DCIT, CHENNAI vs. RAKINDO KOVAI TOWNSHIP P LTD., CHENNAI

The Registry has noted a delay of 28 days in assessee’s cross objections. The condonation of the same has been sought by the assessee on the strength of an affidavit wherein it has been stated that the Tribunal had issued notice of defect in the memorandum of appeal filed by the Department and had advised the Department to rectify the mistake within 10 days of receipt of the defect notice. The assessee was under bona-fide impression that the period of 30 days for filing the cross objection would reckon from the date of rectification of the mistake by the Department and therefore, there was delay in forwarding the papers to the Authorized Representative. Though Ld. DR opposed the condonation, however, keeping in view the principles of natural justice and considering the period of delay, we condone the delay and proceed for adjudication of cross objection on merits. 3. The grounds raised

The Id CIT(A) erred in law in treating the impugned expenses as allowable business expenses and accordingly directing the AO to adjust the income from other sources as per the provisions of Sec.71(1) and to allow set off of business loss against such income. 3.1 The Id CIT(A) failed to note that as the assessee has riot started its business / generated operational income, the business expenses arc only to be treated as pre-commencement expenses and capitalized and the interest income out of investment in deposits etc., needs to be taxed separately under the head "Income from other sources" and the business losses cannot be set off against the income from other sources as directed by the C1T(A).

The grounds in assessee’s cross objections read as under:

The order of the Commissioner of Income tax (Appeals), so far it is prejudicial to the interest of the respondent and cross objector, is contrary to law, facts of the case and material on record. The Commissioner of Income tax (Appeals) grossly erred in upholding the validity of reopening of assessment under Sec.147 of the Income tax Act. The Commissioner of Income tax (Appeals) failed to appreciate that in the facts and circumstances of the case the Assessing Officer has not assumed valid jurisdiction to reopen the concluded assessment.

The Ld. DR supported the findings of Ld. AO and submitted that the assessee was engaged in development of SEZ. To Set-up the business in SEZ, the assessee would require approvals from appropriate authorities and only thereafter, the assessee would be able to set up the business. The Ld. DR submitted that no such approval was obtained by the assessee and the assessee merely procured land. Therefore, the assessee had not commenced business activities during the year which would support the findings of Ld. AO that the business expenditure as claimed by the assessee would not be available as deduction. The Ld. AR, on the other hand, submitted that the assessee’s main objects had already undergone change and the assessee ventured in to real estate development activities. Those activities were already started by the assessee which is evident from the findings of Ld. CIT(A) in the impugned order. The Ld. AR also assailed the validity of reassessment proceedings by submitting the reopening was based merely on change of opinion. Reliance has been placed on the decision of Hon’ble Supreme Court in the case of ACIT V/s Marico Ltd. (SLP No.7367/2020 dated 01.06.2020). For merits, reliance has been placed on the decision of Hon’ble High Court of Madras in the case of Daimler India C.O No.104/Chny/2017 - 5 - Commercial Vehicles Pvt. Ltd. V/s CIT (416 ITR 343). The copy of the decisions have been placed on record.

Having heard rival submissions and after going through relevant material on record, our adjudication would be as given in succeeding paragraphs. Assessment Proceedings 7.1 The assessee being resident corporate assessee is stated to be engaged in development of township and SEZ. However, assessee’s main object had undergone change vide fresh certificate of incorporation dated 31.01.2008. As per revised object Clause, the main objects to be pursued by the assessee, inter-alia, include to deal in land, buildings for the purpose of development and for carrying out development activities. In essence, the assessee’s main object includes real estate development and construction activities. As per the object clause, the assessee could purchase, hire, lease or exchange or acquire any immoveable properties for carrying on the business of developers, builder, realtors, contractors and dealer and to sell or transfer the immoveable property whether as a developed or undeveloped plots. 7.2 The regular assessment was framed for the year in scrutiny assessment u/s 143(3) on 29.12.2011 wherein the sole disallowance made by Ld. AO was disallowance u/s 14A and returned loss of Rs.509.40 Lacs was revised to Rs.488.58 Lacs. 7.3 However, subsequently forming a belief that the income escaped assessment, the case was reopened and notice u/s. 148 of the Act was issued on 31.01.2014 which is within 4 years from the end of relevant assessment year. The reasons for reopening were communicated to the assessee and the assessee’s objections thereto were rejected. The C.O No.104/Chny/2017 - 6 - reason for reopening the assessment was that pre-commencement expenses should have been capitalized and income earned by the assessee was to be assessed as ‘income from other sources’. The assessee, in its objection to reopening, submitted that there being no fresh material to disturb the reasoning arrived at by Ld. AO during regular assessment proceedings, the reopening was not sustainable. However, Ld. AO rejected the same on the ground that the principle of change of opinion would apply where Ld. AO had applied the mind and taken a conscious decision on a particular matter. It will have no application where the assessment order does not address itself to the aspect which forms the basis for reopening of the assessment. 7.4 On merits, the assessee assailed the reliance of Ld. AO on the decision of Hon’ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. However, Ld. AO noted that as per the provisions of Sec.35D, any expenditure incurred by the assessee before commencement of business was to be allowed deduction in a staggered manner. Since the assessee had not commenced the business, all pre- commencement expenses should have been capitalized. Finally, the expenditure was disallowed and interest income of Rs.7.09 Lacs was brought to tax under the head ‘income from other sources’. Appellate Proceedings 8.1 Upon further appeal, Ld. CIT(A) rejected legal grounds of the assessee on the ground that reopening was within 4 years and the issues raised during the reassessment proceedings were not raised in regular assessment. The Ld. AO followed due procedure and reopened the assessment.

