The assessee’s sole substantive grievance raised in the instant appeal challenges correctness of both the lower authorities’ action imposing Section 271(1)(c) penalty of Rs.10,46,957/- pertaining to quantum addition arising from treatment of rental income (as to whether it came under the head ‘income from house property’ or ‘income from business’).
Learned departmental representative fails to dispute that the impugned issue is essentially regarding treatment of assessee’s rental income than involving concealment of particulars or furnishing of inaccurate particulars of income u/s.271(1)(c) of the Act. Hon’ble apex court’s landmark decision in CIT Vs Reliance Petroproducts Limited [322 ITR 158] (SC) holds that quantum and penalty are parallel proceedings wherein each and every disallowance/addition made in former does not ipso facto attract latter penal provision.
FULL TEXT OF THE ITAT JUDGEMENT
This assessee’s appeal for AY.2010-11 arises from the CIT(A)-10, Hyderabad’s order dated 31-03-2017 passed in case No.0026/CIT(A)-10/2015-16, in proceedings u/s.271(1)(c) of the Income Tax Act, 1961 [in short, ‘the Act’]. Case called twice. None appeared at assessee’s behest. He is accordingly proceeded ex-parte.
2. The assessee’s sole substantive grievance raised in the instant appeal challenges correctness of both the lower authorities’ action imposing Section 271(1)(c) penalty of Rs.10,46,957/- pertaining to quantum addition arising from treatment of rental income (as to whether it came under the head ‘income from house property’ or ‘income from business’). The CIT(A)’s detailed discussion confirming the penalty reads as under:
“5.1 It is seen that the assessee admitted rent from the tenant, capital IQ Information systems Pvt. Ltd., fully. However, instead of admitting the rent under the head ‘House property’, the assessee admitted half of the amount under the head ‘Income from Business’ and claimed various expenses under the head business’. The proportionate expenditure claimed with regard to this amount of Rs.6,85,389/- which is admitted under the head ‘business income’ is Rs.7,37,449/-. However, 30% standard deduction is allowable under the head ‘income from House Property’ ie., Rs.2,05,516/-. The difference between these two figures (Rs.7,37,449 – Rs.2,05,516) ie., Rs.5,31,933/- is taken for levy of penalty u/s.271(1)(c) of the I.T. Act. The income tax on this amount is Rs.1,59,579/-. In view of the explanation 1 of Section 271(1)(c) of the I.T. Act, the appellant is liable for penalty on this amount. It is seen that the Hon’ble ITAT, Hyderabad also confirmed the action of the Assessing Officer for earlier years where in the amount of hire charges were treated as income from house property and expenses were not allowed. Though the assessee admitted these amounts in the return of income, the claim is incorrect in the sense that various expenses were claimed which are not otherwise allowable under the head ‘income from house property’. It is evident from the above that rent and hire charges received from capital IQ Information Systems Pvt. Ltd., have not been considered by the Assessing Officer, while arriving at the Income from House Property, hence, I am of the opinion that this is a fit case for levy of penalty u/s.271(1)(c). The penalty imposable u/s.271(1)(c) of the I.T Act in addition to income tax payable by the assessee, is a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income. In this case the minimum penalty imposable is Rs.1,59,579/- and the maximum penalty leviable is Rs.4,78,737/-. Hence, I levy a minimum penalty of Rs.1,70,000/- which should be paid as per the demand notice enclosed”.
3. We have heard learned departmental representative and perused the case file. It emerges during the course of hearing that this tribunal’s co-ordinate bench has already disposed of the assessee’s quantum appeals in ITA Nos.314 & 315/Hyd/2017, dt.20-03-2019 as under:
“2. The assessee has raised the following grounds of appeal and additional grounds of appeal, which are common in both the appeals under consideration:
“1. On the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) – 10, Hyderabad ought not to have dismissed the appeal.
