Rectification Order by AO Neither Erroneous Nor Prejudicial, Revisionary Powers Misapplied on Rental Income Issue: ITAT quashes PCIT's Order [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has quashed the PCIT's order on the ground that it exceeded the revisionary powers vested in it under Section 263 of the Act. The tribunal held that the rectification order by the AO is neither erroneous nor prejudicial.

The assessee was a private limited company formerly known as RMZ Infinity (Chennai) Private Limited (Present name of the Company is ‘Chennai Business Tower Private Limited’), which filed its return of income for A.Y.2010-11 declaring total income of Rs. 3,35,97,939/-. The return was processed under Section 143(1), and an intimation was passed determining income at Rs. 3,35,97,940/- and a tax demand of Rs.18,47,940/-.

Subsequently, the assessee filed a rectification petition under Section 154 to rectify the following mistakes in the intimation under Section 143(1) of the Act: “Income from House property inadvertently not reduced from “business income” and not disclosed under the head “income from house property”

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The AO passed an order under Section 154 of the Act by observing that the mistake above is apparent from the record and rectified the same. But according to the PCIT, the order passed by the AO was erroneous and prejudicial to the interest of revenue since the treatment of rental income under the head ‘Income from house property’ instead of‘income from business’.

The assessee submitted that the order under Section 154 of the Act was neither erroneous nor prejudicial to the interest of the revenue. The assessee also brought the Tribunal’s attention to the issue of the treatment of rental income under the head ‘income from house property’, which had already been the subject matter of an appeal against the order under Section.263 of the Act for the earlier A.Y. 2009-10 in the assessee’s own case before the same bench of the Tribunal wherein the Tribunal, after considering the similar facts and circumstances, had quashed the order of the PCIT. In that case, the Tribunal in this matter observed that:

“8…..Thus, the order which is to be considered for revision must be both “erroneous” as well as “prejudicial to the interest of Revenue”. If either of the limbs are missing the revisionary authority cannot be legally exercised. We have noted that in the case of Malabar Industrial Company Limited (243 ITR 83) Hon’ble Apex Court held that the phrase prejudicial to the interest of Revenue under Section 263 has to be read with conjunction with expression erroneous order passed by the Ld.AO

11The Ld.PCIT has subscribed to the view that the order under Section 154 is erroneous in so far as it is prejudicial to the interest of Revenue because the Ld.AO has not done any examination upon the matter as to how the business income was to be treated as income from house Property. The Ld.PCIT has placing reliance upon ratios laid down by Hon’ble Supreme Court and the Jurisdictional High Court on merits, ordinarily the rental income was to be assessed as business income in such case. It is settled principle of law as repeatedly emphasized by Hon’ble Supreme Court and High courts that the scope of section 154 is very limited and circumscribed and does not encompass any investigation, verification and evaluation of facts and record.

12. An assessing officer can be held guilty of passing an order which is held to be “erroneous in so far as it is prejudicial to the interest of the Revenue provided he fails to do enquiries or verification before passing an order. In the instant case, section 154 does not empowers to hold any enquiries or verification before passing an order and therefore explanation-2 to section 263 cannot be invoked. An assessing officer cannot be held accountable for not holding any verification or enquiries which he was not otherwise statutorily empowered or mandated to conduct…...”

The two-member bench ABY T Varkey (Judicial Member) and S. R. Raghunatha (Accountant Member) observed that the present facts and circumstances of the case were identical to the assessee’s own case decided by the coordinate bench of the Tribunal in the A.Y.2009-10. So following the same, the bench held that the PCIT has exceeded the revisionary powers and quashed the order of the PCIT under Section 263 of the Act by allowing the grounds of appeal of the assessee.

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