ROHAN LANDSCAPE PRIVATE LIMITED,MUMBAI vs. THE PRINCIPLE COMMISSIONER OF INCOME TAX, , MUMBAI

The case of the assessee was selected for complete scrutiny. The notice issued under section 143(2) specifically recorded the reasons for selection, namely high creditors and liabilities, substantial investment by an unlisted company, business loss, and amalgamation. It was thus evident from the outset that the scrutiny proceedings were wide-ranging and not confined to a limited or isolated issue. During the course of assessment proceedings, the Assessing Officer issued notices under section 142(1) calling upon the assessee to furnish, inter alia, details of the nature of business activities carried out during the year, audited financial statements, computation of income, details of expenses claimed, loans and finance costs, justification for high liabilities vis-à-vis income, details of sundry creditors, and particulars relating to amalgamation.

In response to the notices, the assessee furnished detailed written submissions supported by documentary evidence. The Rohan Landscape Private Limited assessee explained that during the relevant year it had carried out substantial business activities, including completion of construction of the Pune warehouse, execution of lease agreements, engagement with brokers and consultants for leasing activities, and incurring of various operational and corporate expenses. It was specifically explained that though rental income had not accrued during the year, the business had already been set up and was operationally active. The assessee emphasised that non-receipt of income during the year was merely a timing difference inherent in its business model and could not be determinative of allowability of expenditure.

With regard to finance expenses amounting to ₹1,03,28,034, the assessee explained before the Assessing Officer that the said amount comprised interest on term loans and interest on inter- corporate deposits. It was clarified that interest incurred prior to obtaining the occupation/completion certificate had been capitalised as part of capital work-in-progress in accordance with accounting standards and tax principles. Only interest incurred after the completion certificate, i.e., after the asset was put to use, was claimed as revenue expenditure. Further, interest on inter-corporate deposits amounting to ₹9,04,110 had been suo motu disallowed while computing total income. The assessee furnished loan agreements, interest computation statements, utilisation details, and a bifurcation of interest capitalised and expensed. These details were placed on record and examined by the Assessing Officer during assessment proceedings.

Rohan Landscape Private Limited 8. In relation to other expenses aggregating to ₹3,73,59,730, the assessee furnished detailed head-wise and ledger-wise break- ups. It was explained that the expenses comprised brokerage and commission incurred in connection with leasing of the completed warehouse, business promotion expenses incurred for soliciting potential tenants, legal and professional fees incurred for corporate, contractual and compliance purposes, statutory payments such as rates and taxes, insurance expenses, bank charges and miscellaneous administrative expenses. The assessee specifically pointed out that these expenses were not incurred for creation of any new capital asset and were incurred wholly and exclusively in the normal course of business after the business had been set up. It was also pointed out that wherever any expenditure was not allowable, such as interest and penalties, the same had already been disallowed suo motu in the computation of income.

The assessee further explained that the figure of business expenditure aggregating to ₹7,03,53,914 included not only revenue expenditure but also depreciation claimed under section 32. It was clarified that depreciation was claimed only on those assets which had been transferred from capital work-in-progress to fixed assets upon receipt of the completion certificate. The assessee furnished depreciation schedules demonstrating that depreciation was claimed for less than 180 days, strictly in accordance with statutory provisions. Asset-wise details, dates of capitalisation, and rates of depreciation were placed on record.

Rohan Landscape Private Limited 10. As regards the increase in share capital and share premium amounting to ₹29,16,68,159, the assessee explained that equity shares had been issued during the year to existing shareholders in proportion to their shareholding. The assessee furnished board resolutions approving allotment of shares, details of share allotment, bank statements evidencing receipt of funds through banking channels, audited financial statements of the shareholders, PAN details, certificates of incorporation, and in the case of the foreign shareholder, Foreign Inward Remittance Certificates, tax residency certificates and audited accounts demonstrating sufficient net worth and creditworthiness. The assessee emphasised that the transactions were genuine, routed through banking channels, and fully supported by documentary evidence.

With respect to the increase in capital creditors amounting to ₹28,18,91,554, the assessee explained that the increase was directly attributable to construction and development activities undertaken for the Pune warehouse project. It was submitted that high creditors were an inevitable feature of a capital- intensive real estate development business, particularly during the construction and completion phase. The assessee furnished creditor-wise details in the format called for by the Assessing Officer, including names of parties, PAN, addresses, nature of liability and outstanding balances. These details were examined by the Assessing Officer during the course of assessment proceedings.

Rohan Landscape Private Limited 12. After considering the submissions and material placed on record, the Assessing Officer completed the assessment under section 143(3) accepting the returned income. In the assessment order, the Assessing Officer noted the existence of high liabilities vis-à-vis income and recorded satisfaction with the explanations furnished by the assessee.