2. The learned CIT(A) ought to have held that the reassessment proceedings initiated by the Assessing Officer are not valid in the eye of law for the reasons that:
(a) There are no reasons to believe that the income got escaped assessment from tax;
(b) For the reason that the Assessing Officer had failed to furnish the reasons recorded for issuance of the notice under section 148 of the Act, despite the request made by the Appellant.
3. Without prejudice to the above, the learned CIT(A) ought to have held that the income from the property derived from the provision of amenities to the tenants of the property is assessable under the head “income from business”.
3(b) The learned CIT(A) ought to have appreciated that the interest expenditure incurred on the amounts borrowed for the provision of amenities is allowable as an expenditure.
4. For these or any other ground or grounds that may be urged at the time of hearing, it is prayed that the Hon. Tribunal may be pleased to allow the appeal.”
3. The assessee has raised 3 grounds and several grounds as additional grounds. At the time of hearing, assessee has pressed only ground No. 3(b) of additional grounds and accordingly, other additional grounds are dismissed as not pressed. The assessee has raised original 3 grounds and at the time of hearing, not pressed ground no. 2, accordingly dismissed the same as not pressed.
4. We are left with only two grounds to adjudicate i.e. ground no. 3 of original ground and ground no. 3(b) of additional ground.
5. The brief facts of the case are, assessee is having commercial property which is rented to M/s Satyam Computer Services Ltd. Assessee was receiving consolidated amount as rent and hire charges of equipment, interiors and furniture. Assessee is declaring the above hire charges an income from business or profession. It is also important to note that in order to provide the equipment and furniture, assessee has taken loan from bank and the relevant interest was charged to P&L A/c as business expenditure. In the earlier assessments, AO has rejected the claim of the assessee and treated the consolidated receipt of rent and hire charges as income from house property. The same view was upheld by the coordinate bench. Assessee preferred an appeal before the High Court.
6. Similar issue was raised by the assessee in the appeal for the AY under consideration. Meanwhile, assessee is declaring the hire charges as business income and claimed the relevant interest on loan as business expenditure. Since, the authorities have treated the hire charges as part of rental income, they also rejected the interest expenditure as claimable expenditure, as it is claimed as business expenditure.
7. Considered the rival submissions and perused the material on record. With regard to ground no. 3, the coordinate bench has decided the issue in favour of the revenue, the relevant extract is reproduced below:
“9. The annual rent in a case when the property is let through out the year is the actual rent received or receivable by the owner. When the amount of the actual rent received or receivable by the owner, is known that would constitute the basis for determining the annual value and it is that value which will have to form the basis for determining the income from house property and for allowing deduction from income from house property to the extent is permitted under the other provisions of the Act. In the present case, the assessee made two agreements one for let out of the property and another for providing amenities and there is a doubt in the mind of the assessing officer regarding the correctness of the income declared by the assessee as ‘income from house property‘ and income from business. He has treated the entire income i.e. as ‘income from house property’. Admittedly, the authorities have the freedom to go beyond the documents to find out the real intention of the parties. In this case, though there is two agreements the real intention of the parties to a document is different what appears from it ex facie. Since there is a doubt, then the assessing officer is justified in going beyond the documents to find out real intention of the parties by ignoring the apparent has to be and has always been conceded. In this circumstance, the assessing officer has to remove the façade to expose the real intention of the parties cleverly cloaked and the actual agreement cannot be given effect. The only bona fide document to be acted upon not otherwise. There is a serious doubt and also it is shocking the conscious of the Bench, whether the assessee is getting hire charges equal to the rental amount for providing amenities. It cannot be real one and assessing officer required to see the actual rental value of the property in that place and bring that amount into tax under the head ‘income from house property. As such, in the present case, the assessing officer came to the correct conclusion that real rental value was bifurcated into two separate income viz., one is rental income of house property and another is hire charges of the equipment. Further, in the case of letting of the machinery, plant or furniture, sec.56(2) (iii) of the Act is applicable, but