2010 (1) TMI 733 - AT - Income Tax

Re-assessment - Assessee claimed interest pertaining capital work in progress as revenue expenditure - interest on borrowing was charged to Capital Work in Progress relating to the expansion of certain projects amount being claimed as deduction u/s.36(1)(iii) of the Income Tax Act - And Administrative expenses incurred by the Engineering and Project Department at the Headquarters Office and the Refinery for the purpose of monitoring and supervision of the execution of the projects which was charged to capital work in progress as Establishment charges claimed as deduction from the computation of income - Held that - Assessing Officer had properly applied his mind qua deductibility of interest and administrative expenses in the original assessment order passed u/s.143(3). In the absence of any further material coming to the possession of the Assessing Officer indicating the fallacy in the assessee s claim the Assessing Officer could not have assumed jurisdiction u/s.147 to re-examine such deductions already allowed in the original assessment. reassessment done by the A.O. in this case was based on change of opinion which is not sustainable in law assessment order set aside.

Issues Involved:

1. Validity of the initiation of reassessment proceedings under Section 147.
2. Allowability of interest on borrowing claimed as revenue expenditure under Section 36(1)(iii).
3. Allowability of administrative expenses claimed as revenue expenditure under Section 37(1).

Detailed Analysis:

1. Validity of the Initiation of Reassessment Proceedings:

The primary issue in this appeal was the validity of the initiation of reassessment proceedings under Section 147 of the Income Tax Act. The original assessment was completed under Section 143(3) on 28.1.2004, determining the total income at Rs. 319.50 crores. The assessment was reopened under Section 147, and notice under Section 148 was issued on 30.3.2006, served on 31.3.2006. The reasons recorded by the Assessing Officer (AO) for reopening the assessment were the incorrect allowance of interest on borrowing and administrative expenses pertaining to capital work in progress as revenue expenditure, leading to an alleged escape of income.

The assessee contended that the original assessment involved a full inquiry into these items, and the AO's subsequent action amounted to a change of opinion, which is not permissible. The Departmental Representative argued that there was no discussion in the original assessment order about these items, indicating non-application of mind by the AO, justifying the reassessment.

The Tribunal held that reassessment cannot be done on the basis of a mere change of opinion, as established by the Hon'ble jurisdictional High Court in various cases, including Asteroids Trading and Investments P. Ltd. vs. DCIT and Asian Paints Ltd. vs. DCIT. The Tribunal noted that the AO had indeed conducted inquiries during the original assessment, and the assessee had provided detailed responses. The absence of discussion in the assessment order did not imply non-application of mind. The Tribunal concluded that the reassessment was based on a change of opinion and was not sustainable in law.

2. Allowability of Interest on Borrowing Claimed as Revenue Expenditure:

The AO had disallowed the interest on borrowing amounting to Rs. 14.65 crores, which was charged to capital work in progress but claimed as a deduction under Section 36(1)(iii). The assessee relied on judicial precedents to support its claim. The Tribunal observed that the AO had raised queries regarding this deduction during the original assessment, and the assessee had provided explanations and clarifications, which were accepted by the AO. The reassessment on this ground was, therefore, deemed to be a change of opinion.

3. Allowability of Administrative Expenses Claimed as Revenue Expenditure:

Similarly, the AO disallowed administrative expenses amounting to Rs. 16.85 crores, incurred by the Engineering and Project Department, which were charged to capital work in progress but claimed as a deduction under Section 37(1). The assessee argued that these were routine administrative expenses and not capital expenditure. The Tribunal found that the AO had inquired into this deduction during the original assessment, and the assessee had provided the necessary details and justifications, which were accepted by the AO. The reassessment on this ground was also considered a change of opinion.

Conclusion:

The Tribunal concluded that the reassessment proceedings were invalid as they were based on a change of opinion. The original assessment involved inquiries and acceptance of the assessee's claims regarding interest on borrowing and administrative expenses. The reassessment was, therefore, quashed, and the appeal was allowed. The Tribunal did not adjudicate on the other grounds raised by the assessee on merits, as the reassessment itself was set aside. The order was pronounced on January 11, 2010.

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