 263 without satisfying conditions. (2) The learned Pr. CIT was driven by extraneous consideration in not dropping the proceedings u/s 263. (II) Merits: (1) The Principal Commissioner of Income Tax erred in initiating proceedings to tax notional rent on unsold units (completed residential/commercial units) in an Assessment Year prior to the date from which the amendment deeming such notional rent to tax came into force. (2) The view taken by the Principal Commissioner of Income Tax is inconsistent with the decision of the Hon'ble Gujarat High Court in case of Neha Builders Pvt. Ltd. (2007) 164 Taxman 342 (Guj) as also the decision of the Hon'ble Income Tax Appellate Tribunal, Surat in case of Shanti Enterprise ITA No.151/SRT/2018. Page | 2 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. (III) Miscellaneous: The appellant craves leave to add, alter or vary any of the grounds of appeal.” 2. Succinct facts are that assessee firm, M/s Vrundavan Enterprise, had filed its return of income for AY.2017-18, on 10.08.2017, declaring total income of Rs.20,20,070/-. Thereafter, the assessee`s case was selected for scrutiny under CASS and scrutiny assessment under section 143(3) of the Act was finalized on 15.12.2019 by accepting the returned income. 3. Later on, Learned Principal Commissioner of Income Tax -1, Surat [in short “the ld. PCIT”], has exercised his jurisdiction under section 263 of the Income Tax Act 1961. Ongoing through the assessment records, it has been observed by ld PCIT that case of the assessee firm was selected for scrutiny, one of the reasons for selection for scrutiny being "Real Estate business with high closing stock". During the assessment proceedings, various questions were asked to the assessee, pertaining to closing stock, vide notices issued u/s 142(1) of the Act dated 16/08/2019 and 29/11/2019. It has been observed that as per ITR & Balance sheet of the assessee firm for the year under consideration, the closing stock value was shown at Rs.11,44,27,749/-. Further, as per records available on assessment record, BU Permission was obtained on 20/10/2014 for Buildings A, B, C, D, E, G, H, and I and on 20.05.2015 for building F. Hence, it is clear that BU permissions were received by the assessee firm and the unsold units have been shown by the assessee firm as closing stock of Rs.11,44,27,749/- in the balance sheet as on 31/03/2017. However, the same have not been considered for computing notional rent income under the head income from house property as stipulated u/s 22 r.w.s. 23 of IT Act 1961. The AO should have determined ALV (Annual Lettable Value) on the closing stock of Rs.11,44,27,749/- in accordance with section 23 of IT Act and should have added the said amount to the total income of the assessee under the head Income from House Property. 4. From the above facts, the ld PCIT observed that Assessing Officer has passed the Assessment Order without proper inquiry/verification on the issue as mentioned Page | 3 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. in the preceding paragraph which should have been made during the course of assessment proceedings and thereby rendering the assessment order u/s 143(3) of the Act passed by him on 15.12.2019, as erroneous in so far as it is prejudicial to the interest of Revenue. 5. Accordingly, proceedings for revision of order u/s 263 of the Act were initiated by issuing show cause notice bearing DIN No. ITBA/REV/F/REV1/2021- 22/1040653318(1) dated 12.03.2022 and duly served through e-proceedings and the assessee was provided an opportunity of being heard and to offer explanation, if any, as well as to adduce evidence, if any, against the proposal of revision u/s. 263 of the Act. 6. In response to the above notice of ld PCIT, the assessee -firm submitted its reply through e-proceedings. The assessee's reply relied upon on the decision of Hon'ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. (2007) 164 taxman 342 (Gujarat). 7. However, ld PCIT rejected the contention of the assessee and observed that assessee had stated that with amendment to section 23 of the Act and introduction of sub-section (5), is seen as beneficial provision to the assessee and change in law has brought certainty and put controversy to rest. The ld PCIT held that reply of the assessee is not correct, as sub section (5) to section 23 was inserted vide Finance Act 2017 w.e.f 01.04.2018 to provide relief of one year from the end of financial year in which completion certificate was received, Thus, prior to insertion of section 23(5) in the Income Tax Act, notional rent was to be charged under section 23(1) r.w.s section 22 of the Act. It may be stated that insertion of section 23(5) of the Act has strengthened the legal position of taxing unsold finished inventories of real estate developers which always existed even in the absence of section 23(5) of the Act. In view of the above provisions of law, the ld PCIT held that assessment order passed u/s 143(3) of the Act dated 15.12.2019 for AY.2017-18 in the case of above- mentioned assessee, is erroneous and prejudicial to the interest of Revenue therefore Page | 4 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. ld PCIT set aside the same with a direction to the Assessing Officer to pass fresh assessment order. 