Facts of the Case

The assessee, Veerprabhu Auto Pvt. Ltd., filed its return of income for Assessment Year 2016-17 declaring a loss of ₹1,46,903. During the relevant year, the assessee earned rental income of ₹9,48,000. A search and seizure operation under Section 132 was conducted in the LMJ Group, and the assessee’s case stood centralised. The Assessing Officer assessed the rental income under the head “Income from House Property” instead of “Income from Business” and disallowed depreciation, repairs, maintenance, and legal and professional expenses. The assessment was completed under Section 143(3) assessing total income at ₹6,43,000. The CIT(A) confirmed the assessment. The assessee filed an appeal before the Tribunal and also raised an additional ground challenging jurisdiction based on CBDT Instruction No. 1/2011.

Issues Involved

Whether rental income earned by the assessee was taxable as business income or income from house property, whether expenses such as depreciation and legal charges were allowable, whether the assessment suffered from lack of jurisdiction due to violation of CBDT Instruction No. 1/2011, and whether a jurisdictional objection could be raised for the first time before the Tribunal in view of Section 124.

Petitioner’s Arguments

The assessee contended that as per its Memorandum of Association, one of its objects was to let out properties and earn rental income, and therefore rental income should be taxed as business income. It was argued that depreciation, repairs, and legal expenses incurred for eviction of tenants were allowable business expenses. By way of an additional ground, the assessee contended that the assessment was without jurisdiction as it was framed by an ACIT in violation of CBDT Instruction No. 1/2011 prescribing pecuniary jurisdiction.

Respondent’s Arguments

The Revenue argued that the main object of the assessee was dealing in automobile parts and not real estate business, and therefore rental income was rightly taxed as income from house property. It was contended that once income is assessed under the head “Income from House Property”, only statutory deductions under Section 24 are permissible. On jurisdiction, the Revenue submitted that the assessee failed to raise objection within the time prescribed under Section 124(3) and that the case was a centralised search case where jurisdiction was validly assumed. Reliance was placed on judicial precedents holding that CBDT Instruction No. 1/2011 is administrative in nature and belated jurisdictional objections are not maintainable.

Court Order / Findings

The ITAT Kolkata held that the assessee’s main object as per its Memorandum of Association was automobile business and not letting out of properties. Applying the ratio of the Supreme Court decision in Sultan Brothers (P.) Ltd. and distinguishing the decision in Chennai Properties & Investments Ltd., the Tribunal held that rental income was correctly assessed as income from house property. The Tribunal further held that once income is assessed under this head, no deductions other than those specified under Section 24 are allowable. On the jurisdictional objection, the Tribunal held that the assessee had raised the issue for the first time before the Tribunal and had failed to object within the limitation prescribed under Section 124(3). It was further held that in a centralised search case, jurisdiction validly vests with the designated Assessing Officer and CBDT Instruction No. 1/2011 does not render the assessment void.

Important Clarification

The Tribunal clarified that mere inclusion of letting activity as an incidental object in the Memorandum of Association does not automatically render rental income as business income. The dominant and main object of the assessee and the manner of exploitation of property are determinative. It was further clarified that jurisdictional objections based on internal CBDT instructions cannot be raised belatedly and are subject to the bar under Section 124 of the Income-tax Act.

Final Outcome

The appeal filed by the assessee was dismissed. The assessment order treating rental income as Income from House Property, disallowing business-related expenses, and rejecting the jurisdictional challenge was upheld in full.

Source Link - https://itat.gov.in/public/files/upload/1768385755-D5xpAn-1-TO.pdf

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