2024 (1) TMI 801 - HC - Income Tax

Marketing expenses without corresponding revenue must be classified as work-in-progress not revenue expenditure under Section 147

The HC dismissed a writ petition challenging reopening of assessment under Section 147. The petitioner claimed deductions for advertising/marketing ... Reopening of assessment u/s 147 - deduction claimed by the petitioner for a sum towards advertising and marketing expenditure for Model Flat and New Sales Office Expenses Exclusive and Market Expenses Express - as per DR no corresponding income from the project for which the expenses were incurred and Respective projects may not have started during the relevant to the previous year for the assessment year - HELD THAT:- Since no revenue was recognized expenses incurred under the head marketing and sale expenses have been classified work in progress which should not have been reckoned as revenue expenditure. The second issue is regarding capitalised of a sum towards Loan Processing Charges pursuant to closure of the loan and switching over of the loan. This was not an issue that was raised before the aforesaid AO dated 27.11.2019 was passed. There was only disclosure in the Financial Statements that were filed by the petitioner before the Assessing Officer before the Assessment Order was passed on 27.11.2019. Notice issued u/s 148 is dated 30.03.2021. It is before the expiry of 4 years. If the income has escaped assessment, invocation of Section 148 of the Income Tax Act, 1961 cannot be interfered. There is no final determination of the tax liability in the impugned order dated 04.02.2022 seeking to reopen the assessment that was completed vide Assessment Order dated 27.11.2019. It is open for the petitioner to urge that the deductions claimed by the petitioner were perfectly in order and therefore question of adding the amounts back to the taxable income of the petitioner would not arise. Therefore, this writ petition is liable to be dismissed. Accordingly, this writ petition is dismissed. Liberty is however given to the petitioner to raise all objections before the Assessing Officer under Section 143(3) r/w 147 & 148 of the Income Tax Act, 1961 as it stood prior to 01.04.2021. Issues Involved:1. Reopening of assessment under Section 148 of the Income Tax Act, 1961 for Assessment Year 2017-2018.2. Classification of expenses as capital or revenue.3. Capitalization of Loan Processing Charges.Summary:Issue 1: Reopening of Assessment under Section 148The petitioner challenged the reopening of the assessment for the Assessment Year 2017-2018, arguing that a regular Return of Income was filed under Section 139 and a Scrutiny Assessment Order was passed under Section 143(3) on 27.11.2019. The petitioner contended that all relevant information was already provided, leaving no scope for reopening under Section 148, thus constituting a jurisdictional error. The respondents maintained that the reopening was justified as the income had escaped assessment, and the notice under Section 148 was issued within the permissible period of four years.Issue 2: Classification of ExpensesThe petitioner objected to the classification of Rs. 11,00,19,005/- incurred for Model Flat and New Sales Office Expenses as capital expenditure instead of revenue expenditure. The respondents argued that since no income was recognized from the project during the relevant financial year, these expenses should have been capitalized as work in progress. The court noted that the previous assessment had already considered some of these expenses and partially disallowed them, but the reopening was justified as the full amount was not addressed.Issue 3: Capitalization of Loan Processing ChargesThe petitioner also contested the capitalization of Rs. 2,81,66,330/- towards Loan Processing Charges, arguing these were incurred for switching over loans and should be treated as revenue expenditure. The respondents countered that these charges were directly attributed to the project and should be capitalized since no income was recognized from the project. The court found that this specific issue was not raised in the original assessment order and thus warranted reopening.Conclusion:The court dismissed the writ petition, affirming the reopening of the assessment under Section 148. The petitioner was granted liberty to raise all objections before the Assessing Officer under Section 143(3) r/w 147 & 148 of the Income Tax Act, 1961. The court directed the Assessing Officer to afford an opportunity of hearing to the petitioner and pass appropriate orders within six weeks. No costs were imposed, and connected miscellaneous petitions were closed.