License fees from shopping complex premises qualify as house property income with 30% standard deduction under section 24(1)

ITAT Kolkata allowed the appeal, holding that license fees from commercial premises in a shopping complex should be assessed under house property income, not business income. The tribunal applied the principle from Radha Soami Satsang case that consistent treatment in earlier years should be maintained when fundamental aspects remain unchanged. The assessee was entitled to 30% standard deduction under section 24(1). Additionally, the tribunal quashed the assessment as the notice under section 143(2) was invalid for not specifying the type of scrutiny as required by CBDT instructions, violating procedural requirements and rendering subsequent proceedings void.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the income received by the assessee as license fees from shopkeepers in a commercial complex should be assessed under the head "Income from House Property" with standard deduction of 30% allowed under section 24(1) of the Income Tax Act, or under the head "Income from Business or Profession" as contended by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

- Whether the Assessing Officer's issuance of notice under section 143(2) of the Income Tax Act for the assessment year 2017-18 was valid, considering the notice did not specify the type of scrutiny (limited, complete, or compulsory manual) as mandated by the Central Board of Direct Taxes (CBDT) Instruction No. F. No. 225/157/2017/ITA-II dated 23-06-2017.

- Whether the interest charged under section 234B of the Income Tax Act is maintainable (though this issue was not adjudicated at this stage).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification of License Fees Income and Allowance of Standard Deduction

Relevant Legal Framework and Precedents: The primary legal provision involved is section 24(1) of the Income Tax Act, which allows a standard deduction of 30% on income from house property. The issue of classification of income as house property income or business income has been judicially examined in various precedents. The principle of consistency in classification across assessment years was emphasized in Radha Soami Satsang Vs CIT (1992) 193 ITR 321 (SC), where the Supreme Court held that while res judicata does not strictly apply to income tax proceedings, it is inappropriate to alter a fundamental factual position accepted in earlier years without challenge.

Court's Interpretation and Reasoning: The Tribunal noted that the assessee had consistently declared the license fees received from shopkeepers in the mall/warehouse as income from house property and claimed the statutory standard deduction of 30%. This treatment was accepted by the tax authorities in preceding years, including the assessment year 2014-15. The AO and CIT(A) had reclassified the income as business income on the ground that the activity amounted to tenancy or logistics business, thereby denying the standard deduction.

Key Evidence and Findings: The Tribunal examined the assessment orders from earlier years, which consistently accepted the income under the head house property and allowed the 30% deduction. The Tribunal also considered the nature of income as license fees from commercial premises, which prima facie falls under income from house property.

Application of Law to Facts: Applying the principle from Radha Soami Satsang, the Tribunal held that the fundamental factual position of the income being house property income should not be disturbed in subsequent years without any challenge in earlier years. The AO's and CIT(A)'s orders to reclassify the income as business income were therefore contrary to settled legal principles.

Treatment of Competing Arguments: The AO's argument that the activity constituted business was rejected on the ground that the income was license fees from letting out premises, a classic example of income from house property, and that the assessee's consistent treatment and acceptance by authorities in earlier years negated the AO's contention.

Conclusions: The Tribunal set aside the orders of the AO and CIT(A) on this issue and directed that the income be assessed under the head house property with allowance of the 30% standard deduction. Grounds 2, 3, and 4 were allowed accordingly.

Issue 2: Validity of Notice Issued under Section 143(2) for AY 2017-18

Relevant Legal Framework and Precedents: Section 143(2) of the Income Tax Act authorizes the AO to issue a notice for scrutiny assessment. The CBDT Instruction No. F. No. 225/157/2017/ITA-II dated 23-06-2017 mandates that such notices must specify the nature of scrutiny-limited scrutiny, complete scrutiny, or compulsory manual scrutiny-in one of three prescribed formats. The binding nature of CBDT circulars and instructions on tax authorities has been upheld by the Supreme Court, including in UCO Bank (supra), and the right of an assessee to raise legal issues at any appellate stage is supported by decisions in Jute Corporation of India Ltd. Vs CIT, National Thermal Power Co. Ltd v. CIT, and PCIT vs. Britannia Industries Ltd.

Court's Interpretation and Reasoning: The Tribunal found that the notice issued to the assessee on 09.08.2018 did not specify the type of scrutiny and was issued in a format inconsistent with the CBDT Instruction. The notice merely stated "Scrutiny (Computer Aided Scrutiny Selection)" without indicating whether it was limited, complete, or compulsory manual scrutiny, thus violating the prescribed formats.

Key Evidence and Findings: The Tribunal examined the notice and compared it with the formats prescribed by the CBDT. The notice was computer-generated and lacked the mandatory specification of scrutiny type. The Tribunal also relied on a coordinate Bench decision in Tapas Kumar Das Vs. ITO and Shib Nath Ghosh Vs. ITO, which held similar notices invalid for non-compliance with the CBDT instruction.

Application of Law to Facts: The Tribunal applied the principle that CBDT instructions issued under section 119 of the Income Tax Act are binding on the tax authorities and failure to comply renders the notice invalid. Consequently, all proceedings consequential to such invalid notice are void ab initio.

Treatment of Competing Arguments: The Revenue's contention that the notice's non-mention of scrutiny type would not invalidate it was rejected. The Tribunal emphasized the mandatory nature of the CBDT instruction and the binding effect of such circulars. The assessee's right to raise the issue at the appellate stage, even if not raised earlier, was upheld.

Conclusions: The Tribunal admitted the additional ground challenging the notice's validity and quashed the assessment order passed pursuant to the invalid notice. Other grounds on merit were left open for future adjudication if necessary. The additional ground was allowed.

Issue 3: Charging of Interest under Section 234B

This issue was raised but not adjudicated at this stage as it was consequential to the main issues decided.

3. SIGNIFICANT HOLDINGS

- "Though the doctrine of res judicata does not apply to Income Tax proceedings, it would not be appropriate to allow the position to be changed in a subsequent year, where a fundamental aspect permeating through different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order for the said years." (Radha Soami Satsang principle applied)

- "The notice issued u/s 143(2) of the Act which is not in the prescribed format as provided under the Act is an invalid notice and accordingly, all the subsequent proceedings thereto would be invalid and void ab initio."

- "The instruction issued by the CBDT are mandatory and binding on the Income tax authorities failing which the proceedings would be rendered as invalid."

- "The assessee is at liberty to raise any legal issue before any appellate authority for the first time even when the same has not been raised before the lower authorities."

- The Tribunal set aside the orders of the AO and CIT(A) on the classification of income issue and directed assessment under house property income head with 30% standard deduction allowed.

- The Tribunal quashed the assessment order for AY 2017-18 on the ground of invalid notice under section 143(2) and allowed the additional ground raised by the assessee.

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