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2019 (3) TMI 2037 - AT - Income TaxReopening of assessment u/s 147 - change of opinion - assessee had claimed deduction u/s 35AD - HELD THAT - As reasons recorded by the AO reveals that the AO had come into the knowledge of escapement of income of the assessee while conducting the assessment proceedings u/s 143(3) of the Act for the subsequent assessment year. Hence, it cannot be said that no information had come to the knowledge of the AO or that it was a case of change of opinion. Though before forming the opinion, the AO has also noted that the aforesaid issue escaped the attention of the AO for the year under consideration and the AO was of the view that the assessee was not entitled to the aforesaid claim of deduction u/s 35AD of the Act. In view of this, it cannot be said that it is a case of change of opinion or that no tangible information had come into the possession of the AO to form the belief of escapement of income for the year under consideration. Sanction of the competent authority has been obtained by the AO for reopening under the provision of Section 151(1) of the Act whereas the sanction had to be obtained u/s 151(2) - Admittedly, the approval for re-opening of the assessment in this case has been given by the Joint Commissioner which is the Competent Authority as provided under the relevant provisions of Income Tax Act. Mere mentioning of the Section as 151(1) instead of 151(2), in our view, is nothing more than a clerical mistake and has not caused any prejudice to the assessee. Joint Commissioner has sanctioned the reopening of the assessment in a mechanical manner without application of mind - As gone through the form of recording reasons and grant of approval u/s 148 of the Act and find that the AO has recorded reasons in detail for forming of belief that the income of the assessee has escaped assessment and where upon the Joint Commissioner, in his own hand-writing has written that he is satisfied that it was a case for issue of notice u/s 148 - we do not think that the Joint Commissioner has not read over the reasons or he had not applied his mind to the reasons recorded by the AO. Whether the approval has been granted in a mechanical manner or after application of mind is subjective and depends upon the facts of each case - we do not think that the Joint Commissioner has not applied his mind while granting approval. Addition u/s 35AD - Deduction in respect of expenditure on specified business - HELD THAT - A perusal of the above provisions of Section 35AD reveals that assessee is eligible to claim deduction in respect of capital expenditure if the same is incurred wholly and exclusively for the purpose of any specified business carried out by him during the previous year in which such expenditure is incurred. However, in cases where such expenditure is incurred prior to the commencement of its operations by the assessee and amount is capitalized in the books of account of the assessee on the date of commencement of operations, then such expenditure is allowable as deduction in the previous year in which the assessee commences operations of his specified business. Lower authorities have wrongly interpreted the relevant provisions of the Act. There are two parts of the above said provisions. In the first part, it has been mentioned that an assessee is eligible to claim deduction of the capital expenditure if such an expenditure has been incurred wholly and exclusively in a specified business. There is no condition of any date or year of commencement of specified business. However, in the second part, it has been provided that if such an expenditure has been incurred prior to the commencement of business and has been duly capitalized in the books of account, the claim will be allowed in the year in which the assessee commences operations of his specified business. There is neither any overlapping nor any contradiction in the aforesaid provision. The assessee is covered in the first part i.e. the assessee has incurred the expenditure on the specified business during the year in which operations of his business of warehousing were already going on. No justification on the part of the lower authorities in denying the deduction to the assessee u/s 35AD - This ground is, accordingly, allowed in favour of the assessee. Disallowance of Prior Period Expenses - HELD THAT - As per the relevant part of the finding of the Tribunal 2016 (7) TMI 1687 - ITAT CHANDIGARH it is the contention of the assessee that assessee is a public sector undertaking and is a vast organization. The expenses when not reported or identified up to the close of the year are subsequently booked under prior period expenses. This system of accounting of the assessee has been regularly accepted by the Department in the past. There is no change in the facts and circumstance of the case. As submitted that necessary details were duly submitted before the AO that all of the expenses are supported by proper vouchers supporting evidence. It is not the case of the Assessing officer that any short coming has been noted in the vouchers. This is also not the case that any distortion in profit has been observed as compared to preceding year in view of the above said expenditure. Revenue has no cogent reason why the prior period expenses claimed by the assessee which have been consistently so claimed and allowed by the Department in earlier years should be disallowed in the current year. Addition on account of work in progress - AO noted that the assessee in the balance sheet had shown Rs. 6,80,90,888/- on account of machinery work in progress while on other hand the assessee had incurred huge interest expenses of Rs. 2,11,65,306/- during the year on various loans, thus interest expenses should not be disallowed and capitalized as the machinery had not been put to use during the year - As submitted that the assessee is a Government organization and if a loan is taken, that is used for that specific purpose only for which it has been taken. The assessee being a government organization, cannot deviate the funds for other works - HELD THAT - We restore this issue to the file of the AO to verify the aforesaid contentions raised by the assessee and if it is found that during the year the assessee has not taken any fresh loan and further that the own funds of the assessee were sufficient to meet the investment in capital work in progress, then no disallowance is to be made on this issue. In view of our finding given above, the appeal of the revenue is treated as partly allowed for statistical purposes.