Subsequently, the learned Principal Commissioner of Income Tax initiated revisionary proceedings under section 263 by issuing a show cause notice dated 22 November 2024, followed by a further notice dated 5 March 2025. In the show cause notices and the impugned order, the Principal Commissioner observed that the assessee had not earned any business income during the year and, therefore, according to him, the business expenditure claimed by the assessee ought to have been capitalised to capital work-in-progress. He further observed that the Assessing Officer had not conducted proper enquiries in respect of finance expenses of ₹1,03,28,034, other expenses of ₹3,73,59,730 and business expenditure including depreciation of ₹7,03,53,914.

The Principal Commissioner further observed that there was a substantial increase in reserves and surplus on account of share premium amounting to ₹29,16,68,159 and expressed the view that the source of funds, genuineness and creditworthiness of the transactions, as well as utilisation of funds in business activities, “seemed suspicious” and required further verification. Similarly, in respect of the increase in capital creditors

Rohan Landscape Private Limited amounting to ₹28,18,91,554, the Principal Commissioner observed that the genuineness of the transactions and their linkage with business activities required verification. On these premises, the Principal Commissioner concluded that the assessment order was erroneous and prejudicial to the interests of the Revenue and directed the Assessing Officer to pass a fresh assessment order after carrying out further enquiries.

In response to the revisionary notices, the assessee filed detailed written submissions before the Principal Commissioner. The assessee reiterated that its business had been set up with effect from 1 April 2019, a fact which was never disputed either in the assessment proceedings or in the revisionary proceedings. It was submitted that the sole basis of the proposed revision was the non-receipt of business income during the year, which, according to the assessee, was legally irrelevant for determining allowability of expenditure once the business had been set up.

The assessee placed reliance on judicial precedents to support its contention that earning of business income is not a sine qua non for allowability of business expenditure. The assessee relied, inter alia, on the decision of the Hon’ble Bombay High Court in Western India Vegetable Products Ltd., 26 ITR 151; the Hon’ble Delhi High Court in CIT v. Dhoomketu Builders & Development Pvt. Ltd., the Hon’ble Supreme Court in CIT v. Sarabhai Management Corporation Ltd., and various decisions of the Tribunal to contend that once a business is set up, all expenditure incurred thereafter is allowable, even if no income is Rohan Landscape Private Limited earned in that year. In the case of Dhoomketu Builders & Development Pvt. Ltd.,(supra), wherein the Hon’ble High Court observed and held as under:-

“9. The Tribunal has observed that having regard to the business of the assessee, which is the development of real estates, the participation in the tender represents commencement of one activity which would enable the assessee to acquire the land for development. If the assessee is in a position to commence business, that means the business has been set-up. The Acts of applying for participation in the tender, the borrowing of monies for interest from the holding company, the deposit of the borrowed monies on the same day with NGEF Ltd its earnest money were all Acts which clearly establish that the business had been set-up. The commencement of real estate business would normally start with the acquisition of hand or immoveable property. When an assessee whose business it is to develop real estates, is in a position to perform certain Acts towards the acquisition of land, that would clearly show that it is ready to commence business and, as a corollary, that it has already been set-up. The actual acquisition of land is the result of such efforts put in by the assessee; once the land is acquired the assessee may be said to have actually commenced its business which is that of development of real estate. The actual acquisition of the land may be a first step in the commencement of the business, but section 3 of the Act does not speak of commencement of the business, it speaks only of setting-up of the business. When the assessee in the present case was in a position to apply for the tender. borrowed money for interest albeit from its holding company and deposited the same with NGEF Lid. on the same day, it shows that the assessee's business had been set-up and it was ready to commence business. The learned senior standing counsel for the revenue would, however, state that till the land is acquired, the business is not set-up. The difficulty in accepting the argument is that an assessee may not be successful in acquiring land for long period of time though he is ready to commence his business in real estate, and that would result in the expenses incurred by him throughout that period not being computed as a loss under the head "business" on the ground that he is yet to set-up his

Thus, despite having unsuccessful in obtaining the tender for the acquisition of land, the Court in the said case allowed the expenditure incurred by the assessee as allowable expenditure noting that assessee has set up its business. The Hon’ble Court held that in case of real estate company set up date is when assessee acquires the land. Here in this case also assessee had not only acquired the land but also had incurred substantial cost therefore, its business has been duly set up. The only reason for denial of the claim by the ld. PCIT is not the criteria for disallowing the claim. The business is set up when it is established or set on foot and there may be interregnum between setting up and actual commencement of business. It is a settled principle that all expenditure incurred by the assessee after setting up is allowable expenditure. Similarly, the Hon’ble Supreme Court in the case of CIT vs. Sarabai management Corporation Ltd., (supra) held that when the assessee acquired immovable properties for letting out of lease, such business is said to have been commenced and actual receipt of rent is not essential. Thus, the observation and the finding of the ld. PCIT is incorrect.

