Trendset Bharat Project Developers Private Limited, Hyderabad, Hyderabad V. ACIT, Circle-2(2), Hyderabad, Hyderabad

ITA 442/HYD/2017

• Counselvise Citation: [2018] 122 COUNSELVISE.COM (IT) 2645 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 26-09-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 08-03-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NILANJAN DEY
• Assessee Lawyers: V RAGHAVENDRA RAO
• Keywords: Depreciation; Search and seizure; Tangible material; Difference of opinion; Reason to believe; Change of opinion; Revenue expenditure
• Section: 143(3); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 442 /HYD/ 2017 ASSESSMENT YEAR: 20 09 - 10 TRENDSET BHARAT PROJECT DEVELOPERS PRIVATE LIMITED, HYDERABAD. PAN: AACCC 9088 K VS. ACIT, CIRCLE - 2(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY: SRI V. RAGHAVENDRA RAO REVENUE BY: SRI NILANJAN DEY, DR DATE OF HEARING: 26 .09.2018 DATE OF PRONOUNCEMENT: 10 . 10 .2018 ORDER PER SMT. P. MADHAVI DEVI, J.M.: THIS IS ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2009 - 10 FILED AGAINST THE ORDER OF CIT(A) - 2, HYDERABAD DATED 17.11.2016. ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. THE ORDER OF THE LD. CIT(A) IS ERRONEOUS BOTH ON FACTS AND IN LAW SO FAR AS IT IS PREJUDICIAL TO THE APPELLANT. 2. THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITION OF RS. 64,78,053/ - AS PRE - OPERATIVE IN NATURE. 3. THE LD. CIT(A) OUGHT NOT HAVE CONSIDERED RS. 64,78,05 3/ - AS PRE - OPERATIVE IN NATURE. THE ENTIRE ADDITION IS LIABLE TO BE DELETED. 4. THE LD. CIT(A) OUGHT TO HAVE ACCEPTED THE EXPENDITURE CHARGED TO THE PROFIT AND LOSS ACCOUNT AS REVENUE EXPENDITURE AND LOSS OF RS. 64,78,053/ - SHOULD BE ALLOWED TO BE CARRIED FO RWARD. 5. THE LD. CIT(A) OUGHT TO HAVE CONSIDERED THE APPELLANT GROUND THAT, THE ASSESSING OFFICER ERRED IN ISSUING NOTICE U/S 148. THE REOPENING U/S 148 IS BAD IN LAW AS SUCH THE ASSESSMENT COMPLETED BY ISSUING NOTICE U/S 148 SHOULD BE DECLARED AS NULL AND VOID. 2 6. THE LD. CIT(A) HAS NOT CONSIDERED APPELLANT GROUND THAT ASSESSING OFFICER HAS NOT INTIMATED THE REASONS FOR ISSUING NOTICE U/S 148 CONSEQUENT TO THAT ANY FURTHER PROCEEDINGS BY ISSUING NOTICE U/S 148 ARE NOT VALID. 