ITAT Mumbai Sets Aside Reopening for AY 2010-11: No New Material, Beyond Four Years, and Notice to Non-Existent Entity

1. Background of the Dispute

The litigation in Lokhandwala Construction Industries Pvt. Ltd. Vs DCIT (ITAT Mumbai) revolves around the validity of reassessment proceedings initiated under Section 147 and Section 148 of the Income Tax Act 1961 for Assessment Year (AY) 2010-11.

The assessee, a real estate developer, was executing a project at Kandivali. For AY 2010-11, the assessee originally filed its return on 28.09.2010 declaring income of Rs. 92,06,37,843/-. This return was later revised on 09.03.2012, reflecting a reduced total income of Rs. 83,28,48,230/-. The case was taken up for scrutiny, and an assessment under Section 143(3) was completed on 06.03.2013 assessing income at Rs. 84,07,89,400/-.

Subsequently, the Assessing Officer (AO) reopened the concluded assessment by issuing notice under Section 148 dated 31.03.2017. The core allegation was that advertisement, sales promotion, legal, professional and related expenses had been excessively allowed in the original assessment. The reassessment culminated in a disallowance of Rs. 4,47,72,703/-, which was sustained by the National Faceless Appeal Centre (NFAC). The assessee challenged this before the Income Tax Appellate Tribunal (ITAT), Mumbai.

The appeal primarily raised jurisdictional objections to the reopening, along with a substantive challenge to the disallowance on merits. The ITAT ultimately accepted the assessee’s contentions on jurisdiction and annulled the reassessment in entirety.

2. Issues Raised in Appeal

The assessee assailed the reassessment on multiple legal and factual grounds, broadly grouped as follows:

2.1 Jurisdictional Grounds

  1. Reopening beyond four years and change of opinion

    • The assessee argued that the reassessment was initiated after expiry of four years from the end of AY 2010-11.
    • It was contended that all material facts were fully and truly disclosed during the original scrutiny proceedings and that the AO had already examined and accepted the impugned expenses.
    • Hence, the reopening was claimed to be based on nothing more than a change of opinion, which is impermissible in law, particularly when the first proviso to Section 147 applies.

  2. Reopening in the name of a non-existing company

    • The assessee pointed out that notice under Section 148 as well as the reassessment order were issued in the name of an entity which had ceased to exist on account of amalgamation.
    • The company had merged with another entity pursuant to a scheme of amalgamation sanctioned by the Bombay High Court with appointed date 01.10.2014, and this fact had already been intimated to the Department much prior to issue of notice.
    • Therefore, the reassessment was stated to be void ab initio for lack of jurisdiction.

  3. Inadequate time post disposal of objections

    • The assessee contended that reassessment was completed within four weeks of rejection of objections to reopening, depriving the assessee of a meaningful opportunity to challenge the reopening before the High Court.

In addition, by way of an additional ground (legal in nature), the assessee asserted that the reopening was triggered solely on the basis of audit objections, thereby again amounting to a pure change of opinion.

2.2 Ground on Merits

The assessee also disputed the disallowance of Rs. 4,47,72,703/- relating to advertisement/sales promotion expenses and legal and professional fees. The AO had effectively recomputed the proportion of such expenses allowable by taking the ratio of work-in-progress (WIP) instead of the ratio of sales, contrary to the method already accepted in earlier years.

However, as will be seen, once the ITAT held that the reassessment itself was invalid, these grounds became academic.

3. Factual Matrix: Treatment of Project Expenses

3.1 Disallowance in Earlier Years and Subsequent Claim

The Kandivali project had commenced in earlier years and was completed in AY 2009-10. In AYs 2006-07, 2007-08 and 2008-09, various expenses related to the project – such as administrative charges, finance charges, advertisement and sales promotion expenses, and legal and professional fees – had been disallowed and capitalised as part of work-in-progress on the ground that they pertained to an ongoing project.