2017 (5) TMI 422 - AT - Income Tax

Reopening of assessment - disallowance of loss claimed - non commencement of business - Held that - The assessment in this case has been completed u/s 143(3) and as seen from the order of the AO he has examined various expenditure claims and disallowed two of the items which would not have come to the knowledge but for the verification of the expenditure claims. Not only that annual report and other documents placed on record indicate that assessee has correctly claimed the revenue expenditure. The issue of commencement of business is necessary to examine for allowing expenditure. It is the first year of business commencement and the AO will certainly examine the commencement of business before allowing loss or profit of the year. Therefore it cannot be said that AO has not applied his mind when he allowed the loss as claimed with certain disallowances. The very basis of earlier opinion being reviewed by the AO in the reassessment proceedings will certainly come into the domain of the review of the order by the successive officer. Review of the order cannot be done in the form of reopening of assessment without there being any tangible material to form a different opinion when the assessment is reopened within the four years from the end of the assessment year. It cannot be stated that assessee has not commenced business during the impugned AY. This is a fact on record that assessee commenced its lab facility which is its main activity on 8th February 2006 i.e. almost 50 days prior to the close of the accounting year. Not only there is an evidence that employees have been recruited and paid salaries to them but also orders for procurement of raw material have been placed and some of the raw material purchased and utilized during the year and Assessee s claim of depreciation was allowed by the AO in the original assessment. Assessee has commenced its business activity during the year under consideration and on merits assets have been put to use. Thus reopening of assessment is bad in law - Decided in favour of assessee.

Issues Involved:
1. Reopening of assessment.
2. Disallowance of loss claimed by the assessee.
3. Commencement of business activities.
4. Capitalization of disallowed expenditure.
5. Allowance of depreciation on assets.

Detailed Analysis:

1. Reopening of Assessment:
The primary issue is whether the reopening of the assessment by the Assessing Officer (AO) is justified. The AO initially completed the assessment under section 143(3) of the Income Tax Act on November 25, 2011, allowing the loss claimed by the assessee. However, the assessment was later reopened on the grounds that the company's annual report indicated that business activities commenced on April 1, 2006, suggesting no business activity during FY 2005-06. The AO treated the loss as preoperative expenses and disallowed the entire expenditure. The assessee contended that there was no fresh material to justify reopening and that all information had been provided during the original assessment. The tribunal noted that the AO had examined the expenditure claims during the original assessment and allowed the loss. Citing the Supreme Court's decision in CIT Vs. Kelvinator of India Ltd., it held that reopening based on a mere change of opinion is not permissible unless there is "tangible material" indicating income escapement. Therefore, the tribunal concluded that the reopening was not justified and was bad in law.

2. Disallowance of Loss Claimed by the Assessee:
The AO disallowed the loss claimed by the assessee, treating it as preoperative expenses based on the annual report's mention that business activities commenced on April 1, 2006. The assessee argued that the laboratory was fully functional by February 8, 2006, and that business activities had commenced during the year under consideration. The tribunal agreed with the assessee, noting that the laboratory's inauguration and the installation of equipment indicated the commencement of business activities. It held that the business was set up during the year, and the AO's disallowance of the loss was not justified.

3. Commencement of Business Activities:
The tribunal examined whether the assessee had commenced business activities during the relevant assessment year. The assessee argued that the business commenced either from the date of the master service agreement (June 1, 2005) or from the laboratory's inauguration (February 8, 2006). The tribunal found that the laboratory was operational by February 8, 2006, with employees recruited, salaries paid, and raw materials procured. It cited various judicial precedents, including decisions from the Delhi High Court and the Supreme Court, to support the view that business activities had commenced. Therefore, it concluded that the assessee had indeed commenced business during the year under consideration.

4. Capitalization of Disallowed Expenditure:
The assessee argued that if the expenditure was disallowed as preoperative expenses, it should be capitalized to the cost of assets, allowing for depreciation. The CIT(A) rejected this contention, stating it was premature to give such directions when the assets were not yet used. The tribunal did not specifically adjudicate this issue separately, as it allowed the appeal on the grounds that the reopening of the assessment was invalid and the business had commenced during the year.

5. Allowance of Depreciation on Assets:
The tribunal noted that the AO had allowed the claim of depreciation in the original assessment, indicating that the assets were put to use. Given that the business activities had commenced, the tribunal held that the assessee was entitled to claim depreciation on the assets.

Conclusion:
The tribunal allowed the assessee's appeal, setting aside the orders of the AO and CIT(A). It restored the original assessment, concluding that the reopening of the assessment was invalid and that the business had commenced during the relevant assessment year. The tribunal did not need to adjudicate the alternative grounds separately due to the primary grounds being allowed. The appeal was pronounced in the open court on May 5, 2017.

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