2. BRIEF FACTS OF THE CASE ARE T HAT THE ASSESSEE - COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF HOUSING PROJECTS, FILED ITS RETURN OF INCOME ON 30.09.2009 RETURNING A TOTAL INCOME OF RS. 3,29,731/ - . THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT U/S 143(3) OF THE ACT WAS COMPLETED BY ACCEPTING THE INCOME RETURNED BY THE ASSESSEE. SUBSEQUENTLY, DURING THE FINANCIAL YEAR 2008 - 09 RELEVANT TO THE A.Y. 2009 - 10 THE PROJECT WAS UNDER CONSTRUCTION / IMPLEMENTATION AND THE ENTIRE EXPENDITURE RELATING TO CONSTRUCTION WORK WAS GROUPED UNDER WORK - IN - PROGRESS AND OTHER EXPENDITURE LIKE PERSONAL COST, ADMINISTRATIVE & FINANCE COST AND DEPRECIATION WERE DEBITED TO PROFIT & LOSS ACCOUNT THOUGH NO REVENUE WAS SHOWN FROM THE CONSTRUCTION BUSINESS RESULTING IN REPORTING OF LOSS OF RS. 64,78,053/ - BEFORE TAX. O BSERVING THAT THE ABOVE EXPENDITURE DEBITED BY THE ASSESSEE TO THE PROFIT & LOSS ACCOUNT IS PRE - OPERATIVE IN NATURE AND CONSEQUENTLY THE LOSS CLAIMED BY THE ASSESSEE OF RS. 64,78,053/ - IS NOT ALLOWABLE TO BE CARRIED FORWARD, THE A.O. ISSUED A NOTICE U/S 148 OF THE ACT TO THE ASSESSEE ON 19.12.2013. 3. IN RESPONSE TO THE NOTICE U/S 148, THE ASSESSEE REPLIED THAT THE A.O, DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, CALLED F OR INFORMATION FROM TIME TO TIME AND AFTER THOROUGH EXAMINATION OF THE REQUIRED DOCUMENTS , COMPLETED THE ASSESSMENT AND THEREFORE, THE RE - OPENING OF THE ASSESSMENT U/S 148 OF THE ACT ON THE SAME SET OF FACTS IS NOT SUSTAINABLE. THE ASSESSEE ALSO REQUESTED FOR THE REASONS FOR RE - OPENING OF THE CASE. THE A.O. OBSERVED THAT THE ASSESSEE NEITHER FILED THE RETURN OF INCOME PURSUANT TO THE NOTICE U/S 148 OF THE ACT NO R MADE ANY SUBMISSION THAT THE RETURN ORIGINALLY FILED ON 30.09.2009 BE TREATED AS RETURN FILED IN RESPONSE TO NOTICE U/S 148 OF THE ACT. THEREFORE, THE 3 ASSESSING OFFICER DID NOT COMMUNICATE THE REASONS FOR RE - OPENING OF THE ASSESSMENT TO THE ASSESSEE . THEREAFTER, THE A.O. PROCEEDED WITH THE RE - ASSESSMENT PROCEEDINGS . HE OBSERVED THAT SINCE THE AS SESSEE DID NOT RESPOND TO HIS LETTER DATED 20.01.2015, HE IS COMPLET ING THE ASSESSMENT ON THE BASIS OF THE MATERIAL AVAILABLE ON RECORD. A.O. FURTHER OBSERVED THAT THE ASSESSEE DID NOT COMMENCE THE BUSINESS ACTIVITY / OPERATIONS DURING THE YEAR UNDER CONS IDERATION AND ALSO THAT IT HAS NOT SHOWN ANY REVENUE FROM OPERATIONS AND THUS , A.O. HELD THAT THE EXPENDITURE IS PRE - OPERATIVE EXPENDITURE IN NATURE AND IS NOT ALLOWABLE AND ACCORDINGLY HE BROUGHT IT TO TAX. 4 . AGGRIEVED, ASSESSEE FILED A N APPEAL BEFORE T HE CIT(A) CHALLENGING THE VALIDITY OF THE RE - ASSESSMENT PROCEEDINGS AND ALSO MERITS OF THE DISALLOWANCE AND CONSEQUENT ADDITION MADE BY THE A.O. HOWEVER, CIT(A) DISMISSED THE SAME AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US BY RAISING THE ABOVE GROUNDS OF APPEAL. 