2011 (1) TMI 1415 - HC - Income Tax

Deduction u/s 35D - Allowability of expenditure for establishing the business of manufacturing and sale of Beer and Cold Drinks - assessee wanted this expenditure to be spread over for a period of ten years as according to him, this expenditure need to be amortized for the aforesaid period - claimed deduction of the entire expenditure in the same year i.e. the assessment years 1995-96 but claimed only 10% thereof as deduction in that year. HELD THAT - The ball was set in motion in the assessment year 1995-96 when the assessee was allowed to claim deduction at the rate of 10% of the total expenditure incurred by it for four years i.e. for the assessment years 1995-96 to 1998-99 the assessment have become final. Thus, 40% of the lump sum amount incurred in the first assessment year has been allowed as deduction at the rate of 10% in each of these years. That is the factual situation prevailing. Upsetting the apple cart in the middle and challenging the course of action by treating these expenditure under Section 35 D of the Act would clearly be impermissible. It may also noted that with interest, that for the assessment years 2002-03 again deduction at the rate of 10% of the said expenditure has been allowed. In these circumstances, apart from the fact that in the year 1995-96, the issue was gone into by the Assessing Officer by applying his mind, we are of the opinion that this course of action cannot be adopted for few assessment years, whereas assessment in respect of five assessment years has already become final. If this is allowed, it will lead to anomalous and absurd situation, inasmuch as, the same expenditure which was incurred in the year 1995-96 has been given one treatment, namely, the Department has allowed it to be spread over and gave the benefit of deduction at the rate of 10% for five years and in respect of some expenditure incurred much earlier, for the remaining year, the department seeks to apply the provisions of Section 35 D of the Act. This is clearly impermissible. The order of the Tribunal cannot and should not be interfered - Appeal dismissed.

Summary

Issues:
- Allowability of expenditure incurred by the assessee in assessment years 1995-96
- Treatment of expenditure under Section 35 D of the Income-Tax Act
- Reopening of assessments for subsequent years based on the treatment of expenditure

Analysis:

The judgment pertains to three appeals related to the same assessee for the assessment years 1999-2000, 2003-04, and 2004-05, focusing on the allowability of expenditure incurred in the assessment year 1995-96. The assessee had spent a significant amount on establishing a business for manufacturing and selling Beer and Cold Drinks, seeking to amortize the expenditure over ten years. The Assessing Officer initially allowed the deduction of 10% of the expenditure in the assessment year 1995-96 and continued to permit the same rate of deduction for the following six years, totaling 40% of the initial expenditure.

However, during the regular assessment for the years 2003-04 and 2004-05, the Assessing Officer changed course, contending that the expenditure should have been claimed under Section 35 D of the Act as pre-establishment expenditure, leading to reassessment. Additionally, notices were issued to reopen assessments for the years 1999-2000, 2000-01, and 2001-02 based on the same premise that income had escaped assessment due to the treatment of expenditure.

The assessee appealed against the reassessment orders for the years 1999-2000, 2000-01, and 2001-02, as well as the regular assessments for the years 2003-04 and 2004-05. The CIT (A) set aside the orders under Section 147 and the assessment orders for 2003-04 and 2004-05. The Department then appealed against these decisions, leading to the present judgment.

The High Court emphasized that the Assessing Officer had already allowed the deduction of the expenditure over multiple years, with assessments for five years being finalized based on this treatment. Disrupting this established practice and applying Section 35 D for subsequent years while maintaining a different approach for earlier years was deemed impermissible and would create an anomalous situation. Therefore, the Court upheld the Tribunal's decision, dismissing the appeals by the Revenue.

In conclusion, the judgment highlights the importance of consistency in the treatment of expenditures over multiple assessment years, emphasizing that altering the approach mid-way would lead to confusion and inconsistency in tax assessments.