2022 (6) TMI 347 - AT - Income Tax

Reopening of assessment u/s 147 - Whether no fresh tangible materials in the possession of the Assessing Officer? - disallowance of proportionate interest expenses u/s.36(1)(iii) - HELD THAT - We do not subscribe to the arguments of assessee for simple reason that once there is element of escapement of income, then the AO can very well look into other issues which come to his knowledge during the course of assessment proceedings. In this case, the assessee himself has conceded fact that there is escapement of income on the issue of deduction towards exceptional items. Therefore, once it is proved that there is escapement of income, then additions made by the Assessing Officer towards other issues being disallowance of interest expenses also in accordance with law. Therefore, we are of the considered view that reopening of assessment u/s.147 of the Act, is valid in the given facts circumstances of the case and thus, arguments of the assessee are rejected. Disallowance of interest expenses u/s.36(1)(iii) - We find that the assessee has substantiated its claim with necessary evidences, including Board resolution and argued that project developed by the assessee is abandoned. Once project is abandoned, it seizes to become eligible asset to capitalize borrowing cost to the work in progress account, till such asset is put to use in business of the assessee. In this case, since, project of the assessee was abandoned, expenditure incurred on said project, including interest, if any, on borrowed capital would be in the nature of revenue expenditure, which needs to be allowed as deduction. This legal principle is supported by the decision in the case of CIT Vs. Priya Village Roadshows Ltd 2009 (8) TMI 765 - DELHI HIGH COURT wherein it has been held that when the project is abandoned without creation of new asset, expenditure related thereto is only that of revenue expenditure. It was further noted that the assessee has incurred amount towards creation of new asset for expansion of existing project. It is well settled principles of law by various judicial precedents that when there is only expansion of existing business, incidental expenditure for bringing capital asset will be revenue in nature. We are of the considered view that the Assessing Officer has erred in disallowing proportionate interest expenses and added back to capital work in progress. CIT(A), without appreciating facts has simply sustained additions made by the Assessing Officer. Hence, we reverse findings of the learned CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of proportionate interest expenses u/s.36(1)(iii) - Decided partly in favour of assessee.

Summary

Issues involved:
1. Reopening of assessment without fresh tangible materials.
2. Disallowance of interest expenses and deductions towards exceptional items.

Reopening of assessment without fresh tangible materials:
The appellant challenged the reopening of assessment, arguing that there were no fresh tangible materials to form a reasonable basis for income escapement. The appellant contended that the same material was used for the reassessment, amounting to a change of opinion, which is impermissible. However, the Tribunal disagreed, stating that if there is income escapement, the Assessing Officer can explore other issues arising during the assessment. The Tribunal noted the concession by the appellant regarding income escapement on exceptional items, supporting the reopening. Ultimately, the Tribunal upheld the validity of the reassessment under section 147 of the Act, rejecting the appellant's arguments.

Disallowance of interest expenses and deductions towards exceptional items:
The appellant argued against the disallowance of proportionate interest expenses under section 36(1)(iii) of the Income Tax Act, 1961. The appellant explained that interest paid on loans borrowed for a project that was later abandoned should be treated as revenue expenditure, not capitalized. The Tribunal found merit in the appellant's argument, emphasizing that when a project is abandoned without creating a new asset, related expenditures are considered revenue expenditures. Citing legal precedents, the Tribunal concluded that the interest expenses should be allowed as a deduction. The Tribunal disagreed with the CIT(A) and directed the Assessing Officer to delete the additions made towards disallowance of proportionate interest expenses. Consequently, the appeal filed by the assessee was partly allowed by the Tribunal.

In conclusion, the Tribunal addressed the issues of reopening the assessment without fresh tangible materials and the disallowance of interest expenses and deductions towards exceptional items. The Tribunal upheld the validity of the reassessment based on income escapement and allowed the appellant's claim regarding the treatment of interest expenses as revenue expenditure, directing the deletion of the disallowed amount.