2022 (9) TMI 597 - AT - Income Tax

Tribunal rejects Commissioner's order, emphasizing interest-free deposits exclusion in ALV calculation.

The tribunal set aside the Commissioner's order in favor of the assessee, dismissing the Revenue's appeal. It was held that the Commissioner's initiation ... Addition in lieu of rent received - rental income in the nature of interest on deposits received by the assessee from its tenant - notional interest on interest free deposits for the purpose of computing assessee’s rental income - HELD THAT:- It has come on record that this tribunals’ co-ordinate bench’s order in assessee’s case [2018 (12) TMI 1958 - ITAT PUNE] itself has examined the very issue on merits while deciding the same against the department (supra). That being the case, we find no merit in the Revenue’s vehement arguments seeking to revive the impugned addition representing the notional interest on interest free deposits for the purpose of computing assessee’s rental income. CIT(A) findings under challenge stand upheld therefore. ISSUES PRESENTED AND CONSIDERED 1. Whether the Commissioner's exercise of revisionary powers under section 263 of the Income Tax Act is valid where the revision was initiated on the basis of an audit objection and the assessing officer had adopted a view which is supported by law or is one of two possible views. 2. Whether notional interest on interest-free security deposits received from a tenant can be treated as rental income (annual letting value) for the purpose of assessment and whether such notional addition is permissible in computing rent for the relevant assessment year. 3. Whether, in the facts where the assessing officer did not make any addition for the issue in question in the assessment orders of the impugned and subsequent assessment years, the power under section 263 can be validly exercised to enhance assessment on account of notional interest on security deposits. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of exercise of power under section 263 when based on audit objection and when AO has taken one of two permissible views Legal framework: Section 263 confers supervisory jurisdiction on the Commissioner to call for and examine records of any proceeding and, if satisfied that an order passed by the Assessing Officer is erroneous and prejudicial to the interests of the Revenue, to revise that order after giving an opportunity of being heard. Precedent treatment: The Court's reasoning follows the established principle that both twin conditions must be satisfied for valid exercise of section 263 - (i) the order must be erroneous and (ii) the error must be prejudicial to Revenue. Where the assessing officer adopts one of two permissible views or a view sustainable in law, the order cannot be treated as erroneous merely because the Commissioner prefers a different view. The Tribunal treated prior authority holding that initiation of section 263 proceedings merely to give effect to an audit objection is not valid where the AO's view was sustainable. Interpretation and reasoning: The Tribunal examined the record and found that the revision was initiated on the basis of an audit objection and that the AO had adopted a view in assessment. In circumstances where the AO's view is permissible in law and where no addition had been made by the AO on the subject in the assessment orders for the relevant and subsequent years, the Tribunal concluded that the prerequisites for invoking section 263 were not satisfied. The Tribunal emphasized that the Commissioner cannot correct every mistake or prefer an alternative permissible view; section 263 requires the AO's order to be unsustainable in law or otherwise erroneous in a manner prejudicial to Revenue. Ratio vs. Obiter: Ratio - Both conditions of section 263 must coexist and the mere existence of an audit objection or a difference of opinion does not justify revision; initiation of revision solely to give effect to audit objection is impermissible if the AO's view is sustainable. Obiter - Remarks distinguishing certain case laws relied upon by Revenue as factually distinguishable. Conclusion: The exercise of revisionary powers under section 263 was invalid in the facts where the revision was founded on an audit objection and the AO's approach was a permissible legal view; therefore the section 263 order was set aside. Issue 2 - Treatment of notional interest on interest-free security deposits as rental income / determination of Annual Letting Value (A.L.V.) Legal framework: Principles governing computation of rental income and determination of Annual Letting Value require consideration of relevant factors that constitute realisable rental value; tax law permits inclusion of receipts that amount to rent in substance but notional calculations require legal justification. Precedent treatment: The Tribunal relied on higher court authority holding that notional rent on security deposits cannot be taken into account for determination of Annual Letting Value. The decision follows precedents where Bombay High Court rulings were applied to hold that security deposits (interest-free) do not give rise to notional rental income by way of presumed interest for A.L.V. computation. Interpretation and reasoning: The Tribunal noted that notional interest on security deposits was treated by the Revenue as an addition representing rental income. However, on legal authorities cited, such notional inclusion is not permissible for determining A.L.V. The Tribunal observed that identical issues in co-ordinate proceedings had been examined on merits and decided against the Revenue, and that the case laws relied upon by Revenue were distinguishable on facts. Given this, imputing notional interest to increase rental income was contrary to binding precedents applied to the facts. Ratio vs. Obiter: Ratio - Notional interest on interest-free security deposits cannot be treated as rental income for A.L.V. calculation; such notional addition is not sustainable where precedent holds otherwise. Obiter - Observations on factual distinguishability of Revenue's authorities. Conclusion: The notional interest addition representing rent was not warranted and the addition of the specified sum was deleted on merits following authoritative precedent. Issue 3 - Application of section 263 where AO made no addition in assessment orders for impugned and subsequent years Legal framework: Section 263 may be exercised only where the AO's order is both erroneous and prejudicial to Revenue; absence of contemporaneous adverse assessment entries for the same issue in the AO's orders for the year and subsequent years is relevant to whether prejudice or error exists. Precedent treatment: The Tribunal relied on co-ordinate Bench reasoning in the same taxpayer's subsequent assessment year where similar facts led to setting aside of the section 263 order; the view reinforces that consistent application by the AO across years and absence of addition undermine the case for section 263 revision. Interpretation and reasoning: The Tribunal found that the AO did not make any addition on the issue in the assessment order for the impugned year nor in later assessment orders for other years. The Commissioner's revision was therefore not demonstrated to correct an impermissible or unsustainable view taken by the AO. The Tribunal also noted absence of material from Revenue to show that the AO's view was erroneous in law or otherwise prejudicial, and that the revision was effectively being used to implement an audit objection rather than to remedy an unsustainable assessment. Ratio vs. Obiter: Ratio - Absence of any addition by the AO on the issue in the assessment orders for the impugned and subsequent years is a factor militating against valid exercise of section 263; where Revenue fails to demonstrate that the AO's view was unsustainable in law, revision is impermissible. Obiter - Reference to timing of assessment orders vis-à-vis the revisionary order. Conclusion: Because the AO had not made any addition on the issue in the assessment orders and Revenue did not establish that the AO's view was erroneous or prejudicial, the section 263 exercise was unjustified and the addition could not be sustained. Overall Disposition The Tribunal upheld the appellate authority's deletion of the notional interest addition and dismissed the Revenue's appeal, holding that the section 263 revision was not validly invoked and that notional interest on interest-free security deposits could not be treated as rental income for the purpose of determining Annual Letting Value in the circumstances of the case.