2022 (5) TMI 677 - AT - Income Tax

Invalid reassessment without new material; business expenses allowed for set-off. Tribunal rules in favor of assessee.

The reassessment proceedings were deemed invalid as they lacked new tangible material, following the Supreme Court's precedent. The expenses were ... Reopening of assessment u/s 147 - reopening was within 4 years - disallowance u/s 14A - case was reopened on the allegation that the assessee had not commenced its business activities and therefore pre-commencement expenses should have been capitalized - HELD THAT:- AO had asked for various details which were duly responded to by the assessee. The Ld. AO, after considering the same, chose to make disallowance u/s 14A and accepted all the other particulars filed by the assessee. Subsequently, the case has been reopened on same set of material as available before Ld. AO. Evidently no fresh tangible material has come to the possession of Ld. AO subsequent to conclusion of regular assessment proceedings. Under such factual matrix, the ratio of cited decisions, as enumerated in preceding paragraphs, is squarely applicable to the facts of the case. Therefore, we would hold that reassessment proceedings were nothing but based on mere change of opinion which is impermissible. The assessment is set-aside as without jurisdiction. The assessee’s cross-objections stands allowed. Commencement of business - So far as the merits of the case are concerned, it could be seen that the assessee was incorporated on 20.03.2007 and became public limited company in September, 2007. Initially the assessee was engaged in development of SEZ. However, the object of the assessee had undergone change w.e.f. 31.01.2008. As per revised object Clause, the main objects to be pursued by the assessee are to deal in land, buildings for the purpose of development and for carrying out development activities. In essence, the assessee’s main object includes real estate development and construction activities. As per the object clause, the assessee could purchase, hire, lease or exchange or acquire any immoveable properties for carrying on the business of developers, builder, realtors, contractors and dealer and to sell or transfer the immoveable property whether as a developed or undeveloped plots. The assessee had already started various activities such as purchase of land, making advances to the parties, laying roads, building construction etc. In a huge project like the one being undertaken by the assessee revenue generation may take time but the same could be a reason to construe as to non commencement of business. The purchase of land was done, advances were given to parties, the land was registered in assessee’s name, roads have been laid, buildings have been under construction. All these facts would prove that the assessee has started business activities. All these findings remain undisputed before us. Therefore, it could be seen that the assessee had already initiated certain activities towards fulfillment of its objectives and already procured land which would be very vital to start real estate development. Therefore, the conclusion that the assessee had commenced business could not be said to be perverse in any manner. Tribunal erred in holding that merely because the manufacturing and sale of the vehicle did not take place, the business of the assessee has not been set up. The manufacturing activity of the assessee was a part of the composite business activities of the assessee and the same had not commenced because the construction of the building and installation of plant and machinery was in progress. Accordingly, Hon’ble Court confirmed the first appellate order. The ratio of this decision is applicable to the merits of the case. Therefore, we would concur with adjudication on merits, in the impugned order. The revenue’s appeal stands dismissed. Issues Involved:1. Validity of reassessment proceedings.2. Classification of expenses as business expenses or pre-commencement expenses.3. Set-off of business losses against income from other sources.Detailed Analysis:1. Validity of Reassessment Proceedings:The assessee challenged the validity of the reassessment proceedings initiated under Section 147 of the Income Tax Act. The primary contention was that the reassessment was based on a mere change of opinion without any new tangible material. The Tribunal noted that the original assessment was completed under Section 143(3), and the reopening was done within four years. However, the reasons for reopening were based on the same set of facts available during the original assessment. Citing the Supreme Court's decision in Kelvinator of India Ltd. (2010; 320 ITR 561), the Tribunal held that reassessment must be based on new information and not a change of opinion. Consequently, the reassessment proceedings were deemed invalid and set aside as without jurisdiction.2. Classification of Expenses:The Revenue contended that the assessee had not commenced business activities and thus, the expenses incurred should be treated as pre-commencement expenses and capitalized. The CIT(A) and the Tribunal found that the assessee had indeed started business activities related to real estate development, such as purchasing land, making advances, laying roads, and constructing buildings. The Tribunal upheld the CIT(A)'s decision that these activities constituted the commencement of business, and therefore, the expenses were allowable as business expenses. The Tribunal referenced the decision of the Madras High Court in Daimler India Commercial Vehicles Pvt. Ltd. V/s CIT (416 ITR 343) to support this conclusion.3. Set-off of Business Losses:The Revenue argued that since the assessee had not commenced business, the business expenses should be treated as pre-commencement expenses and capitalized. Consequently, the interest income should be taxed under the head 'Income from other sources,' and business losses should not be set off against this income. The CIT(A) disagreed, stating that the business had commenced, and thus, the expenses were business expenses. The Tribunal upheld this view, allowing the set-off of business losses against income from other sources as per Section 71(1).Conclusion:The Tribunal concluded that the reassessment proceedings were invalid due to the absence of new tangible material, thus allowing the assessee's cross-objections. On merits, the Tribunal concurred with the CIT(A) that the assessee had commenced business activities, making the expenses allowable as business expenses and permitting the set-off of business losses against income from other sources. The Revenue's appeal was dismissed, and the assessee's cross-objection was allowed.Final Order:The assessee's cross-objection stands allowed, and the Revenue's appeal stands dismissed. Order pronounced on 05th May, 2022.