2018 (10) TMI 356 - AT - Income Tax

Reopening of assessment - eligibility of claiming revenue expenditure - denial of claim as assessee has not commenced the commercial activities - proof of commencement - Held that - Assessee is into real estate business. Various courts have held that commercial activities and setting up of the business depends upon the industry to industry. In the case of real estate business, as soon as the assessee commences the activities of buying the land for development, it amounts to set up of the business. In the given case, we notice that assessee has procured huge land for the purpose of development. Therefore, as soon as the assessee procured the land for development, setting up of the business has commenced. Therefore, in our view, assessee has commenced the commercial activity and setting up of business and, hence, the assessee is eligible for claiming revenue expenditure and he can treat the expenditure incurred during the year subsequent to setting up of business, as revenue expenditure relevant for that AY. In the given case, assessee has incurred interest and financial expenditure relating to the business after setting up of the business. CIT(A) has rightly allowed the interest expenditure relating to the current AY and, therefore, upholding the order of CIT(A), we dismiss the grounds raised by the revenue in this regard. - decided in favour of assessee.

Summary

Issues Involved:
1. Reopening of assessment under Section 148 of the IT Act.
2. Commencement of commercial activities and classification of expenses.

Issue-wise Detailed Analysis:

1. Reopening of Assessment under Section 148:
The core issue revolves around whether the reopening of the assessment by the Assessing Officer (AO) was justified. The AO issued a notice under Section 148, reopening the assessment for AY 2008-09, citing that the assessee had claimed a loss of ?64,10,83,920/- against only other income of ?51,84,711/-. The AO argued that the expenditure claimed was not allowable since the assessee had only admitted other income, invoking the provisions of Section 14A of the IT Act.

The assessee challenged the reopening, arguing that the AO lacked tangible material and merely referred to information in the return of income. The assessee relied on several judicial precedents, including CIT Vs. Orient Craft Ltd. and PCIT Vs. Tupperware India Pvt. Ltd., to support the contention that the reopening was invalid without new tangible material.

The Tribunal observed that the AO's reasons for reopening were extracted from the return of income and lacked any new tangible material. Citing the Delhi High Court's decision in Orient Craft Ltd., the Tribunal concluded that the reopening was an arbitrary exercise of power and not justified. Consequently, the Tribunal allowed the assessee's challenge to the reopening of the assessment.

2. Commencement of Commercial Activities and Classification of Expenses:
The second issue concerned whether the assessee had commenced commercial activities and whether the expenses claimed should be classified as revenue expenditure or preoperative expenses. The AO disallowed ?64,38,02,573/- towards interest and other expenses, arguing that the assessee had not commenced commercial operations.

The CIT(A) overturned the AO's decision, noting that the assessee was engaged in the business of property development and had borrowed funds for acquiring land and development rights. The CIT(A) observed that the business should be considered as commenced once funds were utilized for business purposes, and thus, the expenses should be allowed as business expenditure. However, the CIT(A) disallowed interest expenses of ?9,31,63,045/- from earlier years, allowing the remaining ?55,06,39,528/- as current year expenses.

The Tribunal upheld the CIT(A)'s decision, agreeing that the business of the assessee had commenced with the acquisition of land for development. The Tribunal referenced various judicial precedents, including the ITAT Mumbai's decision in Globex Energia P. Ltd., which emphasized that setting up a business is the crucial event for allowing business expenses. The Tribunal concluded that the assessee had commenced commercial activities and was eligible to claim the expenditure as revenue expenditure.

Conclusion:
The appeal by the Revenue was dismissed, and the Cross Objection (CO) by the assessee was allowed. The Tribunal ruled that the reopening of the assessment was invalid due to the lack of tangible material. Additionally, it upheld that the assessee had commenced commercial activities, justifying the classification of the expenses as revenue expenditure.