2016 (7) TMI 930 - HC - Income Tax

Reopening of assessment - nature of expenditure - capital expenditure OR revenue expenditure - interest free loan advanced by assessee company to a sister concern - Held that - Both the issues came up for consideration before the Assessing Officer at the time of original assessment. In the letter dated 27.7.2011, the assessee had given the breakup of the expenditure of sum of ₹ 1.74crores pointing out that the same was closing stock as on 31.3.2009. The assessee also gave breakup of such sums and the purpose for which such expenditure was incurred. In a later communication dated 4.10.2011, the assessee had made a detailed submission why no addition should be made on the ground that the assessee had made interest free advances to a sister concern.Any attempt on part of the Assessing Officer now to revisit such claims would be based on change of opinion. Even the Assessing Officer did not discard the assessee s contention that the claims were originally examined by the Assessing Officer. He in fact, suggested that such examination was not proper and that therefore, the claims were required to be disallowed. Surely, the Assessing Officer was not acting in the capacity of a revisional authority and, therefore, had no jurisdiction to judge the consideration bestowed to these claims by the Assessing Officer. In fact, there is yet another additional ground with respect to the ground of addition recorded in the reasons. The assessee has in the objections pointed out that no such claim of expenditure was ever made and the amount was shown in the closing stock thereby eliminating from the expenditure side, an issue not examined by the Assessing Officer while disposing of such objections at all. Be that as it may, on the first ground itself of the claim having been examined by the Assessing Officer, the petition must succeed. - Decided in favour of assessee.

Summary

Issues:
Challenging notice for reopening assessment based on alleged under-assessment of income due to misclassification of expenditure and interest-free loan to subsidiary.

Detailed Analysis:

1. Misclassification of Expenditure:
- The Assessing Officer issued a notice for reopening the assessment due to alleged under-assessment of income amounting to ?1.74 crores. The reason cited was that the expenditure on product development was wrongly claimed as revenue expenditure instead of capital expenditure, leading to under-assessment.
- The petitioner contended that the Assessing Officer had already examined this claim during the original assessment, and any reassessment would amount to a change of opinion. The petitioner highlighted that detailed explanations were provided regarding the nature of the expenditure during the assessment proceedings.
- The court agreed with the petitioner, emphasizing that the Assessing Officer's attempt to revisit this issue was unjustified and amounted to a change of opinion. The court noted that the Assessing Officer failed to conduct proper inquiries and examinations before making the original assessment decision.

2. Interest-Free Loan to Subsidiary:
- Another ground for reopening the assessment was the interest-free loan given by the petitioner to its subsidiary. The Assessing Officer contended that interest expenses incurred on the loan should have been disallowed, resulting in under-assessment of income by ?45.15 lakhs.
- The petitioner had previously explained the commercial expediency behind the loan in the original assessment proceedings. The petitioner cited relevant legal precedents and provisions to support the deduction of interest paid on borrowed capital for such transactions.
- The court noted that the petitioner had adequately addressed this issue during the original assessment, providing detailed justifications for the loan to the subsidiary based on commercial expediency. The court held that the Assessing Officer's attempt to reassess this issue was unwarranted and amounted to a change of opinion.

3. Conclusion:
- The court quashed the notice for reopening the assessment dated 24.3.2014, ruling in favor of the petitioner. The court found that the Assessing Officer's grounds for reassessment were based on a change of opinion and lacked proper examination and inquiry. The court emphasized the importance of ensuring a judicial view in assessment proceedings and upheld the petitioner's objections against the reopening notice.