2025 (8) TMI 216 - HC - Income Tax

Reassessment Orders Quashed for Lack of Prior Approval and Improper Consideration of Borrowing Interest Allowance under Income Tax Rules

The HC quashed the reassessment orders due to lack of prior approval for reopening and failure to consider whether the petitioner could claim expenditure ... Reopening of assessment - upon a survey it is ascertained that the petitioner has shown the interest earned from the Borrowing Company as Income from Business by reducing from Work-in-Progress [WIP] with the Assessing Officer asserting that such income must be declared as income from other sources as is being done according to the petitioner's accounting practice HELD THAT:- What remain as uncontroverted are that the petitioner has not been shown prior approval [admittedly, a must for commencement of reassessment proceedings] and that the AO has not considered whether even if the interest received from the petitioner's Holding Company is declared as Income from Other Sources, the petitioner would be entitled for allowance as an Expenditure on borrowing. This Court is of the considered view that both these aspects viz., showing of the prior approval as is required and due consideration of the petitioner's case that it would be entitled for allowance as an Expenditure under the relevant provision even if the interest is brought under Income from Other Sources, will have to be duly considered for justifying an assessment. If the prior approval is not by the competent, the whole proceedings must fail and if ultimately it is concluded that the petitioner indeed would be entitled for allowance as an Expenditure as now contested. This Court is also persuaded to restore the proceedings because the assessment is completed within 14 days from the date of order disposing the petitioner's objections to reassessment. Writ petition is disposed of quashing orders and proceedings are restored to the AO for due consideration of the petitioner's objections. ISSUES: Whether the reassessment proceedings initiated under Section 148 of the Income Tax Act, 1961 are valid without prior approval as required.Whether interest earned from lending money to a holding company, which has not commenced business, should be treated as Income from Business or Income from Other Sources.Whether the petitioner is entitled to claim expenditure incurred on borrowing as an allowable deduction even if the interest income is classified under Income from Other Sources.Whether the Assessing Officer properly considered the petitioner's objections regarding classification of income and allowance of expenditure before passing reassessment orders. RULINGS / HOLDINGS: The reassessment proceedings must be quashed if the prior approval required for initiation of reassessment under Section 148 is not shown, as 'admittedly, a must for commencement of reassessment proceedings'.Interest earned from the holding company, which had only entered into an agreement and not commenced business, cannot be treated as Income from Business but must be treated as Income from Other Sources as per the Assessing Officer's assertion.The petitioner is entitled to claim allowance as an expenditure incurred on borrowing even if the interest income is classified as Income from Other Sources, and this aspect was not duly considered by the Assessing Officer.The Assessing Officer failed to properly consider the petitioner's objections, including the classification of income and allowance of expenditure, and therefore the reassessment orders and demand notices are liable to be quashed and proceedings restored for fresh consideration. RATIONALE: The Court applied the statutory requirement under Section 148 of the Income Tax Act, 1961, which mandates prior approval before initiating reassessment proceedings.The Court relied on the principle that income classification must be consistent with the nature of the recipient's business activity, holding that income from a non-operational holding company cannot be treated as business income.The Court emphasized the necessity to consider allowable deductions under the Income Tax Act, including expenditure incurred in borrowing, even when income is classified under Income from Other Sources.The Court noted procedural fairness requires that objections raised by the assessee be duly considered before passing reassessment orders, and failure to do so warrants quashing and restoration of proceedings.