2025 (5) TMI 1125 - AT - Wealth-tax

Declared Wealth of the appellant - Whether the rental income declared by the assessee from plots of land for FY 2012-13 was correctly treated as income from other sources by the income tax authorities and whether this treatment impacts the wealth tax assessment? - HELD THAT - Here it is important to know that rental income was shown in the assessment year 2013-14 but the enquiries and verification of the land were made by the Wealth Tax Officer in the year 2016-17. The counsel of the assessee has argued that the shades were constructed in the same land from which the rental income was received. Perhaps they could not be there know in the year 2016-17 but on the basis of findings of the year 2016-17 the rental income pertaining to assessment year 2013-14 cannot be denied. As the argument of the counsel of the assessee that on the basis of findings pertaining to assessment year 2016-17 cannot be applied on the actual acceptance of rental income in assessment year 2013-14 and therefore we find it difficult in sustaining the order of the Commissioner of Wealth Tax (Appeals). Thus the assessee s appeal on this issue is allowed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the addition of Rs. 2,98,43,000/- to the declared wealth of Rs. 60,70,000/- by the Assessing Officer (AO) and sustained by the Commissioner of Wealth Tax (Appeals) (CIT(A)) was justified and lawful;

(b) Whether the reopening of the wealth tax assessment under section 17(1) of the Wealth Tax Act, 1957, based on the inspector's report dated 18.10.2016 and the income tax assessment order for FY 2012-13, was valid and legally sustainable;

(c) Whether the rental income declared by the assessee from certain plots of land for FY 2012-13 was correctly treated as income from other sources by the income tax authorities and whether this treatment impacts the wealth tax assessment;

(d) Whether the factual findings of the inspector's report in 2016-17 about the land being vacant can be applied retrospectively to deny the rental income declared and accepted in assessment year 2013-14;

(e) Whether the valuation adopted for wealth tax purposes was proper and in accordance with the Wealth Tax Act and Rules.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Legality and Basis of Addition of Rs. 2,98,43,000/- to Declared Wealth

The addition was made by the AO on the basis that the plots of land declared by the assessee were vacant and hence taxable as wealth under section 2(ea) of the Wealth Tax Act, 1957. The AO relied on the inspector's field report dated 18.10.2016, which found the plots to be vacant. The CIT(A) sustained this addition, holding that the assessee failed to prove that the properties were rented out and that the rental income was a misrepresentation.

The assessee contended that the rental income was declared and accepted in the income tax assessment for FY 2012-13, and that the inspector's report was based on a visit in 2016, which cannot be used to infer the status of the plots in 2012-13. The assessee argued that the addition was made without any basis or reasons and that the reopening itself was bad in law.

The Court noted that the AO's addition was premised on the inspector's report and the fact that no rental agreement was produced. The CIT(A) emphasized that the rental income was assessed under "Income from Other Sources" in the income tax assessment, indicating that the income was not accepted as rental income from built-up property. The Court observed that the AO and CIT(A) relied on factual verification conducted in 2016-17 to conclude that the plots were vacant and hence taxable wealth.

(b) Validity of Reopening under Section 17(1) of Wealth Tax Act

The reopening was initiated on 30.03.2016 based on the reasons recorded, which referenced the income tax assessment order dated 23.03.2016 and the inspector's report. The AO formed a reason to believe that an income of Rs. 3,44,07,000/- had escaped assessment under the Wealth Tax Act.

The assessee challenged the reopening as bad in law, arguing that the inspector's report was based on a 2016 visit and could not reflect the status of the plots in FY 2012-13. Further, the reopening was contradictory to the income tax assessment, where rental income was accepted under "Other Sources."

The Court observed that the reopening was triggered by the income tax assessment and the inspector's report, but the latter was dated after the assessment year under consideration. The Court found merit in the assessee's argument that the status of the plots in 2016-17 cannot be the basis for reopening assessment for 2012-13.

(c) Treatment of Rental Income in Income Tax Assessment and Its Impact on Wealth Tax Assessment

The assessee declared rental income from the plots for FY 2012-13, which was accepted in the income tax assessment but assessed under "Income from Other Sources." The AO contended that this indicated the income was not from built-up property but from vacant plots.

The CIT(A) held that since the assessee failed to produce documentary evidence of rental agreements, the income was rightly assessed as "Other Sources," and the plots were taxable as wealth.

The Court noted that the rental income was accepted in the income tax assessment and that the assessee's declaration was undisputed. The Court found that the factual findings of the inspector's report in 2016-17 about the plots being vacant could not be used to deny the rental income accepted in 2013-14.

(d) Application of Inspector's 2016-17 Findings to Assessment Year 2013-14

The AO and CIT(A) relied heavily on the inspector's field report dated October 2016, which found the plots vacant, to deny the rental income declared for FY 2012-13 and to add the value of the plots to wealth.

The assessee argued that the status of the plots in 2016-17 cannot be applied retrospectively to 2012-13, especially when rental income was accepted in that year.

The Court agreed with the assessee's contention, holding that the findings of 2016-17 cannot be used to negate the rental income declared and accepted for 2013-14. It observed that the rental income was shown in the assessment year 2013-14 and accepted by the income tax authorities, and therefore, the wealth tax addition based on subsequent findings was not sustainable.

(e) Valuation Adopted for Wealth Tax Assessment

The assessee submitted that the value adopted for the plots was based on an estimate submitted during income tax assessment and not in accordance with the Wealth Tax Rules or proper valuation by a valuer.

The Court did not extensively analyze this point but implied that since the addition itself was not sustainable, the question of valuation also did not arise for confirmation.

3. SIGNIFICANT HOLDINGS

"The argument of the counsel of the assessee that on the basis of findings pertaining to assessment year 2016-17 cannot be applied on the actual acceptance of rental income in assessment year 2013-14 and therefore, we find it difficult in sustaining the order of the Commissioner of Wealth Tax (Appeals)."

"The rental income was shown in the assessment year 2013-14 but the enquiries and verification of the land were made by the Wealth Tax Officer in the year 2016-17. The counsel of the assessee has argued that the shades were constructed in the same land from which the rental income was received. Perhaps they could not be there know in the year 2016-17 but on the basis of findings of the year 2016-17, the rental income pertaining to assessment year 2013-14 cannot be denied."

Core principles established include:

- Reopening of assessment under section 17(1) of the Wealth Tax Act must be based on reasons relevant to the assessment year under consideration and cannot rely on facts or reports generated after that year.

- Acceptance of rental income in income tax assessment for a particular year cannot be negated retrospectively on the basis of subsequent factual findings.

- The status of property (vacant or rented) must be determined with reference to the relevant assessment year and not on subsequent inspections.

Final determinations:

- The addition of Rs. 2,98,43,000/- to the declared wealth was not sustainable as it was based on inspector's report dated after the assessment year and contradicted the income tax assessment acceptance of rental income.

- The reopening of the wealth tax assessment was invalid as it relied on post-assessment year facts.

- The appeal of the assessee was allowed, and the impugned addition was deleted.

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