By TIOL News Service

NEW DELHI, AUG 10, 2016: THE issue is - Whether income from licence fee can be construed as income from house property in reassessment proceedings where assessee had declared the same as business income and assessment order u/s 143(3) was passed accepting the same. NO is the answer.

Facts of the case

The Assessee was carrying on a business. It is stated that the property on which he was carrying on business was owned by him with land having been given on long term lease by the Delhi Development Authority ('DDA') on which he has erected a factory premises. It is stated that the Assessee derived income from job work of repairs of batteries and was receiving licence fee from various persons for rendering services. Since AY 1982-83 the Assessee gave on licence 91% of the factory premises and was receiving licence fees. Later due to illness, he ceased to carry on any business activity and the earning of licence fees was the only source of income. For the AY 1982-83 a loss was declared and the licence fee was shown as business income. This return was picked up for scrutiny and an assessment order passed under Section 143(3) accepting the treatment of the licence fee by the Assessee as business income. From AY 1983-84 till AY 1989-90 the Assessee in his returns consistently disclosed the licence fee as business income. For AY 1990-91, the Assessee filed a return declaring income. The income was processed under Section 143(1)(a). The assessment was sought to be reopened by the issuance of a notice under Section 148 on the ground that assessee camouflaged his rental income as business income in the guise of licence fee resulting in sham rental income under the Head "Business and Professional" as against the head "Income from House Property". Higher deduction was claimed and income has escaped assessment. In response, the Assessee filed a return declaring the same income as is disclosed in the original return. AO completed the assessment under Section 143(3) read with Section 148. AO made addition by assessing the licence fee received by Assessee under the head 'income from house property'. The AO also made an addition by estimating net income from job work. The expenses claimed against the various

By the time the was passed, the assessments for three other AYs i.e. 1991-92 to 1993-94, were reopened by the AO by issuing notices under Section 148 and appeals for those AYs were also filed by the Assessee before the CIT (A). CIT (A) by a common order negatived the plea raised by the Assessee to the reopening of the assessment under Section 148. CIT (A) accepted the plea of the Assessee that the licence fee received by him ought to be taxed as income from business and not as income from house property.

The ITAT confirmed the order of the AO and set aside the order of CIT (A). ITAT upheld the order of reopening the assessment.

Having heard the parties, the Court held that,

A) ++ as far as the AYs in question i.e. AY 1990-91 to 1994-95 is concerned they were processed under Section 143(1)(a) and not under Section 143(3) of the Act. Therefore, for the purposes of reopening of the said assessments, there was indeed no requirement that the AO had to base his reasons to believe that the income had escaped assessments on some fresh tangible material;

++ although the AO may not have required fresh tangible material to form such reasons to believe, he should have, after examining the returns and/or the documents accompanying the returns, set out at least the prima facie reasons for arriving at the reason to believe that income had escaped assessment for the AYs in question;

++ the reasons tend by the AO are in fact conclusions. By simply using the word 'camouflage' and 'sham rental income', the AO is not relieved of the obligation of explaining why he came to the above conclusion. Admittedly, the Assessee had placed on record the licence deeds which contain the clauses that have been extracted hereinbefore. A reading of the said clauses reveals that the Assessee made it clear to the party taking the space on licence that it was not an arrangement of lease and that the payment being received was not to be treated as 'rent'. Even though the AO has used the word 'camouflage' there is no material other than the licence deeds and the licence receipts for the AO to come to the conclusion that there was any attempt at camouflaging. The basis for forming the reasons to believe has not even been set out;

++ the ITAT has not engaged with the detailed reasoning of the CIT (A) on an analysis of the licence deed leading to the conclusion that the licence fees received by the Assessee was in fact his only business for the AYs in question. The CIT (A) too overlooked the legal position and simply concluded that the AO had recorded proper reasons. The Court is of the view that none of the authorities paid attention to the requirement of the law that reasons, even prima facie, and not conclusions, needed to be recorded by the AO for reopening the assessments. Reference had to be made to the materials that formed the basis of such reasons even if such materials may not be fresh ones and already formed part of the record. The reasons to believe should have a link with an objective fact in the form of information or materials on record;

++ the Court is satisfied that the reopening of the assessments for the AYs in question by the AO did not satisfy the requirement of the law in terms of Sections 147 and 148 of the Act. Question (i) is accordingly answered in the negative i.e., in favour of the Assessee and against the Revenue;

B) ++ the factors that ought to have been taken note of by the ITAT were that the Assessee had consistently shown the licence fee as business income from AY 1982-83 onwards. The return for AY 1982-83 was picked up for scrutiny and an assessment order passed under Section 143(3) of the Act accepting the stand of the Assessee that the licence fee was in the nature of business income. This stand was continued by the Assessee for all the AYs that followed, including the AYs in question. The ITAT has in the impugned order not given any reason for disagreeing with the CIT (A) and has simply confirmed the order of the AO that the licence fee constituted income from house property and not business income;

++ the income earned by the Assessee from the licence fee could not be characterised as rent and, therefore, income from house property. The Court is of the view that the AO and the ITAT were in error in coming to a contrary conclusion. They appear to have overlooked that the Assessee had consistently treated the licence fees collected as business income since AY 1982-83.

(See 2016-TIOL-1687-HC-DEL-IT)