Issues Involved:
1. Validity of re-opening of assessment under Section 147/148 of the Income Tax Act, 1961. 2. Sanction under Section 151 of the Income Tax Act, 1961. 3. Deduction under Section 35AD of the Income Tax Act, 1961. 4. Disallowance of prior period expenses. 5. Disallowance on account of work in progress. Detailed Analysis: 1. Validity of Re-opening of Assessment under Section 147/148: The assessee contested the re-opening of assessment by the Assessing Officer (AO) under Section 147/148, arguing that there was no tangible material to justify this action. The AO had noted during the assessment proceedings for the subsequent year that the assessee's claim for deduction under Section 35AD was not valid, leading to the belief that income had escaped assessment for the year under consideration. The Tribunal found that the AO had sufficient information to form a belief of income escapement, and it was not merely a case of change of opinion. Thus, the re-opening of the assessment was held valid. 2. Sanction under Section 151: The assessee argued that the sanction for re-opening should have been obtained under Section 151(2) instead of Section 151(1). The Tribunal observed that the Joint Commissioner, the competent authority under Section 151(2), had granted the approval. The mention of Section 151(1) instead of 151(2) was deemed a clerical error, causing no prejudice to the assessee. Additionally, the Tribunal found that the approval was not granted in a mechanical manner, as the Joint Commissioner had applied his mind to the reasons recorded by the AO. 3. Deduction under Section 35AD: The assessee claimed a deduction under Section 35AD for expenditures on constructing warehouses. The AO disallowed this, arguing that the assessee did not commence a new business as required by the proviso to Section 35AD. The Tribunal clarified that the assessee is eligible for the deduction if the expenditure is incurred wholly and exclusively for a specified business, regardless of the commencement date of the business. The Tribunal found that the assessee had incurred the expenditure during the year when the business operations were ongoing and allowed the deduction. 4. Disallowance of Prior Period Expenses: The Revenue challenged the CIT(A)'s decision to allow prior period expenses, arguing that the assessee followed the mercantile system of accounting. The Tribunal upheld the CIT(A)'s decision, noting that the assessee, a public sector undertaking, consistently claimed such expenses, and the Department had accepted this practice in previous years. The Tribunal found no reason to disallow the expenses in the current year. 5. Disallowance on Account of Work in Progress: The AO disallowed interest expenses related to work in progress, assuming that borrowed funds were used for this purpose. The CIT(A) found that the assessee did not borrow funds for capital work in progress during the year and had sufficient own funds. The Tribunal restored this issue to the AO to verify the assessee's claims. If it is found that no fresh loans were taken and sufficient own funds were available, no disallowance should be made. Conclusion: - The legal grounds for re-opening the assessment were decided against the assessee. - The grounds on merits regarding the allowability of the claim of deduction under Section 35AD were allowed in favor of the assessee. - The appeals of the assessee were partly allowed. - The Revenue's appeals were partly allowed for statistical purposes, with specific issues restored to the AO for verification.
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