8. Aggrieved by the order of the ld. PCIT, the assessee is in appeal before us. 9. The Learned Counsel for the assessee, at the outset submitted that the issue raised by the ld. PCIT is squarely covered in favour of assessee by the judgment of Co-ordinate Bench in the case of Jayprakash Khanchand Aswani, in ITA No. 2237/AHD/2015 for AY.2011-12, order dated 18.12.2018, wherein the Tribunal has considered the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. (2007) 164 taxman 342 (Gujarat) and rendered the decision in favour of assessee. The ld Counsel pointed out that assessee is engaged in business of construction and development, which is main object of the assessee. The flats which could not be sold at the end of the year was shown as stock-in-trade. Estimating rental income by the AO for these flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock-in- trade and income arising on its sale is liable to be taxed as business income, therefore, ld Counsel contended that order passed by the assessing officer under section 143(3) of the Act, dated 15.12.2019, is neither erroneous nor prejudicial to the interest of Revenue, hence order passed by the ld PCIT under section 263 of the Act may be quashed. 10. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the ld PCIT, which we have already noted in our earlier para and is not being repeated for the sake of brevity. 11. We have heard both the parties and carefully gone through the submissions put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the facts of the case including the findings of the ld. PCIT and other material brought on record. We find merit in the submission of ld Counsel for the assessee and observed that issue under consideration is no longer res-integra.That is, the issue raised by the ld. PCIT is squarely covered in favour of Page | 5 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. assessee by the judgment of Co-ordinate Bench in the case of Jayprakash Khanchand Aswani, in ITA No. 2237/AHD/2015 for AY.2011-12, order dated 18.12.2018, wherein the Tribunal has considered the judgment of Hon'ble Gujarat High Court in the case of CIT vs. Neha Builders Pvt. Ltd. (2007) 164 taxman 342 (Gujarat) and rendered the decision in favour of assessee. The findings of the Co- ordinate Bench in the case of Jayprakash Khanchand Aswani(supra) is reproduced below: “7. We have heard the rival submissions and perused the material on record. It is an undisputed fact the assessee has shown the properties as stock in trade in the books of accounts. The shops and flats sold by the assessee were assessed under head income from business. There were certain unsold flats and shops in stock in trade which the AO treated the property assessable under the head Income from House Property and computed notional annual netting value on such unsold flats placing reliance in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra). The action of the AO was upheld by the learned CIT(A). 8. The Hon'ble Gujarat High Court in the case of Neha Builders Pvt. Ltd. (supra) considered the question whether the rental income received from any property in the construction business can be claimed under the head ‘income from property’ even though the said property was included in the closing stock. The Hon'ble Gujarat High Court held that if the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the business and the business stocks, which may include movable and immovable, would be taken to be stock in trade and any income derived from such stocks cannot be termed as income from house property. While holding so the Hon'ble High Court observed as under:- “8. True it is, that income derived from the property would always be termed as ‘income’ from the property, but if the property is used as ‘stock-in-trade’, then the said property would become or partake the character of the stock, and any income derived from the stock, would be ‘income’ from the business, and not income from the property. If the business of the assessee is to construct the property and sell it or to construct and let out the same, then that would be the ‘business’ and the business stocks, which may include movable and immovable, would be taken to be ‘stock-in-trade’, otherwise, it is to be seen that there was distinction between the ‘income from property.” 9. From the statement of the assessee, it would clearly appear that it was treating the property as ‘stock-in-trade’. Not only this, it will also be clear from the records that, except for the ground floor, which has been let out by the assessee, all other portions of the property constructed have been sold out. If that be so, the property, right from the beginning was a ‘stock-in-trade.’ 9. Similarly the Coordinate Bench in the case of Runwal Builders Pvt. Ltd. (supra) has considered similar issue as to whether the unsold property which is held as stock in trade by the assessee can be assessed under the head ‘income from house property’ by notionally computing the annual letting value from such property and the Coordinate Bench considering the decision of the Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd. (supra) which the AO relied upon and the decision of the Hon'ble Supreme Court in the case of Chennai Properties & Investments Ltd. vs. CIT Page | 6 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. reported in 373 ITR 673, held that unsold flats which are in stock in trade should be assessed under the head ‘business income’ and there is no justification in estimating rental income from those flats are notionally computing annual letting value under Section 23 of the Act. While holding so the Coordinate Bench observed as under:- “3. The ld. AR placed the order of Bombay Tribunal in the case of M/s Perfect Scale Company Pvt. Ltd., ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013, wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the IT Act. 4. On the other hand, ld. DR relied on the order of Hon'ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property. 