Bangalore ITAT : No Addition in Unabated 153A Assessments Without True ‘Incriminating Material’ – Mere Change of Head of Income Not Permissible

Sarvana Prasad Vs DCIT (ITAT Bangalore)

Bangalore ITAT : No Addition in Unabated 153A Assessments Without True ‘Incriminating Material’ – Mere Change of Head of Income Not Permissible

The Bangalore ITAT held that in respect of completed/unabated assessments, additions under section 153A can be made only on the basis of real incriminating material unearthed during search. The Tribunal observed that a mere change of opinion regarding the head of income or legal characterization of already disclosed transactions does not amount to incriminating material. Accordingly, additions made by treating multiplex lease rental income as “Income from House Property” instead of “Business Income” were deleted for AYs 2013-14 to 2016-17.

The ITAT explained that the multiplex receipts were already disclosed in regular books and consistently offered as business income. The lease agreements found during search merely evidenced existing disclosed transactions and did not reveal any undisclosed income, suppression or hidden asset. Therefore, the Tribunal held that section 153A could not be used as a tool for routine review or reclassification of completed assessments in absence of incriminating material, following the Supreme Court ruling in Abhisar Buildwell Pvt. Ltd..

On merits also, the Tribunal ruled in favour of the assessee and held that the multiplex income constituted business income and not house property income. It noted that the assessee had commercially exploited a specialized multiplex asset through structured arrangements, selective leasing of portions, maintenance and operational involvement. The ITAT distinguished the Karnataka High Court ruling in Bhoopalam Commercial Complex, observing that the present case involved a complex commercial arrangement and not mere passive letting of a building. The Tribunal emphasized that fixed periodic receipts alone do not convert commercial exploitation of a business asset into house property income.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

This set of 6 appeals filed at the instance of the assessee is directed against the common order passed under section 250 of the Income Tax, Act 1961 (hereafter-the Act) by the learned Commissioner of Income Tax-Appeal (hereafter the learned CIT(A)) pertaining to Assessment Years 2013-14 to 2018-19.

2. The majority of grounds of appeal raised by the assessee are common across the A.Ys. 2013-14 to 2018-19. Accordingly, first we take up assessee’s appeal in ITA No. 2799/Bang/2025 pertaining to A.Y. 2013­14 as lead case.

3. The Ground Nos. 1, 2, 8 & 9 of the assessee’s appeal are general grounds which do not require any separate and independent adjudication. Therefore, the same are dismissed as infructuous.

4. Likewise, the Ground No. 7 of the assessee’s appeal pertains to levy of interest under section 234A, 234B, 234C of the Act which is consequential in nature. Hence, the same does not require any separate and independent adjudication. Therefore, the same is dismissed as infructuous.

5. The issue raised by the assessee through Ground Nos. 3(a) and 3(b) of the appeal pertains to validity or legality of the search proceedings under section 132 of the Act.

6. At the outset, we note the learned AR for the assessee at the time of hearing before us submitted that the assessee is not willing to press the issue of validity of the search at this stage. Hence, the ground Nos. 3(a) and 3(b) of the assessee’s appeal are hereby dismissed as not pressed.

7. The next issue raised by the assessee through Ground No. 3(c) is that no incriminating material was found during the search operation, therefore in absence of incriminating material, no addition to total income of the assessee can be made.

8. The facts in brief are that the assessee, an individual drawing salary income from M/s Innovative Studios Pvt Ltd (ISPL) & from M/s Innovative Leisure and Entertainment Pvt. Ltd. (ILEPL). Further, the assessee is also showing business income on account of rent received from letting out “Innovative Multiplex Complex” and from running of canteen of Innovative Multiplex.

9. The assessee was subject to search proceedings under section 132 of the Act dated 16^th November 2017. During the search proceeding at office premises of the innovative film city, a lose sheet marked as page 23 to 24 of annexure A/IFC/2017, showing payment made to one Shri K Manju in cash as well as through bank was found and seized.

9.1 The impugned sheet was confronted to the assessee while recording his statement under section 132(4) of the Act. The assessee in reply stated that he in his individual capacity has made payment of Rs. 54 lakhs including 30 lakhs in cash to Shri K Manju who is well known film producer against the amount earlier received by him through cheque. The assessee voluntary agreed to offer the same as income as unexplained money for the reason that he was unable to recollect the sources of such cash payment. However, the same was not offered to tax in the return filed in response to the notice issued under section 153A of the Act.

9.2 During the assessment proceedings, the assessee submitted that in the year under consideration he has business receipt of Rs. 28,21,949/-which is mainly from canteen sale at innovative multiplex. The impugned cash payment of Rs. 30 Lakhs to Shri K Manju was from the said business collection which has already been offered to tax.

9.3 But the explanation was not accepted by the AO for the reason that the assessee has not provided supporting books such as cash book and cash flow to support the claim that amount was paid out of business receipt. Hence, the AO treated the impugned cash payment of Rs. 30 Lakh as unexplained money under section 69A of the Act.

9.4 Further during the search at the residence of the assessee, a copy of sublease agreement between assessee and Suresh Production was also found with respect of Innovative multiplex. The sublease rental received by the assessee was shown business receipt and after claiming certain expenditure, business income was offered. The AO was of the opinion that as per the ruling of the Hon’ble Karnataka High Court in the case of CIT vs. Bhoopalam Commercial Complex & Industries (P.) Ltd. reported in [2003] 262 ITR 517 (Karnataka), the rent received from leasing out of building or commercial complex constructed on leasehold property is liable to be taxed as income from house property. Hence, the AO brought the same under the head income from house property and made addition to the total income after providing standard deduction to the assessee.

