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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
PER SAKTIJIT DEY, J.M.
The aforesaid appeals filed by the assessee are directed against separate orders of learned Commissioner (Appeals)–17 Mumbai, for the assessment year 2007-08, 2009-10 and 2010-11.
ITA No.7737/Mum/2014 – A.Y. 2007–08
The grounds raised by the assessee in this appeal are as under:
I. Notice u/s. 148 dt. 29/2/2012 bad in law. The learned CIT(A) erred in upholding the reopening of completed assessment u/s. 143(3) dt. 16/12/2009 by issuing notice u/s. 148 dt. 29/12/2012 merely on change of opinion.
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The learned CIT(A) failed to appreciate that reopening of assessment was done on direction of CIT-IT Hyderabad in Sec. 264 proceeding and audit objection, therefore the department cannot take contrary as regard issuance of notice and allowability of claim. II. Preliminary Expenses: 3. The learned CIT(A) erred in not allowing the preliminary expenses claimed of Rs.23,66,319/- being 115th of total expenses on the ground that conditions of sec. 35D are not satisfied. 4. Alternatively and without prejudice to above the id. A.O. erred in not allowing the entire expenditure of Rs.1.47 crores (being preoperative expenses) in A.Y. 2007-08, moreso while disposing of the revision petition u/s. 264 it was assured by the Dept. that the claim would be considered in reopened assessment. 5. The learned CIT(A) failed to appreciate that at least the original claim is to be allowed u/s. 37 as revenue expenditure. 6. The learned CIT(A) failed to appreciate that the claim of Rs.1.47 crores is not a new claim but a modified claim in view of the change in stand by Dept., therefore Sun Engineering vs. CIT 198 ITR 297 (SC) is not applicable as only items unconnected with escapement of income cannot be considered, whereas in facts of present case the claim is directly connected with the issue of reopened assessment.
As could be seen grounds no.1 and 2 are on the legal and jurisdictional issue of reopening of assessment u/s.147 of the Act.
Briefly the facts are, assessee-company is engaged in the business of media advertising. For the assessment year under consideration, assessee filed its return of income on 30.10.2007 declaring ‘Nil’ income under the normal provision and book profit of Rs.1,16,892/- u/s.115JB of the Act. Assessment in case of the assessee was completed u/s.143(3) of the Act vide order dated
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16.12.2009 accepting the income returned by the assessee. Subsequently, the Assessing Officer having reason to believe that income chargeable to tax as per the impugned assessment year has escaped assessment on account of assessee’s claim of deduction u/s.35D(2) reopened the assessment u/s.147 of the Act by issuing a notice u/s.148 on 29.02.2012. In response to the said notice, assessee filed return of income on 20.03.2012 offering the same income as was declared in original return of income. During the re-assessment proceeding when the Assessing Officer called upon the assessee to justify its claim of deduction u/s.35D(2), it was submitted by the assessee that it had inadvertently claimed deduction u/s.35D(2) as preliminary expenses instead of claiming the entire amount of Rs.1.47 crore as Revenue expenditure of the impugned assessment year. The Assessing Officer after considering the submission of the assessee found that the assessee had incurred total expenditure of Rs.1.47 crore towards preliminary expenses and has claimed 1/5th of the same as deduction in terms of Section 35D(2) in the impugned assessment year. The Assessing Officer after verifying the details of expenditure claimed as preliminary expenses found that they are not in the nature of preliminary expenses as envisaged u/s.35D(2). Accordingly, he disallowed assessee’s claim of deduction under the said provision after allowing amount to the extent expenditure admissible u/s.35D(2). As
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far as the alternative claim of the assessee that the entire expenditure is otherwise allowable as Revenue expenditure u/s.37 of the Act, the Assessing Officer referring to the decision of the Hon’ble Supreme Court in case of Sun Engineering Works (P.) Ltd. Vs. CIT, 198 ITR 297 (SC) and some other decisions observed, as the proceedings u/s.147 is for the benefit of the Revenue, assessee cannot make a fresh claim in such proceeding which even has the effect of reducing the income declared in the original return of income. Accordingly, he disallowed assessee’s claim of Revenue expenditure. Of–course, the Assessing Officer made one more addition with which we are not concerned in the present appeal, therefore, there is no need to discuss the same.
