2020 (10) TMI 943 - HC - Income Tax

Revision u/s 263 - Pre-Operative Expenses as per Schedule-6 to the audited Profit Loss Account is not covered by Section 35D and the expenses are required to be capitalised with the block of depreciable assets - HELD THAT - Whether it was an income, taxable or not or whether it was an expenditure, to be capitalised or not, are entirely two different fields and therefore, both the authorities appear to have proceeded on a wholly wrong premise or under a confusion in the matter. These orders have been passed in a casual manner without proper enquiry into the facts by both the fact finding authorities. Therefore, in our opinion, the matter deserves to be remanded back to CIT for passing fresh orders, in accordance with law, under Section 263 of the Act, after giving a reasonable and adequate opportunity of hearing to the Assessee. Appeal of the Revenue is allowed without answering the question of law raised in the matter by setting aside the order as restored on the file of the learned Commissioner of Income Tax - I, Coimbatore, for deciding the proceedings under Section 263 of the Act afresh

Summary

Issues:
1. Interpretation of pre-operative expenses under Section 35D of the Income Tax Act, 1961.
2. Jurisdiction of the Commissioner of Income Tax under Section 263 of the Act.
3. Correctness of the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax.

Issue 1: Interpretation of Pre-Operative Expenses:
The High Court analyzed the dispute regarding the treatment of pre-operative expenses totaling &8377; 3487.18 lakhs under Section 35D of the Income Tax Act. The Commissioner of Income Tax held that these expenses should be capitalized with depreciable assets, contrary to the Assessee's claim that they were allowable in computing total income. The Court noted discrepancies in the treatment of these expenses as either income or expenditure, emphasizing the need for a thorough examination of the facts. Consequently, the Court decided to remand the matter back to the Commissioner of Income Tax for fresh orders after proper enquiry and hearing.

Issue 2: Jurisdiction under Section 263 of the Act:
The Court scrutinized the jurisdiction of the Commissioner of Income Tax under Section 263 of the Act. It observed that the Commissioner initiated proceedings based on the alleged omission to assess &8377; 3487.18 lakhs as income, but failed to issue a show cause notice specifically addressing these expenses. The Court concluded that the Commissioner's order lacked jurisdiction as no error in the Assessee's submissions was identified. Consequently, the Court canceled the Commissioner's order under Section 263 and allowed the Assessee's appeal.

Issue 3: Correctness of Tribunal and Commissioner's Orders:
The Court reviewed the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax. It noted discrepancies between the interpretations of the Tribunal and the Commissioner regarding the nature of the &8377; 3487.18 lakhs - whether income or expenditure. The Court criticized both authorities for potentially overlooking crucial distinctions and factual inquiries. Consequently, the Court set aside the Tribunal's order and directed the matter to be reconsidered by the Commissioner of Income Tax for fresh adjudication in accordance with the law.

In conclusion, the High Court allowed the Revenue's appeal, remanding the case to the Commissioner of Income Tax for a fresh decision on the treatment of pre-operative expenses under Section 35D of the Income Tax Act. The Court emphasized the need for a detailed examination of facts and proper legal procedures in determining the taxability of the disputed amount.