5 . THE LEARNED COUNSEL FOR THE ASSESSEE, SRI V. RAGHAVENDRA RAO, WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW, DRAWN OUR ATTENTION TO PAGES 39 & 40 OF THE PAPER BOOK FILED BY THE ASSESSEE, WHICH IS A COPY OF THE LETTER FILED BY THE ASSESSEE BEFORE THE ASST. COMMISSIONER OF INCOME TAX (A.O.) DATED 21.12.2011 WHEREIN THE ASSESSEE HAS EXPLAINED AS UNDER: - 1. DURING THE COURSE OF ASSESSMENT PROCEEDINGS YOUR GOODSELF HAS REQUESTED THE ASSESSEE - COMPANY TO SUBMIT INFORMATION RELATING TO THE ASST. YEAR 2009 - 10. WITH REGARD TO THAT AND UNDER INSTRUCTIONS FROM THE ASSESSEE, WE ARE PLEASED TO SUBMIT THE FOLLOWING: 2. 3.. 4.. 4 5. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, AN ISSUE WAS RAISED WHY THE EXPENDITURE CHARGED TO THE PROFIT & LOSS ACCOUNT CANNOT BE DISALLOWED. AT THIS JUNCTURE, IT IS TO BE SUBMITTED THAT, THE MAIN OBJECT OF THE COMPANY IS THE DEVELOPMENT OF RESIDENTIAL / COMMERCIAL COMPLEXES. THE COMPANY COMMENCED ITS BUSINESS ACTIVITY BY STARTING THE CONSTRUCTION ACTIVITY. HENCE, ALL EXPENDITURE WHICH ARE RELEVANT TO THE CONSTRUCTION IS CHARGED TO WORK IN PROGRESS AND ALL OTHER ADMINISTRATIVE EXPENDITURE CHARGED TO THE PROFIT & LOSS ACCOUNT. 6. FURTHER, OTHER ISSUE WAS ALSO RAISED, WHY CANT THE ADMINISTRATIVE EXPENDITURE BE CAPITALIZED. AT THIS JUNCTURE, IT IS OUR HUMBLE SUBMISSION THAT, IN THE CASE OF COMPANIES WHERE THE CONSTRUCTION OF COMPANY IN PROGRESS, THE EXPENDITURE INCURRED DURING THE COURSE O F CONSTRUCTION OF THE COMPANY, BE GROUPED UNDER PRE - OPERATIVE EXPENDITURE DURING CONSTRUCTION PERIOD, SINCE THE COMPANY HAS NOT COMMENCED ITS COMMERCIAL OPERATIONS BY STARTING THE CONSTRUCTION ACTIVITY. HENCE, THE EXPENDITURE NOT RELATING TO THE CONSTRUCT ION ARE OUGHT TO BE CHARGED TO THE PROFIT AND LOSS ACCOUNT. THE SAME WAS CHARGED TO THE PROFIT AND LOSS ACCOUNT RIGHTLY BY THE COMPANY. 7. IN VIEW OF THE ABOVE SUBMISSIONS, THE EXPENDITURE CHARGED TO THE PROFIT AND LOSS ACCOUNT CANNOT BE TREATED OTHERWISE THAN TO ALLOW THE LOSS CLAIMED BY THE COMPANY. 8. 6 . THUS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, T HE A.O. HA D EXAMINED THE ISSUE DURING THE ASSESSMENT PROCEEDINGS AND THEREFORE, THE RE - OPENING OF THE ASSESSMENT IS ON A MERE CHANGE OF OPIN ION. HE PLACED RELIANCE UPON VARIOUS CASE LAW IN SUPPORT OF HIS CONTENTION. AS REGARDS THE MERITS OF THE ADDITION, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HA D COMMENCED ITS BUSINESS OF CONSTRUCTION BUT HAD NOT STARTED THE COMMERC IAL ACTIVITY O F SALE OF FLATS. THEREFORE, SINCE THE ASSESSEE HAS COMMENCED ITS BUSINESS, THE ADMINISTRATIVE AND OTHER EXPENDITURE IS REVENUE IN NATURE AND ALLOWABLE AS SUCH. LEARNED DEPARTMENTAL REPRESENTATIVE, HOWEVER, RELIED UPON THE ORDERS OF THE AUTH ORITIES BELOW. 