ITAT allows appeal on deemed rental income, deletes addition as property was inhabitable during assessment year

ITAT Delhi dismissed assessee's objection regarding reopening of assessment under section 147, holding that AO properly disposed of objections per GKN Drive Shafts India Ltd. precedent, upholding CIT(A)'s findings. However, ITAT allowed assessee's appeal on deemed rental income addition, ruling that AO failed to establish property's habitability. Since property was repaired and made habitable only in subsequent assessment year and was inhabitable during relevant AY 2012-13, deemed rental income could not be taxed. Addition deleted.

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Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income Tax Act beyond four years.
2. Compliance with the procedure laid down by the Apex Court in GKN Driveshafts India Ltd. regarding objections to the reopening of assessment.
3. Legitimacy of the addition of deemed rental income under Section 23 of the Income Tax Act for inhabitable properties.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment Under Section 147 Beyond Four Years:
The core issue was whether the reopening of the assessment for AY 2012-13 was justified beyond the four-year limit. The assessee argued that there was no failure on their part to disclose all material facts necessary for assessment, as they had consistently filed returns with complete details. The assessment was reopened based on deemed rental income not disclosed in AY 2012-13, which was later disclosed in AY 2014-15. The Tribunal noted that the Assessing Officer (AO) had prima facie reasons to believe that the assessee had not fully disclosed all material facts, which justified the reopening. The Tribunal upheld the CIT(A)'s decision, affirming that the reopening was valid as the AO had sufficient grounds to believe income had escaped assessment.

2. Compliance with the Procedure Laid Down in GKN Driveshafts India Ltd.:
The assessee contended that the AO did not follow the procedure prescribed by the Apex Court in GKN Driveshafts India Ltd., which requires a speaking order on objections raised against the reopening notice. The AO disposed of the objections on 24.12.2019, but the assessee filed further objections on 26.12.2019. The Tribunal found that the AO had adhered to the procedure by disposing of the initial objections, thus complying with the requirements set by the Apex Court. Consequently, the Tribunal found no reason to overturn the CIT(A)'s findings on this ground.

3. Legitimacy of the Addition of Deemed Rental Income:
The addition of Rs. 15,54,000/- as deemed rental income under Section 23 was challenged on the basis that the properties were inhabitable. The assessee had provided evidence, including photographs, to demonstrate that the properties were not habitable during the relevant assessment year. The Tribunal referred to the decision of the Dispute Resolution Panel (DRP) for AY 2016-17, which had deleted similar additions, acknowledging that the property was not used for business purposes and was not habitable. The Tribunal concluded that merely because the assessee disclosed deemed rental income in AY 2014-15 did not imply the property was habitable in AY 2012-13. Therefore, the Tribunal directed the deletion of the addition, allowing this ground of appeal.

Conclusion:
The appeals for both AY 2012-13 and AY 2013-14 were partly allowed. The Tribunal upheld the reopening of the assessment but directed the deletion of the addition of deemed rental income, recognizing the non-habitable condition of the properties during the relevant assessment years. The order was pronounced on October 16, 2024.

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