On the issue of finance expenses, the assessee reiterated that interest prior to completion had already been capitalised and Rohan Landscape Private Limited only post-completion interest was claimed as revenue expenditure. It was emphasised that this treatment was in accordance with section 36(1)(iii) and accepted accounting principles. On other expenses and business expenditure, the assessee reiterated that these were revenue in nature and incurred wholly and exclusively for business purposes. On depreciation, the assessee reiterated that assets had been put to use and depreciation was claimed strictly in accordance with law.

With regard to share premium, the assessee reiterated that complete documentary evidence establishing identity, creditworthiness and genuineness of shareholders had been furnished not only during the assessment proceedings but also during the revisionary proceedings, including additional documents by way of a supplementary paper book. It was submitted that the Principal Commissioner had not pointed out any defect in these documents and had merely proceeded on suspicion. Similarly, in respect of capital creditors, the assessee reiterated that creditor-wise details had been furnished and examined during assessment and that the revisionary order was based on conjectures.

Before the Tribunal, the learned Departmental Representative supported the order passed under section 263. It was contended that the Assessing Officer had not raised any specific question on allowability of expenditure in a year in which no business income was earned and that the Assessing Officer had failed to examine whether the expenditure ought to have Rohan Landscape Private Limited been capitalised. It was further submitted that the Assessing Officer had not carried out adequate enquiries in respect of the amalgamation-related issues, share premium and capital creditors. The learned Departmental Representative submitted that at the stage of section 263, the Tribunal should confine itself to examining the validity of the revisionary order and should not go into the merits of the claims, as the Assessing Officer had not recorded any findings on merits.

We have carefully considered the entire material placed on record, the elaborate factual submissions of the assessee as emerging from the assessment and revisionary proceedings, the observations and conclusions recorded by the learned Principal Commissioner in the impugned order under section 263, as well as the submissions advanced by the learned Departmental Representative before us. At the outset, it is necessary to remind ourselves of the well-settled contours of the jurisdiction under section 263 of the Act, for the exercise of such power is not plenary but hedged in by strict statutory and judicially evolved limitations. Section 263 empowers the Principal Commissioner to revise an assessment only if he is satisfied that the order passed by the Assessing Officer is both erroneous and prejudicial to the interests of the Revenue. These twin conditions are cumulative and conjunctive; the absence of either is fatal to the assumption of revisionary jurisdiction. An order may be erroneous without being prejudicial, or prejudicial without being erroneous, but unless both elements co-exist, section 263 cannot be validly invoked. This principle stands firmly embedded in tax

The principal foundation of the impugned revisionary order is the observation of the learned Principal Commissioner that the assessee did not earn any business income during the relevant assessment year and, therefore, according to him, the expenditure claimed by the assessee, including finance expenses, other expenses and depreciation, ought to have been capitalised or disallowed. This reasoning, in our considered opinion, strikes at the very root of the settled legal distinction between the “setting up” of a business and the “commencement” of business operations yielding income. It is now trite law that the Act does not predicate allowability of business expenditure on the actual earning of income in a particular year. What is relevant is whether the business has been set up. Once the business is set up, all expenditure incurred thereafter, so long as it is revenue in nature and incurred wholly and exclusively for the purposes of business, is allowable, even if the business does not generate income in that year. The Hon’ble Bombay High Court in Western India Vegetable Products Ltd. v. CIT (26 ITR 151) authoritatively explained that “setting up” means placing the business on foot and that there may be an interregnum between setting up and commencement during which expenditure is fully allowable. This principle has been repeatedly reiterated, including by the Hon’ble Delhi High Court in CIT v. Dhoomketu Builders & Development Pvt. Ltd. (368 ITR 680), where it was specifically held that in the Rohan Landscape Private Limited case of a real estate developer, the business is set up when the assessee is in a position to undertake activities towards acquisition, development and exploitation of real estate, and that actual acquisition of land or earning of income is not the determinative test. Accordingly, in view of the aforesaid principles it clearly negates the observation and the view taken by the ld. PCIT.

In the present case, the factual record, unequivocally establishes that the assessee’s business had been set up much prior to the relevant assessment year. The assessee had completed construction of a warehousing facility, entered into long-term lease arrangements, incurred expenditure for leasing and operational readiness, and had moved assets from capital work-in-progress to fixed assets upon receipt of the completion certificate. The factum of setting up of business has not been disputed by the learned Principal Commissioner either in the show cause notices or in the impugned order. The entire revisionary exercise proceeds only on the premise that no income was earned. Such a premise, being legally untenable, cannot render the assessment order erroneous.

