2018 (11) TMI 127 - AT - Income Tax

Tribunal upholds Commissioner's decisions, invalidates assessment reopening, classifies rental income, allows interest deduction.

Dy. Commissioner of Income Tax, Circle–9 (2), Mumbai Versus M/s. Magnus Properties Pvt. Ltd.

Dy. Commissioner of Income Tax, Circle–9 (2), Mumbai Versus M/s. Magnus Properties Pvt. Ltd. - TMI Issues Involved:1. Validity of reopening the assessment under Section 147 of the Income Tax Act, 1961.2. Classification of income derived from leave and license fees as income from house property or business income.3. Allowance of the assessee’s claim of deduction under Section 24(b) of the Income Tax Act on account of interest on borrowed capital.Detailed Analysis:1. Validity of Reopening the Assessment under Section 147 of the Income Tax Act, 1961:The core issue in the appeals, except for the assessment year 2009-10, concerns whether the reopening of the assessment under Section 147 of the Act is valid. The assessee had originally filed its return of income, which was assessed under Section 143(3) of the Act. The Assessing Officer (AO) later reopened the assessment, believing that the leave and license fee should be assessed as business income rather than house property income. The Commissioner (Appeals) found that the AO had already examined this issue during the original assessment and concluded that reopening the assessment based on a mere change of opinion is legally unsustainable. The Tribunal agreed with this view, stating that the reopening of the assessment without any tangible material to suggest income had escaped assessment is impermissible. This conclusion aligns with judicial precedents, including the Supreme Court's decision in CIT v/s Kelvinator of India Ltd., [2010] 320 ITR 561 (SC).2. Classification of Income Derived from Leave and License Fees:The dispute centers on whether the income from leave and license fees should be classified as income from house property or business income. The AO argued that since the property was shown as stock-in-trade, the income should be treated as business income. However, the Commissioner (Appeals) and the Tribunal disagreed, noting that the primary business of the assessee is real estate development, not leasing property for rental income. The Tribunal emphasized that the accounting treatment in the books is not conclusive; what matters is the intention behind the income generation. The Tribunal cited various judicial precedents, including the Supreme Court's decisions in Chennai Properties and Investment Ltd. v/s CIT and Rayala Corporation v/s ACIT, to support the view that the rental income should be treated as income from house property. The Tribunal also noted that in the assessment year 2009-10, the AO had accepted the rental income as house property income, and the Department cannot take a different stand in other assessment years.3. Allowance of Deduction under Section 24(b) of the Income Tax Act:For the assessment year 2009-10, the issue involved the allowance of the assessee’s claim of deduction under Section 24(b) for interest on borrowed capital. The AO had disallowed the interest payment, arguing that the loan was not for the purchase or construction of the property but for working capital. The Commissioner (Appeals) found that the loan was indeed for construction purposes and that the outstanding loan was converted into a new loan, not a fresh one. The Tribunal upheld this view, stating that the interest on the loan for construction purposes is allowable under Section 24(b). Additionally, the Tribunal agreed that pre-payment charges related to the loan should be considered part of the cost of the loan and are therefore deductible under Section 24(b).Conclusion:All the appeals by the Revenue were dismissed. The Tribunal upheld the Commissioner (Appeals)' decisions that the reopening of the assessment under Section 147 was invalid, the rental income should be classified as income from house property, and the interest on borrowed capital for construction purposes is deductible under Section 24(b). The Tribunal emphasized the importance of the assessee's intention and the consistency of the Department's stance across different assessment years.