TMI Blog2017 (7) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 of the Income Tax Act and the consequential Assessment Order dated 27.01.2014 passed by the respondents is quashed and set aside. - Decided in favour of assessee. - SPECIAL CIVIL APPLICATION NO. 323 of 2014 - - - Dated:- 6-7-2017 - MR. AKIL KURESHI AND MR. BIREN VAISHNAV, JJ. For The Petitioner : Mr Sn Divatia, Advocate For The Respondent : Mrs Mauna M Bhatt, Advocate ORAL JUDGMENT ( PER : HONOURABLE MR.JUSTICE BIREN VAISHNAV) 1 Petitioner is a Public Limited Company engaged in the business of hospitality and outdoor catering. Challenged before us is a notice under Section 148 of the Income Tax Act, 1961, issued to the petitionerAssessee on 26.03.2013. 2 Facts which have given rise to this challenge are as under: 2.1 For the Assessment Year 2008-2009, the petitioner had filed its Ereturn on 19.01.2009 declaring total income of ₹ 14,40,91,411/Subsequently, the petitioner filed, first revised return on 31.03.2009 and second revised return on 17.02.2010, showing an income of ₹ 13,88,33,290/2.2 2.2 The return of the petitioner assessee was selected for scrutiny after regular assessment held under Section 143(3) of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 35D(1)(ii) of the Act too is not available to assessee for extension / expansion of its business. Reliance is placed on the judgment of the Hon. High Court of Delhi in the case of Ansal Housing and Construction Ltd vs. CIT [2010] 320 ITR 420 (Delhi). Hence, the deduction of ₹ 1,17,14,943/in respect of IPO expenses written off is irregular and disallowable. 2 As per section 14A of the I.T.Act, 1961, expense incurred for earning income which does not form part of total income shall be disallowed. The disallowance shall be made in terms of Rule 8D. On verification of the case records, it is seen that an amount of ₹ 8,71,250/being 0.5 percent of the average investments in accordance with Rule 8D(2)(ii) was disallowed in respect of exempt dividend income of ₹ 97,28,550/However, proportionate interest expense of ₹ 18,45,734/[ ₹ 98,03,000/( interest) *Rs 17,41,03,887/( Avg Invest) ₹ 92,46,94,500/( Avg Asset)] as prescribed in RULE 8D(2)(ii) is not disallowed. In this case, assessee has not disallowed any expense against the dividend income earned in the original return or in the two revised returns filed thereafter. The disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee was in the nature of capital expenditure and did not qualify for deduction under the head as income from profits and gains of business or profession . According to the Revenue, such expenses did not qualify for deduction under Section 35D of the Act in view of the fact that when such expenses were incurred the assessee was already engaged in the hospitality business (accomodation and catering). In the opinion of the Revenue, since the assessee had already commenced business, it was not entitled to such exemption. (ii) The second reason for reopening of assessment was that the assessee was engaged in the business of providing hospitality services and was not engaged in industrial activity as envisaged under Section 35D(1)(ii) of the Act, and therefore, deduction under the provisions of Section 35D(1)(ii) was not available to the assessee. (iii) The third ground on which it was thought fit for the Revenue to reopen the assessment was that the authority was of the opinion that an amount of ₹ 8,71,250/being 0.5 percent of the average investments was disallowed in respect of exempt dividend income of ₹ 97,28,550/. According to the Revenue, the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1,17,14,943/as onefifth of the total amount of ₹ 5,85,74,716/towards the IPO expenses. Ledger Accounts for the IPO expenses were also produced together with this communication dated 29.11.2010. Note on allowability of Deduction u/s. 35D The Company had gone for IPO during the relevant Assessment Year to startup its new ambitious 5 Star Hotel Project at Surat. The main agenda behind the IPO was to setup the new Hotel and expand the business to better levels. Since the All the IPO and enhancement of equity capital related statutory fees paid to ministry of Corporate Affairs or any other Statuary liabilities, were directly correlated with new project at Surat, hence such expenses should not be disallowed u/s.35D as amortisation of preliminary expenses. IPO Expenses (Under the head PreOperative Expenses Surat Project) Opening Balance ₹ 25,35,466/- Total Expenses towards IPO during the F.Y 200708 ₹ 5,60,39,250/- Total Rs.5,85,74,716/ 1/5 writtenoff during the year ₹ 1,17,14,943/ (C) As far as disallowances under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as followed the decision of Supreme Court reported in 225 ITR 798 (SC) in Brooke Bond India vs CIT holding the said expenditure as capital in nature and is not allowable as expenditure u/s. 37(1). Accordingly, a sum of ₹ 2,10,000/is disallowed and added to the income. Penalty u/s.271(1)(c) is separately being initiated for furnishing inaccurate particulars of income. 