10. Being aggrieved, the assessee preferred an appeal before the learned CIT(A).

11. The assessee, before the learned CIT(A), submitted that there was no incriminating material found in respect of assessment year under consideration. The document found in relation to repayment of loan to Shri K Manju was in respect of receipt of loan through banking channel and receipt of loan is duly recorded in his books of accounts. The assessee also contended that the payment made should be telescoped with the income already offered to tax in the year under consideration. Therefore, there is no incriminating material found during the course of the search. Accordingly, no addition is warranted in the assessment under section 153A of the Act for the year which is a case of unabated/completed assessment year.

11.1 However, the learned CIT(A) rejected the assessee’s argument by holding that loose sheet found during the search in relation to cash payment to Shri K Manju is incriminating material. On merit also, the learned CIT(A) confirmed the addition made by the AO in the absence supporting evidence.

12. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.

13. The learned AR before us submitted that the impugned assessment i.e. the AY 2013-14 was unabated assessment as on the date of search conducted on 16.11.2017. It was submitted that the time limit for issuance of notice u/s 143(2) for the relevant year had already expired prior to the date of search and, therefore, the completed assessments could not be disturbed in the absence of any incriminating material found during the course of search. In support of the said proposition, reliance was placed on the decision of the Hon’ble Supreme Court in the case of “Abhisar Buildwell Pvt. Ltd. reported in 149 com 399.

13.1 The learned AR further submitted that though certain documents were seized during the course of search, the same did not belong to the assessee in his individual capacity. It was contended that the seized ledger extracts merely reflected transactions undertaken on behalf of the group companies in which the assessee was a director. The assessee, in the course of day-to-day functioning of the group concerns, had only facilitated payments to vendors, associate concerns and other parties. The cash payments reflected in the seized documents were stated to be part of regular business transactions of the group entities and were alongside payments made through normal banking channels. It was argued that the Revenue itself had accepted the corresponding cheque transactions undertaken by the companies and, therefore, selectively treating only cash repayments as unexplained in the hands of the assessee was impermissible.

13.2 The learned AR submitted that the genuineness of the parties and transactions was never doubted by the Revenue authorities. According to him, once the loan transactions and repayments through banking channels by the group companies were accepted as genuine, the related cash payments to the very same parties could not be isolated and taxed in the personal hands of the assessee. Therefore, the seized material neither represented undisclosed income of the assessee nor constituted incriminating material relatable to the completed assessments.

13.3 On the issue relating to change of head of income, the learned AR submitted that the assessee had consistently offered income from running and maintaining the multiplex as business income in earlier years and the same had been accepted by the Department. It was submitted that the assessee was not merely letting out the premises but was actively involved in maintaining and managing the multiplex facility, including deployment of manpower, security, upkeep and other operational responsibilities necessary for smooth functioning of the cinema complex. The learned AR contended that the Revenue, without there being any incriminating material unearthed during the course of search, merely changed the head of income from “business income” to “income from house property” with a view to deny business expenditure and create additional tax demand.

13.4 The learned AR therefore submitted that in the absence of any incriminating material pertaining to the concluded assessment years, no additions could have been made u/s 153A of the Act and the assessments deserved to be quashed on legal grounds itself.

14. The learned DR, on the other hand, strongly supported the orders of the AO as well as the learned CIT(A). He submitted that the additions made in the assessment proceedings were not arbitrary additions but were based on documents and materials found during the course of search coupled with the failure of the assessee to satisfactorily explain the discrepancies noticed therein.

14.1 The learned DR submitted that during the course of search, specific loose sheets reflecting cash as well as cheque payments made to Shri K. Manju were found and seized from the premises connected with the assessee. The assessee himself, in the statement recorded u/s 132(4) of the Act, admitted having made cash payment of Rs. 30 lakh to Shri K. Manju and also voluntarily agreed to offer the same as unexplained income since he was unable to explain the source of such payment. According to the learned DR, once the assessee himself admitted the transaction during the course of search, the seized material clearly assumes the character of incriminating material.

14.2 The learned DR further submitted that though the assessee subsequently attempted to explain that the cash payments were made out of business collections or on behalf of group concerns, no supporting books of account, cash book, cash flow statement or corroborative evidence was furnished before the AO to substantiate such explanation. Therefore, the AO was justified in treating the impugned cash payment as unexplained money u/s 69A of the Act.

14.3 On the issue of incriminating material, the learned DR submitted that the expression “incriminating material” cannot be interpreted in a narrow or technical manner. According to him, any material found during the course of search which exposes undisclosed transactions, inconsistencies or unexplained financial dealings would constitute incriminating material. It was argued that the seized loose sheet directly revealed cash transactions which were not properly explained by the assessee and therefore had clear evidentiary value for making additions u/s 153A of the Act.

14.4 The learned DR further submitted that the learned CIT(A) has rightly appreciated both factual and legal aspects of the issue. He submitted that the learned CIT(A) correctly observed that the AO had examined the financial transactions, nature of receipts and explanations furnished by the assessee and the additions arose from discrepancies and inconsistencies emerging from the seized material and surrounding facts. Therefore, according to the learned DR, the additions were fully supported by material available on record and were within the scope of assessment contemplated u/s 153A of the Act.

14.5 The learned DR also submitted that the decision of the Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt. Ltd. does not support the assessee’s case in the manner sought to be canvassed. According to him, the Hon’ble Supreme Court has held that additions in respect of completed assessments should be linked to incriminating material and in the present case such incriminating material was in fact found during the course of search in the form of seized loose sheets and sub-lease agreement. Therefore, the jurisdiction exercised by the AO u/s 153A of the Act was fully valid.

14.6 On the issue relating to sub-lease rental income, the learned DR submitted that the copy of sub-lease agreement found during search clearly demonstrated the true nature of the receipts earned by the assessee. According to him, the assessee had wrongly offered rental income under the head “business income” though the receipts were in the nature of rental income assessable under the head “income from house property” in view of the judgment of the Hon’ble Karnataka High Court in the case of Bhoopalam Commercial Complex & Industries (P.) Ltd. Therefore, the AO was justified in recharacterizing the income under the correct head while framing assessment u/s 153A of the Act.

