2013 (11) TMI 933 - AT - Income Tax

Reassessment of proceedings - Notice u/s 148 - Whether there are enquiries conducted by the AO into the issue of nature of business activities of the assessee for the year under consideration - Held that - Assessee submitted various details regarding to the commencement of the business relating to the paid-up capitals, expenditure incurred, income earned, services rendered etc in respect of the rest of the questions in the questionnaire. Assessee does not have any fresh or tangible material which works out as a livewire to the AO to form an opinion or create a reason to believe that there is concealment of income. It is also obvious from the written reasons mentioned by the AO that the basis for re-opening is essentially the product of the perusal of the assessment records . Therefore, issue of notice u/s 148, under the circumstances and the details mentioned above, is not proper and not in tune with the settled position in law relating to the provisions of section 148 of the Act - Decided in favour of assessee. Setup and commencement of the business activity - Development of airport infrastructure activity - Held that - Feasibility reports both financial and economic viability is not yet obtained, preparation of development plans is not yet complete, mandatory Environmental Impact Study under Environment Protection Act, 1986 by SICOM is not yet complete and 100MW captive power plant is also at preliminary stages. Thus, the assessee has not completed the stages, which are considered elementary to start the business - Aassessee is yet to obtain the environmental clearance under the Environment Protection Act and favourable feasibility reports On financial and technical fronts, assessee has yet to obtain the approved plans of development, therefore, the business of the development of airport infrastructure cannot be declared set up in this year under consideration. Acquiring of land with a stroke of pen of the Government of Maharashtra cannot be attributed to the business activity of the assessee. What has happened in this year in substance is mere appointment of SICOM, YASHADA, M/s Scott Wilson Kirkpatric India Pvt Ltd, other consultants for various other purposes, which constitutes stages prior to the set up of the business of the assessee. Therefore, in our opinion, the conclusions of the CIT(A) that the main business is not commenced in the year under consideration does not call for any interference. Reopening of assessment, for AY 2005-06, is bad in law though the interest receipts are chargeable to tax under section 56 of the Act, since the business of the assessee cannot be stated to have commenced in the year under consideration but in the ultimate analysis the appeal filed by the assessee has to be treated as allowed. - Decided in favor of assessee.

Issues Involved:
1. Validity of notice issued under section 148 and reassessment proceedings.
2. Commencement and setup of business activities.
3. Classification of interest income as business income or income from other sources.
4. Allowability of expenses under section 57(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Validity of Notice Issued Under Section 148 and Reassessment Proceedings:
The assessee challenged the notice issued under section 148 and the reassessment order passed by the Assessing Officer (AO) as illegal, bad in law, and without jurisdiction. The AO initiated reassessment proceedings based on the information available in the assessment records, concluding that the company had not commenced its business and that the expenses debited to the Profit & Loss (P&L) Account were pre-operative expenses. The assessee contended that the reassessment was based on a mere change of opinion, which is not valid. The Tribunal found that the AO had already applied his mind to the impugned issues during the original assessment proceedings and that no fresh or tangible material was available to justify the reassessment. Citing various judicial pronouncements, including the Supreme Court's judgment in CIT vs. Kelvinator of India Ltd, the Tribunal held that the reassessment was invalid as it was based on a change of opinion. Consequently, the reassessment proceedings were quashed.

2. Commencement and Setup of Business Activities:
The assessee argued that its business had commenced and that the expenses incurred were related to its business activities. The AO and CIT (A) held that the business had not commenced and treated the expenses as capital expenditure. The Tribunal examined the activities undertaken by the assessee, including acquiring land, appointing consultants, and processing tenders. It concluded that these activities were part of the process of setting up the business and not actual business operations. The Tribunal referred to the Gujarat High Court's judgment in Saurashtra Cement and Chemical Industries Ltd, which distinguished between setting up and commencement of business. It held that the business of the assessee was not set up in the year under consideration as the mandatory environmental clearances and feasibility reports were not obtained. Therefore, the expenses were rightly treated as capital expenditure.

3. Classification of Interest Income as Business Income or Income from Other Sources:
The AO treated the interest income earned from funds parked in fixed deposits (FDs) as income from other sources, while the assessee claimed it as business income. The Tribunal upheld the AO's decision, relying on the Bombay High Court's judgment in Shree Krishna Polyster Ltd, which held that interest income from surplus funds not immediately required for business is assessable as income from other sources. The Tribunal distinguished the assessee's case from other judgments cited by the assessee, such as Indian Oil Panipat Power Consortium Ltd, and concluded that the interest income was rightly taxed under section 56 of the Act.

4. Allowability of Expenses Under Section 57(iii) of the Income Tax Act:
The assessee claimed that if the interest income was treated as income from other sources, the expenses incurred to earn that income should be allowed under section 57(iii). The Tribunal found that the CIT (A) had not properly adjudicated this issue and directed the AO to re-examine the claim. It emphasized the need for primary facts relating to the exact expenditure incurred wholly and exclusively for earning the interest income. The matter was remanded to the AO for fresh adjudication.

Conclusion:
The Tribunal quashed the reassessment proceedings for AY 2005-06, upheld the classification of interest income as income from other sources, and directed the AO to re-examine the allowability of expenses under section 57(iii). For subsequent assessment years, the Tribunal remanded the matter to the AO to determine if the business was set up and commenced, considering the specific activities undertaken by the assessee in those years.

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