M/S INESH REALTORS PRIVATE LIMITED vs. THE INCOME TAX OFFICER

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WP/35252/2019HC KarnatakaKAHC01024349201903 June 2025Bench: B M SHYAM PRASAD8 pages
AI SummaryRemanded

What did the High Court hold?

The High Court held that two critical aspects remained uncontroverted and required due consideration for justifying the reassessment. Firstly, the petitioner had not been shown the prior approval, which is a mandatory requirement for commencing reassessment proceedings. The Court stated that if the prior approval is not granted by the competent authority, the entire proceedings must fail. Secondly, the Assessing Officer had not considered whether the petitioner would be entitled to an allowance for expenditure on borrowing, even if the interest received was classified as 'Income from Other Sources'. The Court found merit in restoring the proceedings to the Assessing Officer for proper consideration of these aspects. The Court also noted that the assessment was completed within 14 days of the order disposing of the objections, which was a factor in restoring the proceedings. The writ petition was disposed of by quashing the orders disposing of objections, the reassessment orders, and the demand notices, and the proceedings were restored to the Assessing Officer.

What were the facts?

The petitioner, M/s Inesh Realtors Private Limited, a real estate company, is challenging notices issued under Section 148 of the Income Tax Act, 1961, for Assessment Years 2014-15 to 2016-17. The reassessment proceedings were initiated based on a survey indicating that interest earned from its Holding Company was shown as income from business, reducing Work-in-Progress. The Assessing Officer asserted this should be treated as income from other sources. The petitioner sought the reasons for belief that income had escaped tax and filed objections. The Assessing Officer disposed of these objections, leading to reassessment orders and demand notices. The petitioner's primary contentions include not being shown a copy of the prior approval required for reassessment and that even if interest is classified as income from other sources, the expenditure incurred on borrowing should be allowed.

What were the issues?

1. Whether the reassessment proceedings initiated under Section 147 of the Income Tax Act, 1961, are valid, considering the petitioner was not provided with a copy of the prior approval required for such proceedings? (Question of law and fact) 2. Whether the Assessing Officer erred in disposing of the petitioner's objections without considering the petitioner's claim for allowance of expenditure on borrowing, even if the interest received from the Holding Company is treated as income from other sources? (Question of law and fact) Assessee's Contentions: - The petitioner contends that it was not shown a copy of the mandatory prior approval for reassessment proceedings. - It argues that even if the interest received from the Holding Company is classified as 'Income from Other Sources', the expenditure incurred on borrowing to earn this interest should be allowed as a deduction. Revenue's Contentions: - The revenue argues that the Assessing Officer was justified in disposing of the objections and concluding the reassessment. - It asserts that the interest received from the Holding Company could not be treated as 'Income from Business' because the Holding Company had only entered into an agreement and had not commenced any business. Therefore, it should be treated as 'Income from Other Sources'.

Which sections of the Income-tax Act were involved?

Section 148,Section 147,Section 143(3),Section 156

AI-generated summary — verify with the full judgment below

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 3RD DAY OF JUNE, 2025 BEFORE THE HON'BLE MR JUSTICE B M SHYAM PRASAD WRIT PETITION NO. 35252 OF 2019 (T-IT) BETWEEN:

M/S INESH REALTORS PRIVATE LIMITED REPRESENTED BY ITS DIRECTOR SRI S BAASKARAN SON OF SRI DEEKSHADAR SUBRAMANIA VISWANATHAN AGED ABOUT 50 YEARS NO 41, MANTRI HOUSE, VITTAL MALLYA ROAD, BENGALURU - 560001 …PETITIONER (BY SRI. S. ANNAMALAI, ADVOCATE) AND:

THE INCOME TAX OFFICER WARD 3 (1) (4) BMTC BUILDING 80 FEET RAOD, KORAMANGALA BENGALURU - 560095 …RESPONDENT (BY SRI. Y. V. RAVIRAJ, ADVOCATE)

THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE NOTICE ISSUED UNDER THE PROVISION OF SECTION 148 OF THE INCOME-TAX ACT, 1961 ISSUED BY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-A1 DATED 21.02.2019 FOR THE A.Y.2014-

Digitally signed by VANAMALA N Location: High Court of Karnataka

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

15; QUASH THE NOTICE ISSUED UNDER THE PROVISION OF SECTION 148 OF THE INCOME-TAX ACT, 1961 ISSUED BY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-A2 DATED 21.02.2019 FOR THE A.Y.2015-16QUASH THE NOTICE ISSUED UNDER THE PROVISION OF SECTION 148 OF THE INCOME-TAX ACT, 1961 ISSUED BY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-A3 DATED 21.02.2019 FOR THE A.Y.2016-17; QUASH THE ORDER OF DISPOSAL OF OBJECTIONS PASSED BY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-B1 DATED 24.06.2019 FOR THE A.Y.2014- 15; QUASH THE ORDER OF DISPOSAL OF OBJECTIONS PASSED BY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-B2 DATED 24.06.2019 FOR THE A.Y.2015-16; QUASH THE ORDER OF DISPOSAL OF OBJECTIONS PASSEDBY THE RESPONDENT AS ENCLOSED AND MARKED AS ANNEXURE-B3 DATED 24.06.2019 FOR THE A.Y.2016-17; DECLARE THAT THE RESPONDENT ERRED IN LAW IN INVOKING PROVISIONS OF SECTION 147 OF THE ACT ON MERE SURMISE, CONJUCTURES AND SUSPICION WHICH RESULTED IN REASONS TO SUSPECT WITHOUT HAVING ANY REASONS TO BELIEVE AS CONTEMPLATED UNDER THE PROVISIONS OF SECTION 147 OF THE ACTQUASH THE ASSESSMENT ORDER PASSED BY THE RESPONDENT U/S 143(3) R/W SECTION 147 OF THE INCOME TAX ACT. 1961 DATED 09.07.2019 FOR THE ASSESSMENT YEAR 2014-15 HEREIN MARKED AS ANNEXURE-C1; QUASH THE ASSESSMENT ORDER PASSED BY THE RESPONDENT U/S 143(3) R/W SECTION 147 OF THE INCOME TAX ACT. 1961 DATED 09.07.2019 FOR THE ASSESSMENT YEAR 2015-16 HEREIN MARKED AS ANNEXURE-C2; QUASH THE ASSESSMENT ORDER PASSED BY THE RESPONDENT U/S 143(3) R/W SECTION 147 OF THE INCOME TAX ACT. 1961 DATED 09.07.2019 FOR THE ASSESSMENT YEAR 2016-17 HEREIN MARKED AS ANNEXURE-C3; QUASH THE NOTICE OF DEMAND ISSUED U/S 156 OF THE ACT BY THE RESPONDENT IN FORM NO.7 DATED 09.07.2019 IN RESPECT OF ASSESSMENT YEAR 2014-15 FOR THE PAYMENT OF