14.7 Accordingly, the learned DR submitted that the learned CIT(A) had correctly upheld the additions made by the AO and the grounds raised by the assessee challenging the additions for want of incriminating material deserved to be rejected.

15. We have heard the rival contention of both the parties and perused the materials available on record. The short issue arising for our consideration is whether any incriminating material was found during the course of search so as to justify the additions made in the assessment framed u/s 153A of the Act for AY 2013-14, which admittedly is an unabated/completed assessment year.

15.1 At the outset, we note that it is a settled position of law that in the case of completed or unabated assessments, the scope of assessment u/s 153A of the Act is limited only to additions based on incriminating material found during the course of search. The Hon’ble Supreme Court in the case of Abhisar Buildwell Pvt. Ltd. has held that where assessments have attained finality prior to the date of search, no addition can be made in absence of incriminating material unearthed during the search proceedings. The rationale behind such principal is that section 153A of the Act is not intended to provide a fresh opportunity to review completed assessments in a routine manner. The completed assessment can be interfered with only when the search results in discovery of material which prima facie reveals undisclosed income not already disclosed or examined in the regular course of assessment proceedings.

15.2 Incriminating material, in our considered opinion, means material which has a live nexus with undisclosed income of the assessee, and which reveals something contrary to or outside the regular books of account already maintained by the assessee. Mere existence of a document, without demonstrating undisclosed income embedded therein, cannot automatically partake the character of incriminating material. Similarly, where the transactions reflected in the seized material are otherwise explained, recorded, or are merely part of accounted business dealings, such material loses the character of incriminating material for the purpose of completed assessments.

15.3 In the present case, the document relied upon by the Revenue is a loose sheet marked as pages 23 to 24 of Annexure A/IFC/2017 found during the course of search at Innovative Film City premises, reflecting certain payments made to Shri K. Manju through cash as well as banking channels. The Revenue treated the cash component of Rs.30 lakh as unexplained money u/s 69A of the Act in the hands of the assessee.

15.4 However, on careful examination of the materials available on record, we note that the impugned document itself contains details of both cheque payments and cash payments made to the very same person. The existence and genuineness of Shri K. Manju as recipient is not disputed by the Revenue. Further, the cheque transactions forming part of the same document were admittedly accepted by the Department as genuine transactions in the hands of the group concerned except the cash payment. The assessee has consistently contended that the transactions reflected in the loose sheet pertained to business dealings of the group concerns and not personal dealings of the assessee in his individual capacity. The assessee was admittedly drawing salary from the group concerns and was actively involved in day-to-day management of the group entities.

15.5 We also find force in the contention of the learned AR that the Revenue cannot selectively accept the cheque portion of the same transaction as genuine business transaction while treating only the cash component as personal unexplained money in the hands of the assessee without bringing any supporting evidence on record. The material available before us does not indicate that the impugned loose sheet belonged exclusively to the assessee in his individual capacity. On the contrary, the surrounding facts suggest that the document related to transactions of the group concerns in which the assessee was involved in managerial capacity.

15.6 Therefore, considering the totality of facts and circumstances of the case, we are of the considered view that the loose sheet found during the course of search showing cash and bank payments to Shri K. Manju cannot be regarded as incriminating material qua the assessee for the purpose of making addition in an unabated assessment framed u/s 153A of the Act. Once the very foundation of incriminating material fails, the addition made in the completed assessment year cannot be sustained in law. Accordingly, the addition made on the basis of such loose sheet is liable to be deleted.

15.7 We further note that the Revenue has also relied upon the copy of sub-lease agreement found during the course of search relating to leasing of the Innovative Multiplex Complex. Based on the said agreement, the AO merely changed the head of income from “business income” to “income from house property” by placing reliance on the decision of the Hon’ble Karnataka High Court in the case of Bhoopalam Commercial Complex & Industries (P.) Ltd.

15.8 However, in our considered opinion, the copy of sub-lease agreement found during the course of search cannot be regarded as incriminating material for the purpose of section 153A of the Act. It is an undisputed fact that the rental receipts arising from the multiplex property were duly recorded in the regular books of accounts and consistently offered to tax by the assessee, though under the head “business income”. The existence of the lease arrangement was therefore never concealed from the Department. No unaccounted receipt, undisclosed asset or suppression of income was discovered from the said agreement during the course of search.

15.9 Merely because the AO subsequently formed an opinion that such income ought to have been assessed under a different head, namely “income from house property”, the same would not convert an otherwise disclosed and recorded transaction into incriminating material. A change in legal characterization or head of income is fundamentally different from detection of undisclosed income during search. Section 153A of the Act in case of unabated assessments permits addition only on the basis of incriminating material unearthed during search and not on account of a mere change of opinion regarding taxability or head of income of already disclosed receipts.

15.10 Accordingly, we hold that the copy of sub-lease agreement found during the course of search does not constitute incriminating material within the meaning of section 153A of the Act and therefore no addition or recharacterization of income could have been made in respect of completed/unabated assessment year on the basis of such document. Accordingly, the grounds of appeal raised by the assessee in Ground No. 3(c) are hereby allowed.

15.11 As we have deleted the addition made by the AO and confirmed by the learned ld. CIT-A on legal grounds, we do not find it necessary to deal with issue raised on merit through Ground Nos. 4, 5 & 6 of the assessee’s appeal. Hence, these grounds are dismissed as infructuous.

16. In the result, appeal of the assessee is hereby partly allowed.

Coming to ITA Nos. 2800, 2801 & 2802/Bang/2025 pertaining to A.Ys. 2014-15, 2015-16 and 2016-17.