Being aggrieved of the assessment order so passed, assessee preferred appeal before the CIT(A) both on the legal issue of reopening of assessment u/s.147 as well as merits of the additions made. As far as the legal issue of reopening of assessment is concerned, learned CIT(A) rejected assessee’s contention on the validity of the reassessment proceedings. As far as the merits of the disallowance made on the deduction claimed u/s.35D, the learned CIT(A) agreeing with the Assessing Officer held, as the expenses claimed by the assessee is not in the nature of preliminary expenses as provided u/s.35D of the Act, it cannot be allowed. Insofar as the alternative claim of the assessee to allow the expenditure u/s.37(1),
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learned CIT(A) also rejected such claim by holding that the proceedings u/s.147 since for the purpose assessing the escaped income a new claim made by the assessee cannot be entertained.
Being aggrieved, the assessee is before us. As far as the legal issue is concerned, learned AR submitted, assessment in assessee’s case was completed u/s.143(3) of the Act. He submitted, in the profit and loss account the assessee has debited the preliminary expenses of Rs.29,57,899/- and in the notes to account it is stated that preliminary and pre-operative expenses has been written off over a period of five years in equal installments. Learned AR submitted, apart from the disclosure made in the financial statements as well as in the return of income, during the assessment proceedings, the Assessing Officer has also specifically inquired into this particular issue. In this context, learned AR drew our attention to the notice issued u/s.142(1) of the Act. At the time of original assessment proceedings, he submitted, in response to the query raised by the Assessing Officer, the assessee had furnished all necessary and relevant details of the expenses claimed including preliminary and pre-operative expenses with supporting evidence. Learned AR submitted, the Assessing Officer after making proper inquiry and examining the details submitted by the assessee had completed the assessment u/s.143(3) of the Act. Therefore, reopening of assessment on the basis of facts and materials
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on mere change of opinion is not permissible. He submitted, the Assessing Officer has reopened the assessment at the direction of the CIT(A) u/s.264 of the Act and merely on the basis of audit objection. He submitted, for the aforesaid reasons, the reopening of assessment is invalid.
Learned DR, on the other hand, submitted the assessee had made a wrong and illegal claim u/s.35D(2) knowing fully well that such claim is not permissible as the expenditure is not in the nature of preliminary expenses as provided u/s.35D(2). He submitted, this fact is evident from the submissions made by the assessee not only in the assessment proceedings for the assessment year 2008-09 but in the impugned reassessment proceedings also. Learned DR submitted, as there is escapement of income due to deduction allowed in the original assessment on the basis of wrong claim made by the assessee u/s.35D(2) reopening of assessment is valid.
We have considered the submissions of the parties and perused the material on record. As per reasons recorded, the reopening of assessment is on account of wrong deduction claimed u/s.35D(2) by the assessee which was allowed in the original assessment. As it transpires from the material on record, after completion of the original assessment of the impugned assessment year, the audit party while
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examining the records of the assessee observed that the preliminary expenses claimed by the assessee u/s.35D(2) are not in the nature of preliminary expenses but towards purchase of assets. They also observed that as the assessee has claimed depreciation on such assets, the expenditure of Rs.98,56,584/- has to be reduced from the preliminary expenses and on the balance amount allowable preliminary expenses for the impugned assessment year is Rs.3,95,002/- as against amount of Rs.29,57,899/- claimed by the assessee. As it appears, the aforesaid audit report dated 6.7.2010 was available before the Assessing Officer in the course of assessment proceedings for the assessment year 2008-09. When the Assessing Officer called upon the assessee to furnish the details of expenditure claimed by the assessee as preliminary expenses u/s.35D(2), he noted that out of the total expenditure claimed as preliminary expenses only an amount of Rs.32,423/- can be classified as preliminary expenses as envisaged u/s.35D(2) of the Act. It further appears the assessee in the course of the assessment proceedings for the A.Y. 2008-09 also accepted the aforesaid factual position and submitted that it had inadvertently claimed the expenditure as preliminary expenses. Thus, on the basis of the facts on record, Assessing Officer completed the assessment for A.Y. 2008-09 disallowing assessee’s claim of preliminary expenditure of Rs.29,57,899/- by restricting the claim to Rs.6485/-. While doing
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so, he observed that an amount of Rs.1,47,89,499/- claimed as preliminary expenses cannot be allowed to be amortized as per Section 35D(2). It is further relevant to observe, the aforesaid disallowance made by the Assessing Officer in Assessment Year 2008- 09 was accepted by the assessee as the assessee did not prefer any appeal against such disallowance. Even, in the course of re- assessment proceeding, as could be seen from submission made by the assessee which has been reproduced in paragraph 5.2 of the assessment order, the assessee had admitted that deduction u/s.35D was claimed inadvertently. Thus, the aforesaid facts clearly establish that the claim of deduction u/s.35D was not admissible, which the assessee itself also admitted not only in the assessment proceedings for A.Y.2008-09 but also in the re-assessment proceedings for the impugned assessment year. That being the case, we do not find merit in the submission of the assessee that reopening of assessment is on mere change of opinion. As far as the contention of the assessee that at the time of original assessment the Assessing Officer has examined assessee’s claim, we are not convinced with the same. After perusing the material on record, we are of the opinion that at the time of original assessment, the Assessing Officer has neither made any inquiry nor examined admissibility of assessee’s claim of deduction u/s.35D so called inquiry claimed to have been made by the Assessing
