2025 (7) TMI 1676 - AT - Income Tax

Revision u/s 263 - as per CIT AO accepted the following two claims without any verification i.e. claim for depreciation u/s. 32 of the Act @ 25% on the intangible assets and Rental income was treated as a business income -whether the Right to Collect Toll falls within the definition of commercial right or intangible asset ? - HELD THAT - It is a highly debatable issue as there is cleavage of judicial opinion amongst various High Courts. Therefore it cannot be said that the assessment order is erroneous. Therefore the Ld. PCIT was not justified in exercising the power of revision in respect of the item of allowing depreciation and right to collect toll treating it as an intangible asset @ 25%. Treatment of rental income as business receipts - facts on the record clearly brings out that the rental income was derived by the appellant company during the course of the carrying on the business of the appellant ie. BOT Project. There is a direct nexus between the rental income and the business activity of the appellant company and therefore in view of the decision of Chennai Properties Investments Limited 2015 (5) TMI 46 - SUPREME COURT there cannot be two opinions that the income derived from rental income in the present case is assessable under the business head. PCIT was not justified in exercising the powers of revision. Accordingly we set-aside the order passed U/s. 263 of the Act. Appeal filed by the assessee stands allowed.

Summary

ISSUES:

Whether the claim for depreciation on intangible assets under section 32 of the Income Tax Act, 1961 is allowable where the assessee claims depreciation on "right to collect rent" or "right to collect toll" as intangible assets.Whether rental income derived by the assessee can be treated and assessed as business income.Whether the Principal Commissioner of Income Tax (PCIT) was justified in invoking revisionary powers under section 263 of the Income Tax Act on the grounds that the assessment order was erroneous and prejudicial to the interests of revenue for allowing depreciation and treating rental income as business income without verification.

RULINGS / HOLDINGS:

On the depreciation claim: The court held that the issue of allowing depreciation on "right to collect toll" or "right to collect rent" as intangible assets is a "highly debatable issue" with "cleavage of judicial opinion amongst various High Courts" and therefore the assessment order cannot be termed as "erroneous".On the treatment of rental income: The court held that the rental income was "derived by the appellant company during the course of the carrying on the business" and "there is a direct nexus between the rental income and the business activity," hence it is correctly assessable under the head "business income".On the exercise of revisionary powers under section 263: The court ruled that since the assessment order was not "erroneous" in the legal sense and the issues were debatable, the PCIT was "not justified in exercising the power of revision" under section 263 of the Act.

RATIONALE:

The court applied the statutory framework of section 263 of the Income Tax Act, which permits revision only if the assessment order is "erroneous and prejudicial to the interests of revenue" cumulatively, referencing Supreme Court decisions establishing that the error must be one that is "not debatable or plausible".Judicial precedents were examined, including decisions of various High Courts and Tribunals, which show divergent views on whether "right to collect toll" qualifies as an intangible asset eligible for depreciation under section 32(1)(ii) of the Act.The court relied on authoritative precedents holding that rental income arising from the ordinary course of business activities is assessable as business income, specifically citing the Supreme Court ruling in Chennai Properties & Investments Limited vs. CIT.The court emphasized that since the Assessing Officer had not examined the claims but the issues involved are subject to "plausible views," the assessment order cannot be deemed erroneous for purposes of section 263 revision.No dissent or doctrinal shift was noted; the decision reaffirmed established legal principles governing revisionary powers and depreciation claims on intangible assets.