17. At the outset we note that all these years being A.Ys. 2014-15, 2015-16 and 2016-17 are unabated assessment years and the sole addition made by the AO is on account of recharacterization of income received from sub-leasing of Innovative Multiplex from “business income” to “income from house property”.

18. In this regard, we note that the facts and issues involved in these years are identical to the issue already adjudicated by us while deciding the assessee’s appeal in ITA No. 2799/Bang/2025 for AY 2013-14. In the said year, we have already held that the copy of sub-lease agreement found during the course of search does not constitute incriminating material within the meaning of section 153A of the Act. We have also held that the rental receipts from multiplex property were duly recorded in the regular books of accounts and consistently offered to tax by the assessee, though under the head “business income”. Therefore, merely because the AO formed a different opinion regarding the correct head of income, the same would not partake the character of incriminating material found during the course of search. Therefore, in the absence of any incriminating material unearthed during the course of search relatable to these years, no addition could have been made while framing assessment u/s 153A of the Act.

18.1 Accordingly, respectfully following our findings rendered for AY 2013-14, we hold that the additions made by the AO in AYs 2014-15, 2015-16 and 2016-17 by changing the head of income from business income to income from house property are unsustainable in law and liable to be deleted. Therefore, the grounds raised by the assessee on this issue for these assessment years AYs 2014-15, 2015-16 and 2016-17 are allowed.

18.2 As we have deleted the addition made by the AO and confirmed by the learned CIT-A on legal grounds, we do not find it necessary to deal with issue raised on merit. Similarly, other grounds being general or consequential in nature are dismissed as infructuous.

19. In the result, all the appeal filed by the assessee for A.Ys. 2014-15, 2015-16 and 2016-17 are hereby partly allowed.

Coming to ITA No. 2803/Bang/2025 pertaining to A.Y. 2017-18

20. The Ground Nos. 1, 2, 7 & 8 of the assessee’s appeal are general ground and the same do not require any separate and independent adjudication.

21. Likewise, Ground No. 6 of the assessee’s appeal pertains to levy of interest under section 234A, 234B, 234C of the Act which is consequential in nature. Hence, the same do not require any separate adjudication.

22. The issue raised by the assessee through Ground Nos. 3(a) and 3(b) of the appeal pertains to validity or legality of the search proceeding under section 132 of the Act.

23. At the outset, we note the learned AR for the assessee at the time of hearing before us submitted that the assessee is not willing to press the issue of validity of the search at this stage. Hence, Ground Nos. 3(a) and 3(b) of the assessee’s appeal are hereby dismissed as not pressed.

24. The next issue raised by the assessee through Ground No. 3(c) is that no incriminating material was found during the search, therefore in absence of incriminating materials, no addition to total income of the assessee can be made.

On careful examination of facts, we note that the search in the present case was conducted on 16.11.2017. As on the date of search, admittedly the assessee had not furnished the return of income u/s 139 of the Act for AY 2017-18. Therefore, the assessment proceedings for the year under consideration had not attained finality and the year falls within the category of abated assessment for the purpose of section 153A of the Act. It is a settled position of law that in case of abated assessments, the AO acquires jurisdiction to make a fresh assessment of total income, and such power is not confined only to incriminating materials found during the course of search with respect to abated assessment years. The restriction relating to incriminating material applies primarily in the case of completed/unabated assessments where assessment proceedings had already attained finality prior to the date of search.

24.1 Therefore, in the present case, since AY 2017-18 is an abated assessment year, the assessee cannot succeed on the legal grounds that no incriminating material was found during the course of search. Accordingly, the legal ground raised by the assessee challenging the jurisdiction of addition for want of incriminating material is rejected for AY 2017-18. However, the assessee would still be entitled to contest the additions on merits in accordance with law. Hence, the ground of appeal of the assessee is hereby dismissed.

25. The next issue raised by the assessee through Ground Nos. 4 & 5 of the appeal is pertaining to the merit of addition made by changing the head of lease rental income from business to House property.

The facts in brief are that the assessee in the year 2001 has taken vacant land property measuring 1 acre 10 guntas situated at Munnekolala village, Varthur Jobli, Bangalore South bearing survey No. 90/A on 27 years lease from one Sri Naryan Reddy.

26. Subsequently the assessee in the year 2002 sub-leased the impugned land property to M/s Innovative Themes Pvt Ltd (in which assessee is the key person) for a period of 10 years vide agreement dated 18^th December 2002. As per the sub-lease agreement, it was agreed between the parties that the sub lessee shall pay annual rent of Rs. 60,000/- and utilize the schedule property for development/construction of “multiplex complex”. The sub-lessee was also allowed to mortgage the lease hold right for the purpose of borrowing from Karnataka State Financial Corporation. Accordingly, the sub-lessee company M/s Innovative Themes Pvt Ltd (hereafter- ITPL) borrowed Rs. 1.5 crore from KSFC in the year 2007 by mortgaging the lease hold for the purpose of construction of Multiplex Complex in the name and style of “Innovative Multiplex”.

26.1 Subsequently the sub-lessee M/s ITPL entered into lease agreement with Suresh Productions Entertainment Ltd vide agreement dated 3^rd June 2010. As per the agreement, M/s ITPL leased out certain portion of Innovative multiplex for 20 years to M/s Suresh Production which are detailed as under:

–  One cellar in underground

–  Entire commercial space on ground floor

–  4 screens of cinema theatre situated at Ground floor and 1^st floor

–  And office space equally shared by the ITPL and Suresh Production.

26.2 A monthly rent of Rs. 8,01,000/- to be enhanced by 5% on expiry of every 3 years period was agreed for above lease of portion of Innovative multiplex.