7 . HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ORIGINAL ASSESSMENT WAS COMPLETED ON 29.12.2011 U/S 143(3) OF THE ACT. THE ASSESSEE HAS MADE SUBMISSIONS BEFORE THE A.O, WHICH ARE AT PAGES 39 & 40 AND 40 TO 43 OF THE PAPER BOOK WHICH ARE 5 DATED 21.12.2011; 19.09.2011 AND 29.08.2011 RESPECTIVELY. THUS, IT IS SEEN THAT THE ASSESSING OFFICER DURING THE ORIGINAL ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT HAD APPLIED HIS MIND TO THE RELEVANT FACTS BEFORE COMPLETING THE ASSESSMENT. THEREFORE, WITHOUT THERE BEING ANY TANGIBLE MATERIAL WHICH HAS COME TO THE KNOWLEDGE OF THE A.O. SUBSEQUENT TO THE ASSESSMENT U/S 143(3) OF THE ACT, THE A.O. COULD NOT H AVE RE - OPENED THE ASSESSMENT U/S 147 OF THE ACT. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. KELVINATOR INDIA LIMITED REPORTED IN (320 ITR 561) (SC) HAS HELD THAT WHERE THE ASSESSMENT IS COMPLETED U/S 143(3) OF THE ACT AND THERE IS NO TANGIB LE MATERIAL WHICH HAS COME TO THE KNOWLEDGE OF THE A.O. SUBSEQUENT TO THE PASSING OF THE ASSESSMENT ORDER, THE RE - ASSESSMENT IS NOT VALID. THE RELEVANT PARAGRAPHS ARE REPRODUCED HEREUNDER FOR READY REFERENCE. ON GOING THROUGH THE CHANGES, QUOTED ABOVE, MADE TO SECTION 147 OF THE ACT, WE FIND THAT, PRIOR TO DIRECT TAX LAWS (AMENDMENT) ACT, 1987 , RE - OPENING COULD BE DONE UNDER ABOVE TWO CONDITIONS AND FULFILMENT OF THE SAID CONDITIONS ALONE CONFERRED JURISDICTION ON THE ASSESSING OFFICER TO MAKE A BACK ASSESSMENT, BUT IN SECTION 147 OF THE ACT [WITH EFFECT FROM 1 - 4 - 1989], THEY ARE GIVEN A GO - BY AND ONLY ONE CONDITION HAS REMAINED, VIZ., THAT WHERE THE ASSESSING OFFICER HAS REASON TO BELIEVE THAT INCOME HAS ESCAPED ASSESSMENT, CONFERS JURISDICTION TO RE - O PEN THE ASSESSMENT. THEREFORE, POST 1 - 4 - 1989, POWER TO REOPEN IS MUCH WIDER. HOWEVER, ONE NEEDS TO GIVE A SCHEMATIC INTERPRETATION TO THE WORDS 'REASON TO BELIEVE' FAILING WHICH, WE ARE AFRAID, SECTION 147 WOULD GIVE ARBITRARY POWERS TO THE ASSESSING OFFIC ER TO RE - OPEN ASSESSMENTS ON THE BASIS OF 'MERE CHANGE OF OPINION', WHICH CANNOT BE PER SE REASON TO REOPEN. WE MUST ALSO KEEP IN MIND THE CONCEPTUAL DIFFERENCE BETWEEN POWER TO REVIEW AND POWER TO RE - ASSESS. THE ASSESSING OFFICER HAS NO POWER TO REVIEW; H E HAS THE POWER TO REASSESS. BUT REASSESSMENT HAS TO BE BASED ON FULFILMENT OF CERTAIN PRE - CONDITION AND IF THE CONCEPT OF 'CHANGE OF OPINION' IS REMOVED, AS CONTENDED ON BEHALF OF THE DEPARTMENT, THEN, IN THE GARB OF RE - OPENING THE ASSESSMENT, REVIEW WOUL D TAKE PLACE. ONE MUST