6 xxxxxx xxxxxxxxxxx xxxxxxxx 7 Disallowance u/s. 14A: 7.1 Perusal of the accounts show that the assessee has opening investment of ₹ 5 crores and closing investment of ₹ 29.82 crores. In the computation of income, the assessee has shown dividend income ₹ 97,28,550/which has been claimed exempt. In this regard, the assessee was asked to explain why no expenses incurred in relation to earning of the exempt income be not disallowed u/s.14A. 6 Mrs Mauna Bhatt, learned advocate for the Revenue has opposed the petitioner and contended that the powers under Section 148 of the Income Tax Act were exercised bonafide. According to Mrs Mauna Bhatt, there was enough tangible material before the authorities to come to a conclusion or reason to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vatia for the petitioner, and having gone through the communications on record, what is evident is that from various communications addressed to the Revenue in compliance of the reference to the scrutiny assessment for the Assessment Year 2008-2009, the assessee had extensively, with ledger accounts explained the working out of the assessee s deductions under Section 35D of the Income Tax Act. A note on liability of deduction under Section 35D explaining how the figure of 1,17,14,943/towards 1/5th written off expenses for the IPO expenses was extensively explained in such communications. Even on the question of section 14A of the Income Tax Act, in the communications, particularly, in communication dated 14.12.2010, the assessee had in compliance of Rule 8D(2)(ii) of the Income Tax Rules explained how Section 14A is complied with. 11 Even the Assessment Order dated 21.10.2010 expressly deals with the issues in paragraphs 5 and 7 of the Assessment Order under Section 143(3) of the Act. The Assessment Order also records that the assessee has put on records and from the accounts it is demonstrated that the source of investment is out of interest free funds. The Assessment Order fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvalid in a case where the Assessment Order itself records that the issue was raised and was decided in favour of the assessee. In the opinion of the Court, in such a case, the proceedings would be hit by principle of change of opinion . As is evident from the facts of the case on hand that after exchange of extensive communications between the assessee and the Revenue, a conclusive satisfaction has been arrived at during the scrutiny under Section 143(3) of the Income Tax Act. It was not open for the Assessing Authority to exercise powers under Section 148 of the Income Tax Act merely because it took a different view. 15 In the case of Gujarat Power Corpn. Ltd vs. Assistant Commissioner of Income Tax, reported in [2013] 350 ITR 266 (Gujarat), the Division Bench of this Court considering the question of reassessment under Section 148 of the Act under similar circumstances found that, during the course of original assessment, the Assessing Officer had raised several queries with respect to certain claims. Detailed replies were furnished by the assessee. The Court on facts found that when an Assessment Order is framed and the claim of the assessee is examined and found to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. If such a claim is scrutinized by the Assessing Officer during assessment, it means he was convinced about the validity of the claim. His formation of opinion is thus complete. Merely because he chooses not to assign his reasons in the assessment order would not alter this position.It may be a nonreasoned order but not of acceptance of a claim without formation of opinion. Any other view would give arbitrarypowers to the Assessing Officer. 43. We are, therefore, of the opinion that in a situation where the Assessing Officer during scrutiny assessment, notices a claim of exemption, deduction or such like made by the assessee, having some prima facie doubt raises queries, asking the assessee to satisfy him with respect to such a claim and thereafter, does not make any addition in the final order of assessment, he can be stated to have formed an opinion whether or not in the final order he gives his reasons for not making the addition. 44. At this stage, we may examine the decision of the Division Bench of this Court in the case of Praful Chunilal Patel v. M. J. Makwana, Assistant Commissioner of Income Tax , (supra) more closely. This was a case wherein assessment pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the question of treating the income as capital gain and simultaneously justifying thepetitioners claim for deduction under section 54G of the Act. The petitioner pointed out that having converted its capital asset into stockintrade, under section 45(2) of the Act the income upto the point ofsuch conversion should be treated as long term capital gain. In various places in the said two communications, the petitioner raised this contention. It was only after considering such replies of the petitioner that the Assessing Officer passed the order of assessment. Insuch order of assessment, he gave no reasons for not treating the income as a business income instead of capital gain but gave detailed reasons why petitioners further claim for deduction under section 54G of the Act should be rejected. 12. From the above, it clearly emerges that the Assessing Officer had a full innings of complete scrutiny of the question and the manner in which the income should be taxed. He initially held a belief that such income was a business income of the assessee. This is precisely why he called upon the assessee to explain. The assessee gave two detailed replies and relied on section 45(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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