26.3 However, the sub-lease agreement between the assessee and M/s ITPL expired in the year 2011 and there was no further extension. Hence M/s ITPL surrendered the sub-lease right for the scheduled property and handed over the same back to the assessee vide agreement dated 2nd November 2011. On surrender of sub-lease agreement, the assessee became the owner of the innovative multiplex. The assessee subsequently leased out to M/s Suresh Production for part of the property which was leased out by M/s ITPL earlier. Due to change in sub-lease agreement and ownership of the multiplex, M/s Suresh Production and assessee made verbal understanding that the monthly rental as agreed vide agreement dated 3^rd June 2010 shall be paid to the assessee instead of M/s ITPL. Accordingly, M/s Suresh Production paid rent amount to the assessee during the period starting from Nov 2011 to Feb-2017 on the basis of verbal understanding. A fresh agreement between assessee and M/s Suresh Production was entered into as on 8^th March 2017 (renewed earlier understanding) with enhanced rental amount.

26.4 The rental income received by the assessee on leasing of commercial space, cinema theatre screen and other space as mentioned in preceding para were treated as business income by the assessee. The return filed by the assessee for A.Y. 2011-12 to 2016-17 was accepted by the department without any variation although no assessment proceedings were carried out under section 143(3) of the Act.

26.5 However, during the search proceedings, copy of agreement dated 8th March 2017 was found and accordingly the AO in the proceeding under section 153A of the Act came to know about of receipt of rental income on leasing of certain portion of multiplex constructed or developed on leasehold land property. The AO was of the opinion that rent received from leasing of the commercial space and cinema theatre and other space was required to be taxed as income from house property instead of business receipt as offered by the assessee. The AO in holding so also referred to the decision of Hon’ble Karnataka High Court in the case of CIT vs. Bhoopalam Commercial Complex reported in 262 ITR 517. Accordingly, the AO computed the income under the head house property on annual rental income after providing standard deduction at Rs. 70,35,000/- and added the same to the total income of the assessee.

27. The aggrieved assessee preferred an appeal before the learned CIT(A).

28. The assessee before the learned CIT(A) submitted that he has taken land property belonging to one Sri Narayna Reddy on lease for 27 years with the intention to run business of multiplex. Accordingly, multiplex building was constructed on the leasehold property. However, instead of running the business on own, the cinema screen theatre along with certain other commercial space was let out. Therefore, the income arising from the assets acquired or developed for business purposes should be treated as business receipt. It was also contended that the land on which the property being multiplex was constructed is not owned by the assessee. Therefore, the construction on the impugned land cannot be said to be owned by the assessee and accordingly income cannot be brought as income from house property. The assessee further submitted that the multiplex constructed on the lease hold land was in relation to entertainment industry and he has incurred expenses for maintaining and operating the same. The income over the expenses was offered as business income year after year. The lease rent received was subject to TDS therefore the revenue was aware regarding the nature of receipt and line of the business activity of the assessee.

28.1 However, the learned CIT(A) dismissed the assessee’s ground and confirmed the addition made by the AO by changing the head of lease rental received by the assessee. The relevant findings of the learned CIT(A) are extracted as under:

7.10 The factual position is that the appellant took the property on lease from Narayan Reddy and further sub let the same to Innovative Themes of which he is the Managing Director. This company constructed the Multiplex and gave the theatres and some commercial space on lease to Suresh Productions. After the loan taken from KSFC was closed, the property was reconveyed to the appellant by Innovative themes Pvt Ltd. For the first 10 years, the rent from this property was reflected in the books of M/s ITPL. After the closure of loan and reconveyance, the rental receipts were being offered by the appellant in his individual capacity although the old lease agreement between M/s ITPL and Suresh Productions was not renewed or redrafted. The fresh lease agreement between the appellant and Suresh Production was signed in 2017 which was found and seized during the search proceedings. The appellant was paying lease rental to Narayan Reddy and receiving rentals from Suresh Productions. From the Financials submitted before the undersigned, the appellant has accounted for the rents received from Suresh Productions at Rs 96.12 lakhs and claimed certain expenses like rent paid and salaries, repairs and maintenance and offered a net income of Rs 28,21,949/- for the A.Y.2013-14.

7.11 The moot question here is not whether the appellant is the owner of the property or not. It is whether it is the business of the appellant to lease out or rent out property. The dominant intention of the appellant, the tenure of the lease, the nature of the activities performed by the appellant after leasing the property and the control and management of the property are certain factors that determine whether the lease rentals constitute IFHP or PGBP.

7.12 The courts have given contrary judgements on this issue as on one hand it was considered that there is, “no difference as to whether the property constitutes stock-in-trade of a business or that it is the business of assessee to let out house properties or rooms” and on the other hand it was considered that there exists a difference in both the properties. Therefore, there raises a question that whether the rental income generated from house property be charged as Income from House Property or as Business Income. Some such cases are discussed as under:

“In East India Housing and Land Development Trust Ltd. v. CIT, a company was formed with the purpose to develop immovable properties and construct markets and stalls. The company purchased a land in Calcutta and developed stalls for market purposes. The assessee argued that the income earned from letting out the shops should be considered as a Business Income as the object of the company was to commercialize the space. However, the department contended that the income must be charged under IFHP. It was held by the court that, if a company derives income from shops and stalls it shall fall under the scope of IFHP. The mere fact that a company was formed with the purpose of developing and setting up stalls shall not change the nature and character of the income received. It was opined by the court that, “a company which has been incorporated with the object of promoting and developing markets was assessable under Section 22 and not subjected to Section 28 with regard to the rental income of market shops and stalls owned by it”.”

7.13 In Keyaram Hotels (P.) Ltd. v. Dy. CIT, it was held that, if there the income is earned by the assessee by leasing out an immovable property but there is no commercial activity involved, it shall be considered as IFHP.