Upon perusal of regular assessment order dated 29.12.2011 as framed u/s 143(3), it could be observed that Ld. AO had asked for various details which were duly responded to by the assessee. The Ld. AO, after considering the same, chose to make disallowance u/s 14A and accepted all the other particulars filed by the assessee. Subsequently, the case has been reopened on same set of material as available before Ld. AO. Evidently no fresh tangible material has come to the possession of Ld. AO subsequent to conclusion of regular assessment proceedings. Under such factual matrix, the ratio of cited decisions, as enumerated in preceding paragraphs, is squarely applicable to the facts of the case. Therefore, we would hold that reassessment proceedings were nothing but based on mere change of opinion which is impermissible. The assessment is set-aside as without jurisdiction. The assessee’s cross-objections stands allowed.

So far as the merits of the case are concerned, it could be seen that the assessee was incorporated on 20.03.2007 and became public limited company in September, 2007. Initially the assessee was engaged in development of SEZ. However, the object of the assessee had undergone change w.e.f. 31.01.2008. As per revised object Clause, the main objects to be pursued by the assessee are to deal in land, buildings for the purpose of development and for carrying out development activities. In essence, the assessee’s main object includes real estate development and construction activities. As per the object clause, the C.O No.104/Chny/2017 - 10 - assessee could purchase, hire, lease or exchange or acquire any immoveable properties for carrying on the business of developers, builder, realtors, contractors and dealer and to sell or transfer the immoveable property whether as a developed or undeveloped plots. It has already been noted by Ld. CIT(A) that the assessee was engaged into development of integrated feeder township and SEZ on approx. 900 acres of land near Coimbatore. The assessee had already started various activities such as purchase of land, making advances to the parties, laying roads, building construction etc. In a huge project like the one being undertaken by the assessee revenue generation may take time but the same could be a reason to construe as to non- commencement of business. The purchase of land was done, advances were given to parties, the land was registered in assessee’s name, roads have been laid, buildings have been under construction. All these facts would prove that the assessee has started business activities. All these findings remain undisputed before us. Therefore, it could be seen that the assessee had already initiated certain activities towards fulfillment of its objectives and already procured land which would be very vital to start real estate development. Therefore, the conclusion that the assessee had commenced business could not be said to be perverse in any manner. The cited decision of Hon’ble High Court of Madras in the case of Daimler India Commercial Vehicles Pvt. Ltd. V/s CIT (416 ITR 343) also support the case of the assessee. In this case, the Hon’ble Court, after referring to catena of decisions, held that where the assessee had commenced activities relating to designing of commercial vehicles and related products R&D, buying and selling of parts and was in the process of construction of factory building for manufacture of commercial C.O No.104/Chny/2017 - 11 - vehicles, then it could be said that the business of the assessee had been set up in the previous assessment year. Therefore, the Tribunal erred in holding that merely because the manufacturing and sale of the vehicle did not take place, the business of the assessee has not been set up. The manufacturing activity of the assessee was a part of the composite business activities of the assessee and the same had not commenced because the construction of the building and installation of plant and machinery was in progress. Accordingly, Hon’ble Court confirmed the first appellate order. The ratio of this decision is applicable to the merits of the case. Therefore, we would concur with adjudication on merits, in the impugned order. The revenue’s appeal stands dismissed.

Finally, the assessee’s cross-objection stands allowed whereas the revenue’s appeal stand dismissed. Order pronounced on 05th May, 2022.