Revenue loses appeal on deemed rental income from joint development flats under equality principle

ITAT Bangalore dismissed Revenue's appeal regarding deemed rental income addition on flats acquired through joint development agreement. Court applied equality principle from Union of India v. Kaumudini Narayan Dalal, noting Revenue cannot selectively assess parties to same transaction when other co-owners weren't taxed similarly. Capital gains from flat sale were correctly treated as long-term based on 1960 land acquisition date, following consistency principle from Radhasoami Satsang case. However, plant and machinery rental income issue was remanded to AO for fresh examination due to computational discrepancies and unclear TDS treatment.

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Issues Involved:
1. Deletion of addition on account of deemed rental income.
2. Classification of capital gains as Long Term Capital Gain (LTCG) instead of Short Term Capital Gain (STCG).
3. Taxability of rental income from plant and machinery.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Deemed Rental Income:

The Revenue challenged the deletion of Rs. 1,18,01,752 as deemed rental income by the National Faceless Appeal Centre (NFAC). The Revenue argued that the NFAC erred in deleting the addition solely because no addition was made in the cases of the other two co-owners of the same property. The Revenue contended that the assessments of the three co-owners were completed in a faceless manner, and the omission of addition in the other cases could be due to lack of proper care and diligence, which cannot justify the deletion of the addition.

The assessee argued that the flats were acquired under a Joint Development Agreement (JDA) for sale and not for self-occupation, and the deemed rental income should not be assessed. The CIT(A) accepted the assessee's contention, stating that the flats were held for sale and not for self-occupation, and no material was brought on record by the AO to conclude otherwise. The CIT(A) relied on the judgment of the Hon'ble Mumbai Bench of the Tribunal in the case of Sachin R. Tendulkar v. DCIT [2018] 172 ITD 266 (Bom).

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue cannot adopt a pick-and-choose approach while assessing citizens, as it would violate Article 14 of the Constitution of India. The Tribunal also observed that the deemed rental annual value is not assessable for flats acquired for sale rather than self-occupation.

2. Classification of Capital Gains as Long Term Capital Gain (LTCG) Instead of Short Term Capital Gain (STCG):

The Revenue contended that the NFAC erred in treating the capital gains as LTCG instead of STCG. The AO had observed that the flats, which were claimed to be sold and on which the assessee offered LTCG, came into existence during the year when the occupancy certificate was received on 25.06.2019. Therefore, the AO treated the gain as STCG.

The assessee argued that the land component was acquired in 1960, and the rights in flats were accrued when the JDA was entered into on 15-12-2010 and 19.06.2013. The CIT(A) accepted the assessee's contention, stating that the land component was acquired long ago, and the rights in flats were accrued earlier. The CIT(A) also noted that in AYs 2014-15 and 2015-16, the department treated the gain as LTCG under similar facts, and therefore, the principle of consistency should apply.

The Tribunal upheld the CIT(A)'s decision, applying the principle of consistency as formulated by the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321.

3. Taxability of Rental Income from Plant and Machinery:

The AO had added Rs. 4,75,590 as rental income from plant and machinery under the head 'income from other sources' (IOS), based on the TDS deducted u/s 194I(a). The assessee clarified that the amount was for the rent of a flat, not plant and machinery, and was already included in the rental income declared. The CIT(A) accepted the assessee's contention, stating that the income should be taxed under the head 'income from house property,' and no separate addition was required.

The Tribunal observed discrepancies in the monthly rent and the total rent considered by the CIT(A). The Tribunal remitted the issue to the AO for re-examination, directing the AO to verify the correct amount of rent and the TDS deducted. If the TDS was deducted at 10% and the correct amount of rent is reconciled with Form 26AS, the income should be taxed as 'income from house property,' and no separate addition should be made.

Conclusion:

The Tribunal partly allowed the Revenue's appeal for statistical purposes, upholding the CIT(A)'s decisions on deemed rental income and classification of capital gains, while remitting the issue of rental income from plant and machinery to the AO for re-examination. The order was pronounced in the open Court on 30th July, 2024.

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