Section 263 Revision Inapplicable Where AO Has Conducted Enquiry: Punjab & Haryana High Court Ruling on Section 24(a) Deduction

Background and Context

The Punjab and Haryana High Court recently delivered a significant ruling in the matter of PCIT Vs Ropar District Coop. Milk Producers Union Limited, addressing two critical questions that frequently arise in income tax proceedings — the legitimate scope of revisionary powers under Section 263 of the Income Tax Act, 1961, and the eligibility of a lessee-assessee to claim standard deduction under Section 24(a) on rental income derived from sub-letting leased property.

The appeal was filed by the Principal Commissioner of Income Tax (PCIT), Chandigarh, challenging an order of the Income Tax Appellate Tribunal (ITAT), Chandigarh, which had overturned the PCIT's own revisionary order passed under Section 263 of the Income Tax Act, 1961. The underlying dispute centred on whether rental income received by the assessee from three booths — originally leased from the Municipal Corporation, Chandigarh, and subsequently sub-let to individuals operating milk booths — qualified as income from house property, thereby making it eligible for the standard deduction of 30% under Section 24(a).

Facts of the Case

The assessee, Ropar District Coop. Milk Producers Union Limited, had taken three booths on lease from the Municipal Corporation, Chandigarh. These booths were further sub-let to individual parties for running milk booths, and the assessee received rental income in return.

During the assessment proceedings, the Assessing Officer (AO) passed an order dated 19th February, 2021, accepting the assessee's claim that this rental income constituted income from house property and accordingly allowed a standard deduction of 30% of the annual rental value under Section 24(a) of the Income Tax Act, 1961.

The PCIT, exercising revisionary jurisdiction under Section 263, set aside the AO's order by taking the position that:

  • The assessee, being a lessee (and not a legal owner) of the booths, could not be treated as the owner of the property for the purposes of claiming income under the head "Income from House Property"
  • Consequently, the rental income ought to have been assessed under "Income from Other Sources", making the deduction under Section 24(a) unavailable
  • The AO's assessment order was therefore erroneous and prejudicial to the interests of Revenue

The ITAT subsequently set aside the PCIT's revisionary order, which led the Revenue to approach the Punjab and Haryana High Court.

Revenue's Arguments Before the High Court

The Senior Standing Counsel appearing for the Revenue advanced the following contentions:

  1. Reliance on Earlier Orders Was Misplaced: The ITAT had incorrectly placed reliance on decisions rendered by the CIT (Appeals) and the ITAT for earlier assessment years, wherein rental income of a similar nature had been classified as income from house property and allowed the benefit of Section 24(a).