Turning first to the issue of finance expenses amounting to ₹1,03,28,034, the record shows that the Assessing Officer had specifically called for details of loans, interest and utilisation of funds. The assessee furnished a complete bifurcation demonstrating that interest incurred prior to obtaining the completion certificate was capitalised as part of capital work-in-

The same holds true for other expenses aggregating to ₹3,73,59,730. These expenses, as borne out from the record, comprise brokerage and commission incurred for leasing the completed warehouse, business promotion expenses for soliciting tenants, legal and professional fees, statutory payments, insurance, bank charges and general corporate overheads. These are quintessential revenue expenses incurred in the normal course of business after the business has been set up. The Assessing Officer examined the details during scrutiny and the assessee even disallowed non-allowable components suo motu. The learned Principal Commissioner’s view that these expenses ought to have been capitalised merely because no income was earned betrays a misunderstanding of the law and does not render the assessment order erroneous.

The learned Principal Commissioner has also sought to revise the assessment on the ground that there was a substantial increase in share premium amounting to ₹29,16,68,159 and that the source, genuineness and creditworthiness of the transactions “seemed suspicious”. The record, however, shows that the assessee furnished exhaustive documentary evidence establishing the identity, creditworthiness and genuineness of the shareholders, including board resolutions, bank statements, audited financial statements, PAN, certificates of incorporation, and in the case of the foreign shareholder, FIRC and tax residency certificates. The shares were issued to existing shareholders in proportion to their shareholding and through banking channels. The learned Principal Commissioner has Rohan Landscape Private Limited neither recorded any finding that these documents are unreliable nor conducted any independent enquiry to demonstrate error. Revision under section 263 cannot be founded on mere suspicion or conjecture.

It is now well settled that if the Principal Commissioner is of the view that the Assessing Officer has not made any enquiry, he must himself make or cause to be made such enquiry before branding the assessment order as erroneous. This principle has been lucidly explained by the Hon’ble Delhi High Court in PCIT v. Delhi Airport Metro Express Pvt. Ltd. (398 ITR 8), where it was held that the Commissioner cannot simply remand the matter for verification without first establishing error through some enquiry of his own. The same principle has been affirmed by the Hon’ble Orissa High Court in PCIT v. Earth Minerals Co. Ltd. (162 taxmann.com 272), where it was held that absence of enquiry by the Commissioner himself vitiates the exercise of section 263 jurisdiction.

Similar infirmity vitiates the revisionary action in respect of increase in capital creditors amounting to ₹28,18,91,554. High creditors were one of the very reasons for selection of the case for complete scrutiny. The Assessing Officer issued specific queries, called for creditor-wise details, and examined the explanations furnished by the assessee linking the increase in creditors to construction and development activities. The learned Principal Commissioner has not pointed out any discrepancy in the creditor details, nor has he demonstrated that the explanation

The learned Departmental Representative has contended that the Assessing Officer did not raise any specific question on allowability of expenditure in a year of no income and that, therefore, the assessment order suffers from lack of enquiry. We are unable to accept this contention. The record clearly shows that the case was selected for complete scrutiny, that notices under section 142(1) were issued covering business loss, expenditure, loans, creditors and amalgamation, and that detailed replies were furnished and examined. At best, the Revenue’s grievance can be characterised as one of alleged inadequacy of enquiry. It is settled law that inadequacy of enquiry, as opposed to complete lack of enquiry, does not empower the Commissioner to invoke section 263, particularly when the Assessing Officer has taken a plausible view after examining the material on record.

It is equally important to note that section 263 does not confer appellate jurisdiction on the Principal Commissioner. He cannot substitute his own opinion for that of the Assessing Officer merely because he prefers a different view. The Assessing Officer in the present case has taken a view which is not only plausible but fully supported by settled legal principles. The assessment order, therefore, cannot be branded as erroneous.

In the totality of the facts and circumstances of the case, we are of the considered view that the learned Principal Commissioner has failed to demonstrate how the assessment order is erroneous in law or how it is prejudicial to the interests of the Revenue. The revisionary order is founded on an incorrect understanding of the law relating to allowability of business expenditure, depreciation and the scope of section 263, and on vague suspicions rather than concrete findings.

Accordingly, the impugned order dated 21 March 2025 passed under section 263 is set aside. The assessment order dated 28 September 2022 passed under section 143(3) is restored.

In the result, the appeal filed by the assessee is allowed.