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Officer is purely of general nature and does not specifically relate to assessee’s claim of deduction u/s.35D. As far as the allegation of the assessee that reopening of assessment is at the behest of the CIT and the audit party without proper application of mind by the Assessing Officer we are unable to accept the same. as discussed earlier the audit objection is on a completely different footing. It is clear from the audit report that they have objected to assessee’s claim of deduction of preliminary expenses only for the reason that part of expenses relate to purchases on which the assessee had claimed depreciation. On the contrary, during the assessment proceedings for Assessment Year 2008-09 the Assessing Officer after verifying the details has found that the expenditure claimed by the assessee as preliminary expenses do not fall within the category of expenses enumerated u/s.35D(2). This finding of the Assessing Officer in the Assessment Year 2008-09 has been accepted by the assessee. Similar is also the case in the re-assessment proceeding as the assessee has admitted that it has inadvertently claimed preliminary expenses u/s.35D. In view of such facts on record demonstrating escapement of income on account of assessee’s inadmissible claim of deduction u/s.35D(2), the reopening of assessment u/s.147, in our view, is justified and cannot be assailed. As far as the allegation of the assessee that reopening was at the behest of the Commissioner, in our view, such allegation is
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not correct. Only because the Commissioner while disposing of assessee’s application u/s.264 has made a general observation that assessee’s case is considered for reopening that will not lead to the conclusion that the reopening is at the behest of the CIT, unless, the assessee establishes such fact with supporting evidence. The observation by the CIT may be on the basis of the audit report and assessment order for Assessment Year 2008-09 available on record. Be that as it may, when the assessee himself admits that the claim of deduction u/s.35D was inadvertently made, it clearly proves escapement of income justifying reopening of assessment u/s.147. Therefore, we are unable to accept assessee’s contention. The ground raised is, therefore, dismissed.
Grounds no.3 to 6, are on the merits of the disallowance made of deduction claimed under section 35D of the Act.
As we have dealt with the facts in detail relating to assessee’s claim of deduction under section 35D, in the earlier part of the order, there is no necessity to discuss the facts again. Suffice to say, in the return of income filed originally, assessee had claimed deduction under section 35D towards preliminary expenses, an amount of ` 29,57,899, being 1/5th of the total preliminary expenses of ` 1,47,57,071. While completing the assessment under section 143(3) of the Act originally,
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the Assessing Officer had allowed the deduction claimed. However, subsequently, the Assessing Officer re–opened the assessment under section 147 of the Act being of the view that the expenditure claimed not being in the nature of preliminary expenses as provided under section 35D(2), is not allowable. In the course of re–assessment proceedings, the assessee, though, agreed that it is not in the nature of preliminary expenses and the deduction was inadvertently claimed under section 35D, however, it put forward an alternative claim to the effect that the entire pre–operative expenditure of ` 1,47,57,071, is allowable as revenue expenditure in the impugned assessment year. The Assessing Officer rejected assessee’s claim on the reasoning that re–opening of assessment under section 147 of the Act being for the benefit of the Department, the assessee cannot make a fresh claim. In this context, the Assessing Officer relied upon the principle laid down in case of Sun Engineering v/s CIT, 198 ITR 297 (SC).
The learned Commissioner (Appeals) also concurred with the view expressed by the Assessing Officer.
The learned Authorised Representative submitted before us that at the time of completion of assessment for the assessment year 2008–09, the Assessing Officer while rejecting assessee’s claim of deduction under section 35D(2), had observed that the expenditure of
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` 1,47,57,071 is in the nature of pre–operative expenses. That being the case, the expenditure incurred being of revenue nature is allowable in its entirety in the assessment year in which it accrued i.e., assessment year 2007–08. The learned Authorised Representative submitted, though, in case of Sun Engineering (supra), it has been held that re–assessment proceedings is for the benefit of revenue, however, the Hon'ble Supreme Court had also observed that while bringing to tax the escaped of income in a re–assessment proceedings, it is open to the assessee to put forward claims for deduction in any expenditure of respect of that income or the non–taxability of the items at all. Therefore, the assessee can alternatively claim the deduction under section 37(1) of the Act at least to the extent of the amount claimed as deduction under section 35D.
