Wrong Classification of Income won’t alter True Character of Income: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore held that the nature of income has to be decided on commercial principles and a wrong classification would not alter the true character of income.

The assessee, M/s Cessna Garden Developers Pvt. Ltd is engaged in the development of the Special Economic Zone (SEZ). The assessee has derived lease/ rental income from the development of SEZ. The lease/ rental income from SEZ was declared by the assessee under the head ‘income from house property’. The assessee also claimed deduction from such income under Section 80IAB while filing the return of income. The lease income so declared by the assessee under the head ‘income from house property’ was accepted by the Assessing Officer and was also allowed at the time of framing assessment. The assessment was accordingly completed after allowing the deduction.

After the completion of the assessment, the AO initiated rectification proceedings under Section 154 of the Act whereby deduction allowed u/s. 80IAB against the lease income declared under the head ‘income from house property’ was sought to be withdrawn on the ground that deduction under Section  80IAB is admissible only in respect of profits & gains from SEZ business of developing a Special Economic Zone and not from income taxable under the head ‘income from house property’.

The ITAT consists of a Vice-President, N. V. Vasudevan, and an Accountant Member, Pradeep Kumar Kedia while relying on the decision of the Supreme Court held that the nature of income has to be decided on commercial principles and a wrong classification would not alter the true character of income.

The tribunal partly allowed the appeal made by the assessee and said, “ the issue concerning disallowance of deduction under Section 80IAB is allowed for statistical purposes.”

“The issue towards the claim of interest expenses is also required to be examined de novo by the AO in the light of overhaul and realignment of nature of SEZ income under the head business income. Accordingly, the issue of allowability of interest is restored to the file of AO for redetermination in accordance with the law in the light of provisions apply in relation to income chargeable under the ‘business income,’ the tribunal said.