ITAT Mumbai Sets Aside Section 263 Revision: Business Expenditure Allowed Despite Zero Income When Business Is Set-Up

Introduction

The Income Tax Appellate Tribunal (ITAT) Mumbai delivered a significant verdict in the matter of Rohan Landscape Private Limited Vs PCIT, holding that the revision proceedings initiated under Section 263 of the Income Tax Act, 1961 were unsustainable. The Tribunal emphasized that when an Assessing Officer (AO) has conducted comprehensive scrutiny and adopted a reasonable standpoint, the revisionary authority cannot interfere merely on the ground that a different view is possible. This judgment reinforces the fundamental principle that once a business entity has been set-up, revenue expenditure and depreciation claims become allowable irrespective of whether income has been generated during the relevant financial year.

Background of the Case

Nature of Business Operations

The assessee company operates in the domain of warehousing infrastructure development, specifically focusing on modern industrial real estate and logistics facilities. The business framework involves purchasing land parcels, undertaking construction and development of warehousing projects, completing these facilities, and subsequently generating revenue through long-term leasing arrangements. The inherent nature of this business model necessitates extended gestation periods, resulting in scenarios where revenue realization may not synchronize with the period during which substantial operational activities are undertaken.

Corporate Restructuring

During the relevant previous year, Rohan Housing Schemes Private Limited was amalgamated with the assessee company pursuant to an order issued by the National Company Law Tribunal, with 1st April 2019 designated as the appointed date. This corporate restructuring was appropriately disclosed in the audited financial statements, accompanying notes, and schedules submitted to the revenue authorities.

Return Filing and Scrutiny Selection

For Assessment Year 2020-21, the assessee initially filed its return under Section 139(1) on 15th February 2021, subsequently submitting a revised return under Section 139(5) on 31st March 2021, declaring a loss of ₹7,68,01,982. The computation included explanatory notes specifically stating that the business had been set-up effective from 1st April 2019. The case was selected for comprehensive scrutiny assessment based on multiple factors including substantial creditors and liabilities, significant investment by an unlisted entity, reported business loss, and the amalgamation transaction.

Assessment Proceedings

Detailed Examination by Assessing Officer

The AO issued notices under Section 143(2) and Section 142(1), calling for extensive information regarding:

• Nature and scope of business activities undertaken during the relevant year
• Audited financial statements and income computation details
• Comprehensive expense breakup with supporting documentation
• Loan agreements, finance cost bifurcation, and fund utilization certificates
• Justification for high liabilities vis-à-vis reported income
• Particulars of sundry creditors with confirmations
• Complete documentation regarding the amalgamation transaction

Assessee's Submissions During Assessment

In response to the notices, the assessee furnished elaborate written submissions supported by documentary evidence, establishing:

Business Activities Undertaken:
The assessee demonstrated that during the year under consideration, substantial business operations were carried out, including completion of construction of the Pune warehousing facility, execution of lease agreements, engagement with brokers and consultants for tenant acquisition, and incurrence of various operational and corporate overheads. It was specifically emphasized that although rental income had not accrued during the year, the business had already been established and was operationally functional.

Finance Expenses (₹1,03,28,034):
The assessee explained that this amount comprised interest on term loans and inter-corporate deposits. Interest incurred prior to obtaining the occupation/completion certificate had been capitalized as part of capital work-in-progress in accordance with accounting standards. Only interest incurred after the completion certificate, when the asset was put to use, was claimed as revenue expenditure. Additionally, interest on inter-corporate deposits amounting to ₹9,04,110 had been suo motu disallowed. Complete loan agreements, interest computation statements, utilization details, and bifurcation of capitalized versus expensed interest were provided.

Other Expenses (₹3,73,59,730):
Detailed head-wise and ledger-wise breakups were furnished, demonstrating that these expenses comprised brokerage and commission for leasing activities, business promotion expenses for tenant solicitation, legal and professional fees for corporate and compliance matters, statutory payments including rates and taxes, insurance expenses, bank charges, and miscellaneous administrative costs. The assessee emphasized that these were not incurred for capital asset creation and were wholly and exclusively for business purposes.

Depreciation Claim:
The business expenditure of ₹7,03,53,914 included depreciation claimed under Section 32. The assessee clarified that depreciation was claimed only on assets transferred from capital work-in-progress to fixed assets upon receipt of completion certificates. Asset-wise details, capitalization dates, and depreciation rates were provided.

Share Capital and Premium (₹29,16,68,159):
Equity shares were issued to existing shareholders proportionately. Complete documentation was furnished including board resolutions, share allotment details, bank statements showing receipt through banking channels, audited financial statements of shareholders, PAN details, certificates of incorporation, and for the foreign shareholder, Foreign Inward Remittance Certificates, tax residency certificates, and audited accounts demonstrating adequate net worth and creditworthiness.

Capital Creditors (₹28,18,91,554):
The increase was directly attributable to construction and development activities for the Pune warehouse project. Creditor-wise details including names, PAN, addresses, nature of liability, and outstanding balances were provided.

Assessment Order

After examining the submissions and material on record, the AO completed the assessment under Section 143(3) accepting the returned income. The assessment order noted the existence of high liabilities vis-à-vis income and recorded satisfaction with the explanations furnished.

Revision Proceedings Under Section 263

Show Cause Notices Issued by PCIT

The Principal Commissioner of Income Tax (PCIT) initiated revision proceedings under Section 263 by issuing show cause notices dated 22nd November 2024 and 5th March 2025. The PCIT made the following observations:

• The assessee had not earned any business income during the year, and therefore business expenditure should have been capitalized to capital work-in-progress
• The AO had not conducted proper enquiries regarding 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 substantial increase in share premium amounting to ₹29,16,68,159 "seemed suspicious" and required further verification regarding source, genuineness, and creditworthiness
• The increase in capital creditors of ₹28,18,91,554 required verification regarding genuineness and linkage with business activities

Assessee's Response to Revision Notices

The assessee filed detailed written submissions before the PCIT, reiterating that its business had been set-up effective from 1st April 2019, which was never disputed. The sole basis of proposed revision was non-receipt of business income during the year, which according to the assessee was legally irrelevant for determining allowability of expenditure once business had been set-up.

Judicial Precedents Relied Upon by Assessee

The assessee placed reliance on several landmark judicial decisions:

Western India Vegetable Products Ltd. (26 ITR 151) - Bombay High Court 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.

CIT v. Dhoomketu Builders & Development Pvt. Ltd. - Delhi High Court held: