2023 (12) TMI 274 - AT - Income Tax

Tribunal Corrects Tax Error: Rental Income Not Business Income, Rs. 18,32,000/- Addition Deleted, Favoring Assessee.

The Tribunal allowed the appeal, overturning the CIT(A)'s order, which had erroneously classified rental income as business income and taxed it twice. The ... Enhancing Income from House Property under the head PGBP - rent received was offered for tax by the assessee under the head Income from House Property - Whether CIT (A) erred in not granting 30% deduction on the gross rent at the time of reducing the corresponding gross rental Income which was taxed under the head PGBP? - HELD THAT:- Prima facie on verification of the facts and evidences substantiating the claim, the total income as per the computation of income is Rs. 36,84,300/-. The Ld. AR demonstrated the Acknowledgement of ITR- 3 filed for A.Y 2020-2021 & A.Y 2021&22 along with the computation of income disclosing the rental income under “Income From house Property”. Further the Ld.AR highlighted on the Tax Audit report U/sec 44AB of the Act along with the Form. 3CB&CD in support of the Income from business and profession and the total income cannot exceed Rs. 38,69,300/-. Prima facie, we find there is no dispute on the disclosure of income and cannot be taxed twice and the revenue has been accepting consistent accounting system adopted by the assessee. Accordingly, we considering the facts and circumstances, set-aside the order of the CIT(A) on the disputed issue of sustaining the addition made by the CPC and direct the assessing officer to delete the addition and allow the grounds of appeal in favour of the assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether rental receipts disclosed and taxed under the head 'Income from House Property', after claiming deductions under section 24, can be recharacterised and enhanced as income from Business and Profession (PGBP) by CPC/AO leading to double taxation. 2. Whether, if rental receipts are treated as business income, the corresponding statutory deduction (30% or section 24 deduction as applicable) must be allowed while computing the income charged under PGBP. 3. Whether consistent accounting treatment and prior years' acceptance by the revenue preclude reopening/rectification action under section 154 which results in increased assessment on identical receipts. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Recharacterisation of rental receipts disclosed under 'Income from House Property' as PGBP (double taxation) Legal framework: Income-tax classifications for heads of income; return of income and computation under section 143(1); rectification under section 154; charging of income under appropriate head as per taxpayer's disclosure and books. Precedent Treatment: No specific judicial precedents were cited in the judgment. The Court relied upon documentary record (ITR, computation, tax audit reports) and accounting consistency rather than precedent. Interpretation and reasoning: The Court examined the ITR and computation where the assessee had separately disclosed 'Income from House Property' after claiming deduction under section 24 and had disclosed business & profession income and other sources. The Tribunal gave weight to the consistent accounting treatment evidenced in audited financial statements, tax audit report (Form 3CB/3CD), and prior-year acknowledgements. The Court held that when rental receipts have been specifically offered under the head 'Income from House Property' and accepted in earlier assessments, they cannot be taxed again by recharacterising them as business income without adequate justification. The Tribunal emphasized that the total income as per the assessee's computation (and earlier acceptance by revenue) could not be exceeded by unilateral enhancement at CPC/AO without addressing the disclosed classification and supporting documents. Ratio vs. Obiter: Ratio - Recharacterisation leading to double taxation is impermissible where the assessee has consistently and verifiably disclosed receipts as income from house property and claimed relevant statutory deduction; material documentary evidence supporting such disclosure binds assessment unless cogent grounds for reassessment/reclassification are shown. Obiter - Observations regarding the administrative role of CPC and general remarks on debatable issues were incidental. Conclusions: The Tribunal set aside the enhancement of Rs. 18,32,000 treated as business income by CPC/AO and directed deletion of that addition. The Court concluded that the addition amounted to double taxation of receipts already offered under 'Income from House Property'. (Cross-reference: Issue 3 on rectification/consistency.) Issue 2 - Allowability of corresponding deduction (30% or section 24) when rental income is taxed as PGBP Legal framework: Section 24 deductions are expressly available for income from house property; generally, when income is taxed under PGBP, different principles/deductions apply. The question arises whether the 30% deduction (or section 24) can be allowed if receipts are treated as PGBP. Precedent Treatment: No precedent was applied or distinguished on this point in the judgment; the decision turned on primary classification rather than separate legal authorities on cross-head deductions. Interpretation and reasoning: The Tribunal did not need to decide the abstract question of applying section 24 or a 30% deduction to PGBP because it found on facts that the receipts were properly disclosed and offered as income from house property and therefore should not have been reclassified as PGBP. The Court noted the appellant's plea that section 24 deductions had been claimed and accepted in the computation and in earlier years; accordingly, the necessity to entertain the alternative claim for a 30% deduction under business treatment became moot once the reclassification was set aside. Ratio vs. Obiter: Obiter - Remarks about 30% deduction are incidental since the factual conclusion was that the receipts are chargeable as house property income; thus specific ratio on allowance of section 24 versus 30% under PGBP was not laid down. Conclusions: As the Tribunal restored the classification to 'Income from House Property' with section 24 deduction already claimed in the return, there was no requirement to grant a separate 30% deduction in the context of PGBP. The relief granted was deletion of the addition rather than an express ruling on cross-head deductibility. Issue 3 - Effect of consistent accounting treatment and prior acceptance by revenue on rectification/enhancement under section 154 and assessment revisions Legal framework: Principles governing rectification under section 154, finality of assessments under section 143(1) where returns are processed, and reliance on audited accounts and tax audit reports (Form 3CB/3CD) showing consistent classification of income. Precedent Treatment: No authoritative precedent was invoked; the Tribunal relied on documentary consistency and the settled administrative expectation that material disclosures in ITR and audited accounts merit consideration before unilateral enhancement. Interpretation and reasoning: The Tribunal treated the documented, consistent disclosure of rental income in ITRs and audited statements for the relevant and preceding year as significant. The Court observed that the revenue had accepted the accounting system in earlier years and that the rectification action under section 154 which sustained the CPC addition lacked sufficient basis in the face of supporting records. The Tribunal considered the issue to be prima facie established on evidence (ITR acknowledgement, computation, Form 3CB/3CD, tax audit report) and concluded that the AO/CPC could not uphold enhancement without confronting this evidence and providing cogent justification for reclassification. Ratio vs. Obiter: Ratio - Where the taxpayer has consistently disclosed income under a particular head supported by audited financial statements and tax audit reports, and the return has been processed under section 143(1), a post-facto rectification/enhancement that results in double taxation must be set aside unless the revenue adduces cogent reasons to the contrary. Obiter - Broader administrative comments on debatable and ascertainment issues. Conclusions: The Tribunal set aside the CIT(A)'s partial confirmation of CPC's enhancement and directed the assessing officer to delete the addition made by CPC. The Court allowed the appeal, holding that consistent accounting treatment and prior acceptance were determinative on the facts to preclude the sustained reclassification and resultant increase in assessed income.