7.14 The Supreme Court in Chennai Properties & Investment Ltd. v. CIT laid down certain factors which are to be borne in mind while creating a charge over the income considered as income from house property:

• • The “Dominant Intention” of the assessee to let out the property is important and relevant i.e. whether the assessee has the intention to let out the property merely as a house or the property is considered as a specialized commercial asset.
  • The true nature of the transaction will determine whether the income is a business income or income from house property. The books of accounts, charter documents such as memorandum of association and articles of association or other entries in the business documents shall not determine the nature of income.

• • Another point of discussion is whether the transaction of letting out or sub­letting of the property is a part of the business operations of the assessee. In case if the transaction is a part of the trading and business operation of the assessee, then the income shall be considered under the ambit of business income.

7.15 In Rayala Corporation Ltd. v. Asstt. CIT, the assessee company was a private company and had a house property, which was let out and earned a rental income from the premise. The main issue before the court was that, whether the income so received should be taxed under the head “Income from House Property” or “Profit and gains of business or profession”. The reason for which the aforestated issue has arisen is that though the assessee is having the house property and is receiving income by way of rent, the case of the assessee is that the assessee company is in business of renting its properties and is receiving rent as its business income, the said income should be taxed under the Head “Profits and gains of business or profession” whereas the case of the Revenue is that as the income is arising from House Property, the said income must be taxed under the head “Income from House Property”.

7.16 In Raj Dadarkar & Associates v. Asstt. CIT, the Maharashtra Housing and Developing Authority was engaged in construction of buildings. The market space was auctioned on a monthly license to the municipal market by the market department. The assessee was also a participant in the auction to acquire the “Right to conduct market on the market portion”. The object of the assessee company was to develop a premise as market, and for the said purpose, they leased out the property to a partnership for a lease of more than 12 years to develop such as a market. The object clause of the memorandum of association stated that the entity was to take the property on lease, develop and then let it out to retailers. The issue before the court was that, “whether this kind of income is IFHP or PGBP”.

7.17 It was held by the court that, “Merely because there is an entry in the object clause of the business showing a particular object, would not be the determinative factor to arrive at a conclusion that the income is to be treated as income from business. Such a question would depend upon the circumstances of each case. This Court while holding that the income shall be treated as income from the house property, rested its decision in the context of the main objective of the company and took note of the fact that letting out of the property was not the object of the company at all. The Court was therefore, of the opinion that the character of that income which was from the house property had not altered because it was received by the company formed with the object of developing and setting up properties. Hence it was held that, the income in question for assessment is income from house property and not income from business.”

7.18 In the recent judgement of Dy. CIT v. Cache Properties (P.) Ltd., the assessee had a business of “infrastructure development and leasing out of commercial spaces”. The assessee claimed to create a charge over the income under the head IFHP whereas it was contended by the department that the income must be subjected to charge under PGBP. The Assessing Officer was of the opinion that the main intent of the assessee was to commercially exploit the property by renting it out and the property was let out along with certain ancillary services being provided such as car parking and electricity supply. 7.19 The court opined that merely letting out of property as a commercial complex shall not suffice to create a charge over the rental income under the head “Business Income”. A four-fold test has to be applied which includes, “tenure of lease, objects of the company, intention of the company and the services provided by the assessee after letting out of the property”. The court accepted that the rental income must be assessed as IFHP as the “assessee intention is to enjoy the rental income on a long-term basis by leasing out the premises and not to exploit the same commercially on short term basis”.

7.20 The conclusive factor for treatment of a rental income under the appropriate head i.e. Income from House Property or Business Income, is the “real intent and main object of business/nature of trading operations of the assessee”. The factual matrix of the case, the main ingredients required to treat the income as either IFHP or PGBP are shortlisted as the intention of the appellant, tenure of the lease, Ownership, and Nature of income and control and Management.

7.21 In the present case, the intention of the appellant was to sub-let the property to earn rental income. The tenure of the lease was 10 years. As regards the ownership, the appellant was not the owner as he himself had stated that, Sri. Narayana Reddy is the owner as he was paying the property tax to BBMP. As regards the nature of income, the income being rent was being received monthly and forms the substantial part of the appellant’s business.

7.22 The dominant intention of the appellant may be is to sub-let the property to earn income. The lease is a long-term lease of 10 years. The appellant is not in the business of renting or leasing out properties. The sub lease Agreement has been entered into in Individual capacity with Innovative Themes Pvt Ltd. Further the appellant is a lessor and the Innovative themes had undertaken to develop and construct a Multiplex on the same. Hence the dominant intention of the appellant is to enjoy the rental income on a long­term lease of 10 years from sub-letting the property which is land and no super structure on it. In view of the same, it is held that the income earned by the appellant has to be treated as income from House property and not Business Income. It is Innovative Themes which has entered into the Lease Agreement with Suresh Productions and has received rental income from letting out theatres and commercial space and not the appellant in his individual capacity in the initial 10 years of sub-letting. The control and management of the property. The lessee, Suresh Productions was to pay all the taxes, service tax, electricity charges, water charges and the wages for the staff which goes to say that the appellant was a passive owner. Further, as held in the case of CIT Vs Poddar Cements, in case of a lease hold property, the owner is entitled with the right to receive income earned from such property and shall be considered as IFHP.Accordingly, in view of the above discussion, I am of the opinion that the dominant intent of the appellant was to earn rental income on a long-term basis which characterizes it as income from House Property and not income from business.

7.23 Hence the AO was correct in treating the same as income from House Property. The grounds raised are accordingly dismissed for all the relevant A.Y.s.

29. Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.

30. The learned AR before us submitted that the assessee has consistently offered the income from running and maintaining the multiplex as business income, which is evident from the returns filed over the years and accepted by the department.