Learned Departmental Representative on the other hand strongly relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals) as well as the ratio laid down by the Hon'ble Supreme Court in Sun Engineering (supra) submitted that assessee’s claim either under section 35D or under section 37 cannot be accepted.
We have considered the submissions of the parties and perused the material available on record in the light of the ratio laid down in
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case of Sun Engineering (supra). Undisputedly, in the original return of income, the assessee had treated the amount of ` 1,47,57,071, as preliminary expenditure under section 35D(2) of the Act and claimed 1/5th of the same as deduction. However, in the course of assessment proceedings for the assessment year 2008–09, the assessee itself accepted that the deduction under section 35D was inadvertently claimed as the expenditures are not in the nature of preliminary expenditure. Thus, the Assessing Officer completed the assessment in A.Y. 2008–09 rejecting assessee’s claim of deduction under section 35D, while observing that only an amount of ` 32,000 is in the nature of preliminary expenditure and accordingly allowed 1/5th of the same. There is no dispute that the assessee had accepted the aforesaid decision of the Assessing Officer in assessment year 2008–09 as no appeal was preferred against the assessment order. The assessee on the other hand filed a petition under section 264 of the Act for asst. year 2007–08 before the Commissioner claiming the amount of ` 1,47,57,071, as revenue expenditure. The aforesaid revision application filed under section 264 was dismissed by the learned Commissioner. Against such dismissal order, though, the assessee preferred a Writ Petition before the Hon'ble Andhra Pradesh High Court, however, ultimately it was withdrawn by the assessee. In other words, the assessee did not pursue its claim of deduction under
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section 37(1) of the Act in proper forum. Instead in the re–assessment proceedings, the assessee put forward a fresh claim that the expenditure claimed is otherwise allowable under section 37(1). It is evident on record that the re–opening of assessment is for the reason that there is escapement of income due to inadmissible claim under section 35D. As far as admissibility of assessee’s claim of deduction under section 35D is concerned, there cannot be any dispute that the assessee itself accepts that such expenditure is not allowable not only in the assessment proceedings for the assessment year 2008–09, but also in the course of impugned re–assessment proceedings. Therefore, as far as assessee’s claim of deduction under section 35D is concerned, the same has to be rejected.
With regard to the alternate claim of deduction under section 37(1), it is worth mentioning, assessee neither in the original return of income nor in the original assessment proceedings has claimed it as revenue expenditure under section 37(1). Though, the assessee filed a revision application, under section 264, seeking redressal of its grievance relating to claim of revenue expenditure, such petition was dismissed by the learned Commissioner. Though, the assessee preferred a writ petition before the Hon'ble Andhra Pradesh High Court challenging the order under section 264, but in its own wisdom, the assessee decided to withdraw the Writ Petition. Thus, the assessee did
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not wish to pursue its claim of deduction 37(1). Having decided not to pursue its claim before the proper forum it chose to claim it in the re– assessment proceedings. In our view, as the re–assessment proceedings is for the benefit of the revenue since it relates to assessment of escaped income, the assessee cannot make a fresh claim which has an effect of reducing even the returned income. As far as the contention of the learned Authorised Representative that at least the expenditure to the extent of deduction claimed under section 35D, should be allowed under section 37(1), we are unable to accept such contention simply for the reason that the assessee had all along claimed the deduction under section 35D(2) as preliminary expenses and it has been accepted by the assessee that such expenditure is not admissible under section 35D(2). That being the case, in the re– assessment proceedings, fresh claim made by the assessee for allowing the expenditure under section 37(1) cannot be entertained in view of the ratio laid down by the Hon'ble Supreme Court in Sun Engineering (supra). Though, the learned Authorised Representative relying upon the ratio of the decision in Sun Engineering (supra) submitted, the assessee can claim deduction of expenditure in relation to the escaped income, however, we are not convinced with the same. Undisputedly, the re–assessment proceeding is for the purpose of bringing to tax the escaped income on account of deduction claimed
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under section 35D which is not admissible under the provisions of the Act. Therefore, what is to be examined in the re–assessment proceedings, is assessee’s claim of deduction under section 35D(2) and its admissibility. Once it is decided that assessee’s claim under section 35D(2) is inadmissible, then such deduction has to be disallowed. Under the scheme of the Act, in a proceeding under section 147 the Assessing Officer is empowered to assess income which has escaped assessment as per reasons recorded and while assessing such income, the Assessing Officer is also empowered to assess any other escaped income which comes to his notice in course of the proceeding. Therefore, in re–assessment proceedings, the Assessing Officer cannot examine a fresh claim of deduction by assessee. For the aforesaid reasons, we are unable to accept assessee’s claim. Grounds are dismissed.