TREAT THE CONCEPT OF 'CHANGE OF OPINION' AS AN IN - BUILT TEST TO CHECK ABUSE OF POWER BY THE ASSESSING OFFICER. HENCE, AFTER 1 - 4 - 1989, ASSESSING OFFICER HAS POWER TO REOPEN, PROVIDED THERE IS 'TANGIBLE MATERIAL' TO COME TO THE CONCLUS ION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. OUR VIEW GETS SUPPORT FROM THE CHANGES MADE TO SECTION 147 OF THE ACT, AS QUOTED HEREINABOVE. UNDER THE DIRECT TAX LAWS (AMENDMENT) ACT, 1987, PARLIAMENT NOT ONLY DELETED THE WORDS 'REASON TO BELIEVE' BUT ALSO INSERTED THE WORD 'OPINION' IN SECTION 147 OF THE ACT. HOWEVER, ON RECEIPT OF REPRESENTATIONS FROM THE COMPANIES AGAINST OMISSION OF THE WORDS 'REASON TO BELIEVE', PARLIAMENT RE - INTR ODUCED THE SAID EXPRESSION AND DELETED THE WORD 'OPINION' ON THE GROUND THAT IT 6 WOULD VEST ARBITRARY POWERS IN THE ASSESSING OFFICER. WE QUOTE HEREINBELOW THE RELEVANT PORTION OF CIRCULAR NO. 549, DATED 31 - 10 - 1989, WHICH READS AS FOLLOWS: '7.2 AMENDMENT MADE BY THE AMENDING ACT, 1989, TO REINTRODUCE THE EXPRESSION 'REASON TO BELIEVE' IN SECTION 147. A NUMBER OF REPRESENTATIONS WERE RECEIVED AGAINST THE OMISSION OF THE WORDS 'REASON TO BELIEVE' FROM SECTION 147 AND THEIR SUBSTITUTION BY THE 'OPINION' OF T HE ASSESSING OFFICER. IT WAS POINTED OUT THAT THE MEANING OF THE EXPRESSION, 'REASON TO BELIEVE' HAD BEEN EXPLAINED IN A NUMBER OF COURT RULINGS IN THE PAST AND WAS WELL SETTLED AND ITS OMISSION FROM SECTION 147 WOULD GIVE ARBITRARY POWERS TO THE ASSESSING OFFICER TO REOPEN PAST ASSESSMENTS ON MERE CHANGE OF OPINION. TO ALLAY THESE FEARS, THE AMENDING ACT, 1989, HAS AGAIN AMENDED SECTION 147 TO REINTRODUCE THE EXPRESSION 'HAS REASON TO BELIEVE' IN PLACE OF THE WORDS 'FOR REASONS TO BE RECORDED BY HIM IN WRI TING, IS OF THE OPINION'. OTHER PROVISIONS OF THE NEW SECTION 147, HOWEVER, REMAIN THE SAME.' [EMPHASIS SUPPLIED] RESPECTFULLY FOLLOWING THE SAME, WE SET - ASIDE THE ASSESSMENT ORDER PASSED U/S 143(3) R.W.S 147 OF THE ACT. 8 . SINCE WE HAVE SET - ASIDE THE RE - ASSESSMENT ORDER, THE OTHER GROUNDS OF APPEAL ON THE MERITS OF THE DISALLOWANCE ARE NOT ADJUDICATED AT THIS STAGE AS IT WOULD ONLY RESULT AN ACADEMIC EXERCISE. 9 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 10 TH OCTOB ER , 2018. SD/ - SD/ - (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 10 TH OCTOBER , 2018 OKK 7 COPY TO: - 1) P.R. DATLA & CO., CHARTERED ACCOUNTANTS, 6 - 3 - 788/A/9, FIRST FLOOR , DURGA NAGAR, AMEERPET, HYDERABAD - 016. 2) ACIT, CIRCLE - 2(2), HYDERABAD. 3) THE CIT(A) - 2 , HYDERABAD 4) THE PR. CIT - 2 , HYDERABAD 5) THE DR, ITAT, HYDERABAD 6) GUARD FILE