only letting of building with certain amenities, this provision is not applicable and in that event, the income from letting out was chargeable under the head ‘income from house property’. The hire charges said to heve been collected for the purpose of providing amenities and the rent for the building not come under the purview of sec.56(2)(iii) of the Act. The word ‘plant’ cannot be liberally construed so as to include all items noted in Annexure I appearing elsewhere in the order, within the ambit of the word ‘plant’. It is not possible to give such a wide construction as suggested by the learned counsel for the assessee. In the case of Sultan Brothers Pvt.Ltd. v. CIT 51 ITR 353 (SC) what was let out to the tenant was a building fitted up with the furniture and fixtures, for being run as a hotel. Therefore, the Supreme Court held that since the building was let along with the furniture and fixtures, the provisions of sec.56(2) (iii) would be applicable and the income from building should be assessed under the head ‘other sources’. But according to the fact arising in the present case, plant and machinery or furniture was not hired by the assessee along with the building. Therefore, the decision of the apex court in Sultan Bros case supra, will not be applicable to the facts of the present case. Thus, on a plain reading of sec.56(2)(iii) of the Act, in the light of the facts of the case, we hold that conclusion reached by the CIT(A) is not correct. Further, no precise test can be laid out to ascertain whether income referred to by whatever nomenclature, lease amount, rent or licence fee received by an assessee from leasing or letting out of assets would fall under the head ‘profit and gains of business or profession and it has to be determined from the point of view of a businessman in that business depending upon the fact and circumstances of each case and there is no readymade jacket formula. The ratio laid down by one case cannot be applied or fit to the facts of the present case. We have to see the intention of the assessee whether the letting was the doing of a business or to exploitation of his property by an owner. The assessee when exploited the property to derive rental income it has to be held that the income realized by him by way of rental income from a building if the property with other asset attached to the building to be assessed as ‘income from house property’ only. The only exceptions are cases where the letting of the building is inseparable from letting of the machinery, plant and furniture. In such cases, it has to be held that the rental would not have been realized but for the letting out of the machinery, plant or furniture along with such building and therefore, rental received for the building is to be assessed under the head ‘income from other sources’. In the present case, on the facts of the case, it is clear that the assessee as the owner of the building was only exploiting the property as owner by letting out the same and realizing income by way of rent. Such rental income was liable to be assessed under the head ‘income from house property.’ The various assets let out to the tenants are incidental to letting out the building being integral part of the letting. Accordingly, we reverse the order of the CIT(A) and restore that of the assessing officer. This ground of the revenue is allowed.”
Respectfully following the same, the ground raised by the assessee is dismissed.
8. With regard to additional ground No. 3(b), we notice that assessee has availed loan to arrange the relevant fixed assets in the building and incurred interest expenditure. Since, the assessee was claiming them as business expenditure as the income was declared as business income. As the authorities have treated the business income as income from house property, the interest expenditure is connected to the earning of income and head of income was changed due to the facts of the case, the relevant expenditure is accordingly claimable u/s 24(b) of the Act. Merely accepting the income and excluding the related expenditure is not proper. Therefore, we direct the AO to allow the relevant expenditure, which assessee has incurred to earn the rental income. Accordingly, additional ground raised by the assessee is allowed.
9. As the facts and grounds in AY 2010-11 are materially identical to that of AY 2007-08, following the conclusions drawn therein, ground No. 3 raised in the grounds of appeal is dismissed and additional ground No. 3(b) is allowed”.
4. Learned departmental representative fails to dispute that the impugned issue is essentially regarding treatment of assessee’s rental income than involving concealment of particulars or furnishing of inaccurate particulars of income u/s.271(1)(c) of the Act. Hon’ble apex court’s landmark decision in CIT Vs Reliance Petroproducts Limited [322 ITR 158] (SC) holds that quantum and penalty are parallel proceedings wherein each and every disallowance/addition made in former does not ipso facto attract latter penal provision.
Respectfully following the same, we direct the Assessing Officer to delete the impugned penalty.
5. This assessee’s appeal is allowed in above terms.