30.1 It was submitted that the nature of activity is not a simple letting out of property. The assessee was actively involved in managing and maintaining the multiplex facility, while the tenant was only running the cinema operations.

30.2 The Ld. AR further submitted that the assessee was required to ensure proper upkeep of the entire facility, employ staff and maintain the premises in a condition suitable for smooth functioning, which clearly shows active commercial involvement.

30.3 It was contended that the assessee incurred expenses towards labour, security and maintenance, which were claimed as business expenditure, and therefore the activity has all the characteristics of a business operation.

30.4 The Ld. AR argued that the rental receipts are not in the nature of passive income from house property, since the assessee did not merely hand over possession to the tenant but continued to participate in the operation and maintenance of the facility.

30.5 It was further submitted that the Revenue has wrongly changed the head of income from business income to income from house property without appreciating the peculiar facts and manner in which the property was exploited.

30.6 The Ld. AR also submitted that there is no incriminating material found during the course of search to justify any such change in the head of income.

30.7 It was finally prayed that considering the consistent treatment, nature of activity and absence of incriminating material, the income should be assessed as business income and appeals be allowed.

31. The learned DR, on the other hand, submitted that the primary issue is the recharacterization of receipts from business income to income from house property, which has been rightly done by the AO and upheld by Ld. CIT(A).

31.1 It was contended that the receipts are regular, fixed and arise from exploitation of immovable property, and there is no evidence of any complex commercial or organized business activity carried out by the assessee.

31.2 The Ld. DR submitted that mere classification of income as business income in the return or books does not change its true nature, which has to be determined from the substance of the transaction.

31.3 It was further submitted that the lease agreement clearly shows that the assessee has only acquired leasehold rights with authority to sub­lease or license the property and earn rental income, and thus the income arises from property rights and not from any independent business activity.

31.4 The Ld. DR pointed out that the consideration received is fixed and periodic in nature, without any linkage to profit-sharing, business risks or operational performance, which establishes the character of income as rent.

31.5 It was also submitted that the agreement does not cast any substantial commercial obligations on the assessee such as provision of complex services or active business operations, thereby lacking the essential attributes of a business.

31.6 The Ld. DR further relied on surrounding facts such as deduction of tax at source under provisions applicable to rent, which supports the treatment of income as house property income.

31.7 It was argued that the ld. CIT(A) has correctly appreciated that the true nature of income must be determined from the rights created under the agreement and not from the nomenclature adopted by the assessee. The Ld. DR finally submitted that the findings of the ld. CIT(A) are based on proper appreciation of facts and materials on record, and therefore the action of the AO in assessing the income under the head “Income from House Property” deserves to be upheld.

33. We have heard the rival contentions of both the parties and perused the materials available on record. The issue for our consideration is whether the lease rental receipts arising from the multiplex are assessable under the head “Income from House Property” or “Profits and gains of business or profession”.

32.1 At the outset, we note that the AO has proceeded on the premise that the receipts are in the nature of rent arising from immovable property and therefore liable to be taxed under section 22 of the Act. The learned CIT(A) has affirmed the said view by applying the dominant intention test and by relying upon various judicial precedents. However, on a careful examination of the factual matrix, we find that the conclusions drawn by the lower authorities are not in consonance with the actual nature of the activity carried on by the assessee.

32.2 From the facts on record, it is evident that the assessee had taken land on long-term lease with a clear commercial objective of developing and exploiting a multiplex complex. The property was not a ready-built passive asset, but a commercial project which came into existence through development, financing and structured arrangements involving sub­leasing and commercial exploitation.

32.3 We further note that after the surrender of sub-lease by M/s ITPL, the assessee stepped into the arrangement and continued to derive income from the multiplex by exploiting the commercial asset. The receipts are thus not merely attributable to ownership or letting of property, but arise from a composite commercial arrangement relating to a specialized business asset.

32.4 A crucial aspect which has not been properly appreciated by the lower authorities is that the assessee has not let out the entire property in a passive manner. Rather, only certain identified portions of the multiplex, namely cinema theatre screens, commercial space on the ground floor and certain specified areas, were let out to M/s Suresh Productions, while the overall structure and commercial character of the multiplex remained that of an integrated business asset.

32.5 Thus, the arrangement is not one of complete divestment of possession or simple letting of an independent property. It is a case where parts of a composite commercial asset are exploited through structured agreements, which is a recognized mode of carrying on business in commercial complexes and multiplexes.

32.6 The AO has emphasized that the receipts are fixed and periodic. In our view, such a factor alone cannot determine the character of income. Even in commercial exploitation of assets, the consideration may be structured as fixed rent or minimum guarantee. What is relevant is the nature of the asset and the manner of its exploitation, which in the present case clearly indicates a business arrangement.

32.7 The learned CIT(A), while applying the dominant intention test, has concluded that the assessee intended to earn rental income on a long­term basis. However, such conclusion overlooks the fact that the asset itself is a multiplex developed for commercial exploitation, and the assessee’s role is not confined to a passive landlord. The selective letting of specific portions, coupled with continued involvement in maintenance and operation of the facility, indicates that the assessee is commercially exploiting the asset rather than merely enjoying rental income.

32.8 We further find that the learned CIT(A) has treated the assessee as a passive owner on the ground that certain operational responsibilities were borne by the lessee. In our considered view, such allocation of responsibilities is a matter of commercial arrangement and cannot, by itself, lead to the conclusion that the assessee is not engaged in business activity.

32.9 The AO as well as the learned CIT(A) have placed reliance on the decision of the Hon’ble Karnataka High Court in CIT vs. Bhoopalam Commercial Complex & Industries (P.) Ltd (supra). In our considered view, the said decision is distinguishable based facts.

32.10 In the said case, the assessee constructed a commercial complex and derived rental income therefrom in its own right. The Hon’ble High Court, applying the ratio of Podar Cement reported in 226 ITR 625, held that the assessee was to be treated as owner and the income was assessable under the head house property.