In the result, assessee’s appeal for A.Y. 2007–08 stands dismissed.
ITA no.7738/Mum./2014 – A.Y. 2009–10
Ground no.1, relates disallowance of preliminary expenses of ` 29,54,524, claimed as deduction under section 35D of the Act.
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This issue is identical to the issue raised by the assessee in ITA no.7737/Mum./2014, wherein we have upheld the disallowance of deduction claimed under section 35D for the detailed reason recorded therein. Following the said reasoning, we uphold the disallowance in the impugned assessment year also. Ground no.1 is dismissed.
In ground no.2, assessee has sought a direction for allowance of entire expenditure of ` 1,47,57,071 in assessment year 2007–08.
In our view, this ground raised by the assessee is totally misconceived as the allowance of a particular expenditure is to be considered in the appeal relating to that year. Therefore, in the appeal relating to the assessment year 2009–10, no direction can be issued for allowance of deduction in another assessment year. In any case of the matter, while deciding the appeal of the assessee for assessment year 2007–08, we have rejected assessee’s claim of deduction of ` 1,47,57,071. That being the case, ground no.2, deserves to be dismissed. We direct accordingly.
In the result, assessee’s appeal for A.Y. 2009–10 is dismissed.
ITA no.7739/Mum./2014 – A.Y. 2010–11
Before us, the learned Counsels appearing for both the parties admitted that the facts and circumstances of the issue arising out of
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grounds no.1 and 2, in the present appeal are identical to the facts and circumstances of the ground no.2 raised by the assessee in its appeal being ITA no.7737/Mum./2014, for the assessment year 2007– 08, wherein the said issue is decided against the assessee and in favour of the Revenue vide Para–13 and 14 of this order. Consistent with the view taken therein, we dismiss the grounds no.1 and 2 raised by the assessee.
In grounds no.3 and 4, the assessee has challenged the disallowance of consultancy charges paid of ` 10,59,700 and in the alternative has sought allowance of depreciation on the said amount.
Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee had paid consultancy charges of ` 10,59,700 in connection with new site development. He further noticed, all other expenses relating to new site development except consultancy charges were shown under WIP. The Assessing Officer, therefore, called upon the assessee to explain why the expenditure should not be treated as capital expenditure. In response to the query raised by the Assessing Officer, the assessee agreed that consultancy charges claimed is to be treated as capital expenditure and added to work–in–progress. On the basis of submissions made by
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the assessee, the Assessing Officer disallowed consultancy charges of ` 10,59,700 by treating it as capital expenditure.
Though, the assessee challenged the disallowance before the first appellate authority, however, the learned Commissioner (Appeals) also sustained the disallowance by observing that the assessee did not press the ground raised on this issue.
Learned Authorised Representative assailing the observations of the learned Commissioner (Appeals) submitted, the assessee did not withdraw its grounds of appeal on the issue before the learned Commissioner (Appeals). However, learned Authorised Representative submitted, as the Assessing Officer has treated consultancy charges as capital expenditure, it should be added to the work–in–progress and depreciation should be allowed on it.
Learned Departmental Representative on the other hand supported the decision of the authorities below.
We have considered the submissions of the parties and perused the material available on record. The claim of the assessee before us is even if the consultancy charges is treated as capital expenditure and added to the work–in–progress, depreciation on the said amount should be allowed. As could be seen, the assessee before the
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Assessing Officer had agreed for disallowance of consultancy charges by treating it as capital expenditure. Prima–facie, it appears the assessee did not claim depreciation on the said amount. Learned Authorised Representative is also not able to clarify whether any depreciation otherwise was claimed on work–in–progress by the assessee and allowed by the Assessing Officer. As relevant facts are not fully established on record, we deem it appropriate to restore the issue back to the file of the Assessing Officer for deciding afresh in accordance with law and only after providing adequate opportunity of being heard to the assessee. Ground raised by the assessee is allowed for statistical purposes.
In the result, assessee’s appeal for A.Y. 2010–11 is partly allowed for statistical purposes.
To sum up, assessee’s appeals being ITA no.7737/Mum./2014 and 7738/Mum./2014 are dismissed and ITA no.7738/Mum./2014 is partly allowed for statistical purposes. Order pronounced in the open Court on 30.09.2016
Sd/- Sd/- SAKTIJIT DEY MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.09.2016
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Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai