2023 (5) TMI 579 - AT - Income Tax

Scrutiny Assessment - CIT(A) and AO concluded that the assessment on issues and matters which are different from the reasons for limited scrutiny communicated during the assessment proceedings - HELD THAT - On perusal of the copies of notice u/s 143(2) of the Act, as stated earlier, we do not find anywhere that the case was selected under the limited scrutiny. Assessee stated that the AO has given reason for selection of scrutiny in the assessment order which says as the CASS reasons for selection of scrutiny where there is large difference in the closing stock shown in the balance sheet and profit and loss account for the current year as per the return of income. The Central Board of Direct Taxes had framed certain reasons for selection of scrutiny assessment under which, the case has been selected and reason for selection for scrutiny is assuming the jurisdiction for scrutiny assessment. In view of this, the arguments advanced by the ld.AR of the assessee are rejected. Accordingly, this ground is rejected. Character of land - reclassification/ recharacterizing of land from 'stock-in-trade' to 'capital asset' - disallowance of revenue expenses u/s 37(1) - HELD THAT - It cannot be said that the assessee had changed its business activity or re- characterized the assets from the current asset into capital asset. The assessee has taken steps in getting land converted and the lands in question have classified as urbanized land in 2007 as per letter dated 03/08/2007 issued by the Member Secretary, Malaphuram Town Local Planning Committee. The lands were already converted and classified for imposing development commercial and residential and no further conversion was warranted. The AO noted after expiry of 9 years, the company has not done any activity in this regard. It has been observed that after acquiring land, the assessee approached the Electricity Department for removal of high tension electric wires and paid fee - The high tension wire was eventually shifted from assessee land. Thereafter the assessee has tried to acquire adjacent land in order to give needful access to the road. Therefore, it cannot be said that the assessee is not doing business activity. Lower authorities have taken wrong view that no any business activities have been done after the purchase of the land and the value appearing under the head work-in-progress are capital assets. The expenditure incurred by the assessee are revenue expenditure and allowed as deduction u/s. 37 of the Act. Ground No. 3 is allowed. Nature of income - interest income received - business income or income from other sources - HELD THAT - Interest received on fixed deposits by the assessee is to be treated as income from other sources, therefore, ground raised by the assessee on this issue is rejected. Nature of expenses - legal and professional charges - revenue of capital expenses - AR submitted that the legal and professional charges has been incurred towards business of the assessee for maintaining the peaceful possession of the land acquired - HELD THAT - Since we have uphold ground No.3 in favour of the assessee, therefore, these expenditure also would be treated as revenue expenditure Setting off of the loss arising from the business carried on by the assessee during the year under consideration and the interest received on Fixed Deposits as income from other source - HELD THAT - Since it is held interest received from investment of surplus funds is income from other sources, accordingly the business loss to that extent is eligible for set off from other heads of income as per the provisions of the Income Tax act. In view of this, AO is directed to give benefit for setting - off the business loss from the interest income as per law. Accordingly this issue is partly allowed for statistical purpose.

Issues Involved:
1. Limited Scrutiny
2. Reclassification of Land from 'Stock-in-Trade' to 'Capital Asset'
3. Addition of Interest Income as 'Income from Other Sources'
4. Disallowance of Expenditure
5. Enhancement of Income
6. Set-off and Carry Forward of Business Loss
7. Levy of Interest under Section 234B and 234D

Summary:

1. Limited Scrutiny:
The assessee challenged the validity of the limited scrutiny notice under section 143(2) dated 04.05.2016, arguing it was issued without stating reasons for limited scrutiny. The tribunal found no indication in the notice that the case was selected under limited scrutiny, rejecting the assessee's argument based on CBDT instructions applicable only to limited scrutiny cases. Thus, the ground was rejected.

2. Reclassification of Land from 'Stock-in-Trade' to 'Capital Asset':
The AO reclassified the land held by the assessee from 'stock-in-trade' to 'capital asset,' arguing that no business activities were carried out on the land after its purchase in 2007-08. The tribunal, however, noted the continuous business activities and steps taken by the assessee to develop the land, including legal and professional expenses. Therefore, the tribunal concluded that the land should be treated as 'stock-in-trade,' allowing the assessee's ground.

3. Addition of Interest Income as 'Income from Other Sources':
The AO and CIT(A) classified the interest income of Rs. 17,35,627 from fixed deposits as 'income from other sources.' The tribunal upheld this classification, citing judgments that interest income received during the construction period should be taxed as income from other sources. Thus, the ground was rejected.

4. Disallowance of Expenditure:
The AO disallowed the entire expenditure of Rs. 39,21,033, treating it as capital expenditure. The tribunal, however, recognized the incurred legal and professional charges as revenue expenditure, given that the business had already been set up and was operational. Therefore, the tribunal allowed the assessee's ground.

5. Enhancement of Income:
The CIT(A) enhanced the assessed income by recharacterizing legal and professional expenditure as capital expenditure. The tribunal, aligning with its decision on the reclassification of land and disallowance of expenditure, treated these expenses as revenue expenditure, allowing the assessee's ground.

6. Set-off and Carry Forward of Business Loss:
The tribunal directed the AO to allow the set-off of business loss against the interest income classified as 'income from other sources,' as per the provisions of the Income Tax Act. Thus, the ground was partly allowed for statistical purposes.

7. Levy of Interest under Section 234B and 234D:
The grounds relating to the levy of interest under sections 234B and 234D were acknowledged as consequential in nature.

Conclusion:
Both appeals were partly allowed for statistical purposes, with the tribunal pronouncing the decision on May 12, 2023.

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