32.11 However, in the present case, the factual matrix is materially different. The assessee has not simply constructed and let out a building. The entire arrangement involves leasehold land, development of a multiplex through a sub-lessee, subsequent surrender, and continued commercial exploitation of a specialized asset. The income arises not from mere ownership but from a chain of commercial arrangements and exploitation of a business asset. Therefore, the ratio of Bhoopalam Commercial Complex which deals with a case of simple letting of constructed property, in our humble understanding, cannot be mechanically applied to the present facts.

32.12 The learned CIT(A) has relied upon decisions such as East India Housing, Keyaram Hotels, Rayala Corporation, Raj Dadarkar & Associates and Cache Properties. In all these cases, the Hon’ble Courts have examined situations where the assessee was either deriving rental income from property ownership or where there was absence of significant commercial activity. In the present case, as discussed above, the asset is multiplex and the assessee has not merely let out the property but has exploited it in a commercial manner by letting out only certain portions and continuing to operate and maintain the facility. Therefore, the factual foundation of those decisions is absent in the present case.

32.15 We also find considerable merit in the contention of the assessee on the principle of consistency. It is an undisputed fact on record that the assessee consistently offered the impugned receipts as business income in earlier years. The said position was within the knowledge of the department, as the receipts were subjected to deduction of tax at source and duly reflected in the returns of income filed by the assessee. Thus, the nature of receipts and the manner of their disclosure were never concealed or suppressed.

32.16 It is further pertinent to note that the change in stand by the Revenue has arisen only in consequence of the search proceedings wherein the lease agreement was found. However, such agreement does not represent any undisclosed transaction. Rather, it merely evidences the very same business activity, the income from which has already been offered to tax by the assessee. In the absence of any incriminating material suggesting that the income was wrongly disclosed or that the nature of activity was different from what was declared, there was no justification for the Revenue to take a divergent view of the impugned year.

32.17 In our considered view, when a particular treatment of income has been consistently accepted and the underlying facts remain unchanged, the Revenue cannot arbitrarily depart from such settled position without bringing any new material on record. Accordingly, on this ground also, the action of the AO in recharacterizing the income is unsustainable.

32.18 In view of the above discussion, we hold that the income in question arises from commercial exploitation of a business asset and cannot be brought to tax under the head “Income from House Property”. The findings of the AO and the learned CIT(A) are based on an incomplete appreciation of facts and are therefore set aside. Accordingly, we direct the AO to assess the impugned receipts under the head “Profits and gains of business or profession”. Hence, the grounds raised by the assessee are allowed.

33. In the result the appeal filed by the assessee is partly allowed.

Coming to ITA No. 2804/Bang/2025 pertaining to A.Y. 2018-19

34. Ground Nos. 1, 2, 7 & 8 of the assessee’s appeal are general grounds which do not require any separate and independent adjudication. Accordingly, the same are hereby dismissed as infructuous.

35. Likewise, Ground No. 6 of the assessee’s appeal pertains to levy of interest under section 234A, 234B, 234C of the Act which is consequential in nature. Hence, the same do not require any separate and independent adjudication. Accordingly, the same are hereby dismissed as infructuous.

36. The issue raised by the assessee through Ground Nos. 3(a) and 3(b) of the appeal pertains to validity or legality of the search proceeding under section 132 of the Act.

37. At the outset, we note the learned AR for the assessee at the hearing before us submitted that the assessee is not willing to press the issue of validity of the search at this stage. Hence, Ground Nos. 3(a) and 3(b) of the assessee’s appeal are hereby diminished as not pressed.

38. The next issue raised by the assessee through Ground No. 3(c) is that no incriminating material was found during the search, therefore in absence of incriminating material, no addition to total income of the assessee can be made.

38.1 On careful examination of facts, we note that the search in the present case was conducted on 16.11.2017, hence the year under consideration is search year for which assessment under section 143(3) r.w.s. 153D of the Act was made. Therefore, the assessment proceedings for the year under consideration do not fall within the category assessment for the purpose of section 153A of the Act.

38.2 It is a settled position of law that in case of normal assessments under section 143(3) of the Act, the AO acquires jurisdiction to make assessment of total income, and such power is not confined only to incriminating material found during the course of search. The restriction relating to incriminating material applies primarily in the case of completed/unabated out of 6 preceding assessment year for initiating the proceedings u/s 153A of the Act. Therefore, in the facts of the present case, since AY 2018-19 is a case of assessment year under section 143(3) of the Act, Hence, the assessee cannot succeed on the legal ground that no incriminating material was found during the course of search. Accordingly, the legal ground raised by the assessee challenging the jurisdiction of addition for want of incriminating material is rejected for AY 2018-19.

39. The next issue raised by the assessee through Ground Nos. 4 & 5 of the appeal is pertaining to the merit of addition made by changing the head of lease rental income from business to House property.

40. At the outset, we note that the issues raised by the Revenue in its grounds of appeal for the AY 2018-19 are identical to the issue raised by the assessee in ITA No. 2803/Bang/2025 for the assessment year 2017­18. Therefore, the findings given in ITA No. 2803/Bang/2025 shall also be applicable for the assessment years 2018-19. The appeal of the assessee for the A.Y. 2017-18 has been decided by us vide paragraph No. 15 of this order in favour of the assessee. The learned AR and the DR also agreed that whatever the findings are for the assessment year 2017-18 shall also be applied for the assessment year 2018-19. Hence, the grounds of appeal filed by the assessee are hereby allowed.

41. In the result appeal of the assessee is hereby partly allowed.

42. In the combined result, all 6 appeals of the assessee are hereby partly allowed.

Order pronounced in court on 26^th day of May, 2026