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

RS.67,30,160/- HEREIN MARKED AS ANNEXURE- D1QUASH THE NOTICE OF DEMAND ISSUED U/S 156 OF THE ACT BY THE RESPONDENT IN FORM NO.7 DATED 09.07.2019 IN RESPECT OF ASSESSMENT YEAR 2015-16 FOR THE PAYMENT OF RS.4,42,80,790/- HEREIN MARKED AS ANNEXURE-D2; QUASH THE NOTICE OF DEMAND ISSUED U/S 156 OF THE ACT BY THE RESPONDENT IN FORM NO.7 DATED 09.07.2019 IN RESPECT OF ASSESSMENT YEAR 2016-17 FOR THE PAYMENT OF RS.6,26,36,000/- HEREIN MARKED AS ANNEXURE-D3DECLARE THAT ASSESSMENT ORDER IN ANNEXURE-A1 TO A3 ARE PASSED IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND WITHOUT JURISDICTION.

THIS PETITION, COMING ON FOR PRELIMINARY HEARING IN B GROUP, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: CORAM: HON'BLE MR JUSTICE B M SHYAM PRASAD

ORAL ORDER

The petitioner has impugned the notices issued under Section 148 of the Income Tax Act, 1961 [for short, 'the IT Act'], the orders disposing of the petitioner's objections for reassessment, the reassessment orders and the demand notices. These impugned notices and orders [Annexures - A1, A2, A3, B1, B2, B3, C1, C2, C3, D1, D2 and D3] are for the Assessment Years 2014-15 to 2016-17. The undisputed material fact for the present purposes is

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

that the petitioner, which is engaged in Real Estate, has borrowed money and invested the same with its Holding Company incurring expenditure in such borrowing and earning certain interest from the monies lent to the Holding Company.

2.

The reassessment proceedings are begun in the premise that upon a survey it is ascertained that the petitioner has shown the interest earned from the Borrowing Company as Income from Business by reducing from Work-in-Progress [WIP] with the Assessing Officer asserting that such income must be declared as income from other sources as is being done according to the petitioner's accounting practice.

3.

The petitioner has sought for the reasons to believe that income has escaped tax, and the petitioner is served with an extract of the reasons but not the reasons as recorded in the Assessment Orders. The petitioner has filed objections, and the

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

petitioner inter alia has contended that it has not been shown a copy of the prior approval that has to be taken and that even if the interest received from the Holding Company is treated as Income from Other Sources, it will be entitled to allowance as an Expenditure incurred in discharging the cost of Borrowing because it is utilized to pay the lending company.

4.

If Mr. Annamalai, the learned counsel for the petitioner, relies upon the afore circumstances to support the petition, Mr. Y.V. Raviraj, the learned standing counsel for the respondent, submits that the Assessing Officer is justified in disposing of the petitioner's objections and in concluding the reassessment because the petitioner cannot dispute that its Holding Company had only entered into an agreement and not begun any business, and that in which event, the interest received from the Holding Company could not have

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

been treated as Income from Business and it should have been treated only as Income from other Sources.

5.

However, what remain as uncontroverted are that the petitioner has not been shown prior approval [admittedly, a must for commencement of reassessment proceedings] and that the Assessing Officer has not considered whether even if the interest received from the petitioner's Holding Company is declared as Income from Other Sources, the petitioner would be entitled for allowance as an Expenditure on borrowing.

6.

This Court is of the considered view that both these aspects viz., showing of the prior approval as is required and due consideration of the petitioner's case that it would be entitled for allowance as an Expenditure under the relevant provision even if the interest is brought under Income from Other Sources, will have to be duly considered for justifying an assessment. If the prior approval is

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

not by the competent, the whole proceedings must fail and if ultimately it is concluded that the petitioner indeed would be entitled for allowance as an Expenditure as now contested. This Court is also persuaded to restore the proceedings because the assessment is completed within 14 days from the date of order disposing the petitioner's objections to reassessment. In the light of the afore, the following: ORDER a. The writ petition is disposed of quashing Annexures - B1, B2, B3, C1, C2, C3, D1, D2 and D3, and the proceedings are restored to the Assessing Officer for due consideration of the petitioner's objections with liberty to the petitioner to file additional objections. b. The petitioner shall, in terms of the liberty now reserved file additional

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HC-KAR NC: 2025:KHC:18733 WP No. 35252 of 2019

objections within four [4] weeks from the date of receipt of a certified copy of this order.

Sd/- (B M SHYAM PRASAD) JUDGE

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