2015 (3) TMI 261 - AT - Income Tax

Revision u/s 263 - allowability of interest and other incidental expenses after ascertaining whether the appellant has carried out its business activities as per the Memorandum of Association (MOA) and whether lending money to the holding and subsidiary companies constitutes its business activities - CIT has issued two notices dated 25.10.2013 as well as 28.10.2013 - Held that - Notice issued u/s 263 is concerned, it is merely a show cause notice. It does not decide that the order is erroneous as well as prejudicial. Section 263 requires an assessee be given an opportunity of being heard. The notice represent the opportunity of hearing given to the assessee. Issuing of the notice u/s 263 does not get the assessment proceedings pending. The CIT can give in our opinion as many opportunity as he may desire. Therefore, issuing two notices to the assessee on different dates u/s 263 will not invalidate the order passed u/s 263. Company has not commenced its business or development of SEZ / real estate still the interest payable / paid on the loans and other incidental expenses were charged to the profit and loss account as expenses incurred during the previous year relevant to the assessment year and computed the business loss at ₹ 36109708/-. The assessing officer has allowed the carry forward of these expenses even though the assessee has not commenced its business. The order passed u/s 263 has to be upheld as, in our opinion, it has passed through test of fulfilment of both the conditions by the CIT that the order passed by the AO is erroneous as well as prejudicial to the interest of the revenue on the issue of claim of expenses allowed to the Assessee without verifying whether the assessee has set up / commenced the business during the year. We, therefore, dismiss the appeal filed by the Assessee by upholding the order passed u/s 263. - Decided against assessee.

Summary

Issues Involved:
1. Validity of notices issued for invoking jurisdiction under section 263 of the Income Tax Act.
2. Whether the assessment order under section 143(3) was erroneous and prejudicial to the interest of the revenue.
3. Examination of the allowability of interest and other incidental expenses.
4. Determination of whether the business of the appellant was set up and commenced during the assessment year 2008-09.

Issue-wise Detailed Analysis:

1. Validity of Notices Issued for Invoking Jurisdiction Under Section 263:
The appellant contended that the proceedings initiated under section 263 were illegal and void due to the issuance of two notices, one dated 25.10.2013 and another dated 28.10.2013. The appellant argued that the facts stated in the notice dated 25.10.2013 did not pertain to them and relied on precedents which suggest that a second notice issued during the pendency of proceedings under the first notice is not valid. However, the tribunal found that the issuance of multiple notices under section 263 does not invalidate the proceedings, as section 263 merely requires giving an opportunity of being heard, and the issuance of notices represents this opportunity.

2. Whether the Assessment Order Under Section 143(3) Was Erroneous and Prejudicial to the Interest of the Revenue:
The tribunal examined whether the assessment order was erroneous and prejudicial to the revenue's interest. It was noted that the company had not commenced its business of development of SEZ/Real estate during the relevant assessment year and had claimed interest and other incidental expenses as business losses. The tribunal emphasized that for invoking section 263, both conditions-erroneous order and prejudice to revenue-must be satisfied. The tribunal concluded that the assessment order was erroneous due to a lack of inquiry into the commencement of the business, and this lack of inquiry rendered the order prejudicial to the revenue.

3. Examination of the Allowability of Interest and Other Incidental Expenses:
The CIT directed the AO to examine the allowability of interest and other incidental expenses after verifying whether the appellant had carried out its business activities as per the Memorandum of Association (MOA) and whether lending money to holding and subsidiary companies constituted its business activities. The tribunal found that the AO had not made any inquiry regarding the commencement of the business, which was essential to determine the allowability of these expenses. The tribunal held that the lack of inquiry by the AO made the assessment order erroneous and prejudicial to the revenue's interest.

4. Determination of Whether the Business of the Appellant Was Set Up and Commenced During the Assessment Year 2008-09:
The appellant argued that its business was set up and commenced during the assessment year 2008-09 when it borrowed money from the holding company and lent it to the subsidiary company. However, the tribunal noted that no inquiry was made by the AO regarding the commencement of the business. The tribunal emphasized that the expenses could only be regarded as revenue expenditure if incurred after the business was set up. The tribunal upheld the CIT's order to set aside the assessment and directed the AO to re-examine the issue after providing the appellant an opportunity to present their case.

Conclusion:
The tribunal upheld the CIT's order passed under section 263, finding that the assessment order was erroneous and prejudicial to the revenue's interest due to the lack of inquiry into the commencement of the business and the allowability of expenses. The appeal filed by the appellant was dismissed, and the AO was directed to re-examine the issues after providing an opportunity to the appellant. The tribunal clarified that issuing multiple notices under section 263 does not invalidate the proceedings.