Case: Zuari Management Services Limited, Through Its Authorized Representative Shri Anandu Vithal Nayak Vs. Commissioner of Income Tax

3. The assessee Company filed return of income for the0 declaring total income of Rs. Nil and claiming loss of Rs. 36109708/under the head profits and gains of business and long term capital loss of Rs.. The same loss was claimed as loss to be carried forward as pertained to A.Y.. The case of the assessee Company was selected for scrutiny under CASS. On 28th December, 2011 the assessment order u/s 143(3) of the Income Tax Act was passed, accepting the income returnedThe relevant part of the assessment order reads as under:y is set up with the objectives of developing Special Economic Zone Information technology and also of real estate development activities. During the year the company transferred shares of Zuari Developers held by it and computed loss under the head long terms capital gain. After discussion with the assessees representative and perusal of the details produced assessment is completed as underTotal income as per return Nil4. The assessee company was served with notices dated 25th October, 2013 under Section 263 of the Income Tax Act for the A.Y.0 stating that the above assessment order was erroneous and prejudicial to the interest of revenue as the assessing officer had not looked into the following aspect while completing the assessmentDuring the previous year relevant to the assessment year the company has not commenced its business of development of SEZ/Real estate. The company has obtained loans from holding company amounting to Rs. 49,81,00,000 in the8 and utilized for investing in shares of subsidiary company M/s. Zuari Developers Private Ltd. amounting to Rs.8,26,75,564/and giving loans to subsidiary company of Rs.. The interest payable/paid on the above said loans amounting to Rs.3,56,51,678 and other incidental expenses amounting to Rs.4,69,544] aggregating to Rs.3,61,21,222 was charged to the profit and loss account as expenses incurred during the P.Y. relevant to0 and computed business loss of Rs.3,61,09,708 and claimed the said loss to carry forward to subsequent years. Under the provisions of the Income Tax Act, 1961, any expenditure exclusively incurred for the purpose of the business is an allowable deduction. Since the company has not commenced its business and the loan availed was not used for the purpose of its business of development of SEZ/real estate business, the expenditure claimed is required to be disallowed and the loss claimed be carry forward to subsequent years is required to be disallowed and the loss claimed be carry forward to subsequent years is required to be denied. Failure to do so has resulted in loss allowed to carry forward of Rs. 3,61,09,708 involving notional tax effect of Rs. 1,22,73,689. [i.e. 33.99% of Rs. 3,61,09,708]5. After giving due hearing to the assessee company the CIT passed the impugned order dated 28th January, 2014 under section 263 of the IT Act setting aside the assessment order dated 28th December, 2011 and directing the Assessing Officer to pass fresh order after verifying the claim of the assessee company in respect of carry forward of the loss of Rs. 36109708/6. The assessee company challenged the order of CIT by preferring appeal to the ITAT contending that invoking of jurisdiction under section 263 of the Income Tax Act by the CIT was erroneous because the assessment order was neither erroneous nor prejudicial to the interest of the revenue and that it had been passed after making detailed enquiries during the course of assessment proceedings. It was also contended that the CIT erred in ignoring the fact that the business of the appellant was set up as well as commenced during AY9 when it had borrowed money from holding company and lent it to subsidiary company, which represents one of the objects of the appellant. The ITAT dismissed the appeal by its detailed order dated 16th February, 2015. Therefore, the present appeal which is in the nature of this second appeal.

Reasoning: We find no merit in both the contentionsAs regards the objection of the order of CIT being ag order, we find that the order though not as elaborate as the Order of the ITAT, does not suffer from lack of reasons. The order clearly makes out that the assessment order is erroneous and has adverse effect on the interest of the Revenue9. The first requisite for exercise of revisional jurisdiction is that the order of the Assessing Officer is erroneous on the ground of not being in accordance with law. The CIT in his order has held that the Assessing Officer has not taken into account the relevant consideration of absence of actual business activity of the appellant for the purpose of treating the expenditure claimed as an allowable expenditure. Perusal of the assessment order quoted above substantiates these observations of the CIT. Therefore, in our opinion, the first requisite of law stands satisfied10. The second requisite is of the loss to the revenue on account of the error in the assessment order. The impugned orders observe that the Assessing Company during the previous year, relevant to the Assessment Year, has not commenced the business of development of SEZ/Real Estate and that the Company had merely obtained loan from the holding company amounting to Rs.49,81,00,000/in the financial year8 and utilized it for investing in share of subsidiary company M/s. Zuari Developers Pvt. Ltd., to the extent of Rs.8,26,75,564/and giving loans to subsidiary company to the extent of Rs.. The interest paid on the loans amounted to Rs. 3,56,51,678/and other incidental expenses, amounting to Rs. 4,69,544/were charged to the Profit and Loss Account as expenses incurred during the P.Y. relevant to the assessment year. On the basis of this business loss of Rs.36,10,09,708/was computed and claimed as loss to be carried forward to subsequent years. In the opinion of the CIT and ITAT since the Company had not commenced its business of development of SEZ/Real Estate, the expenditure claimed could not have been treated as the expenditure incurred for the purpose of business. As such, it was denied. Since the expenditure was not allowable expenditure, it amounted to irregular allowances of loss. Such loss was allowed to be carried forward to the extent of Rs.1,78,57,950/and involved notional tax effect of Rs. 60,69,917/. This notional tax effect is directly attributable to the error in the assessment order. Therefore, even the second requisite is satisfied.