5. We have considered rival contentions and perused the record. The issue under consideration has been restored by the CIT(A) to the file of AO to compute the annual value. Recently the Hon'ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. Vs. CIT, reported in (2015) 42 SCD 651, vide judgment dated 9-4-2015 has held that where assessee company engaged in the activity of letting out properties and the rental income received was shown as business income, the action of AO treating the rental income as income from house property in place of income from business shown by the assessee was held to be not justified. The Hon'ble Supreme Court held that since the assessee company’s main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business. On the very same analogy in the instant case, assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year was shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold was its stock-in-trade and income arising on its sale is liable to be taxed as business income. Accordingly, we do not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee’s stock in trade as at the end of the year. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act. 10. In the case on hand before us it is an undisputed fact that both assessee have treated the unsold flats as stock in trade in the books of account and the flats sold by them were assessed under the head ‘income from business’. Thus, respectfully following the above said decisions we hold that the unsold flats which are stock in trade when they were sold they are assessable under the head ‘income from business’ when they are sold and therefore the AO is not correct in bringing to tax notional annual letting value in respect of those unsold flats under the head ‘income from house property.’ Thus, we direct the AO to delete the addition made under Section 23 of the Act as income from house property. 11. In the result, the appeals filed by the assessee are allowed.” 10. In the light above judicial pronouncements, we are of the considered opinion that provisions of section 23 of the Act are not applicable in the case of the assessee. Page | 7 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. Accordingly, the AO is directed to delete the addition made by estimating letting value of the flats u/s.23 of the I.T. Act. This grounds of appeal is therefore, allowed.” 12. A bare reading of section 263 of the Act 1961, makes it clear that the pre- requisite for the exercise of jurisdiction by the PCIT suo moto under it, is that the order of ITO is erroneous, so far as it is prejudicial to the interest of revenue. The PCIT has to be satisfied twin conditions, namely (1), the order of AO sought to be revised is erroneous and (2) it is prejudicial to the interest of revenue. If one of them is absent- if the order of ITO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue - recourse cannot be had to section 263 (1) of the Act. The provision cannot be invoked to correct each and every type of mistake or error committed by the AO; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of fact or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principle of natural Justice or without application of mind. The 'phrase prejudicial to the interest of revenue' is not an expression of art and is not defined in the Act. Understood it is ordinary meaning it is of wide import and is not confined to loss of tax. The scheme of the Act is to levy and collect tax in accordance with the provision of the Act and this task is entrusted to the revenue. If due to an erroneous order of the ITO, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of revenue. The phrase prejudicial to the interest of revenue has to be read in conjunction with an erroneous order passed by the A.O. Every loss of revenue as a consequence of an order of AO, cannot be treated as prejudicial to the interest of revenue, for example, when an ITO, adopted one of the course permissible in law and it has resulted in loss of revenue, or where two views are possible and the ITO has taken one view with which the PCIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue. Unless the view taken by ITO is unsustainable in law. 13. We note that flats not sold by assessee were its stock-in-trade and income arising on its sale is liable to be taxed as business income, therefore, issue raised by ld PCIT in his revision order under section 263 of the Act, is not tenable in law. In Page | 8 123/SRT/2020/AY.2015-16 Vidyabharti Co.op. Credit Society Ltd. any event, we note that the Assessing Officer has adopted one of the courses permissible in law and even if it has resulted in loss to the revenue, the said decision of the Assessing Officer cannot be treated as erroneous and prejudicial to the interest of the revenue as held by Hon’ble Supreme Court in Malabar Industries Ltd. vs. CIT [2000] 243 ITR 83(SC). Since the order of the Assessing Officer cannot be held to be erroneous as well as prejudicial to the interest of the revenue, in the facts and circumstances narrated above, the usurpation of jurisdiction exercising revisional jurisdiction by the Principal CIT is “null” in the eyes of law and, therefore, we are inclined to quash the very assumption of jurisdiction to invoke revisional jurisdiction u/s 263 by the Principal CIT. Therefore, we quash the order of the Principal CIT dated 29.03.2022, being ab initio void. 14. In the result, appeal filed by assessee is allowed. Order is pronounced in the open court on 06/10/2022 and placing the result on the Notice Board. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER lwjr /Surat Ǒदनांक/ Date: 06/10/2022 SAMANTA Copy of the Order forwarded to 1. The Assessee 2. The Respondent 3. The CIT(A) 4. CIT 5. DR/AR, ITAT, Surat 6. Guard File By Order // TRUE COPY // Assistant Registrar/Sr. PS/PS ITAT, Surat