Mere occupancy right under leave & licence agreement not sufficient to attract Explanation 1 of section 32(1)

ORDER

Per R. V. Easwar

Senior Vice President: This is an appeal by the assessee relating to assessment year 2004- 05 and it is directed against the order passed by the CIT under section 263 of the Act on 18.09.2008.

2. The brief facts giving rise to the appeal may be noted. The assessee is a public limited company engaged in the sales and service of automobiles. It filed a return of income declaring a loss of Rs. 4,33,62,100/-. It was accompanied by audited profit and loss account, balance sheet and the tax audit report. The return was first processed under section 143(1) but later selected for scrutiny. Notices were issued under section 142(1) and section 143(2), in response to which the assessee submitted elaborate details and explained the return of income. Ultimately, the assessment was completed under section 143(3) by an order dated 31.10.2006 on a loss of Rs. 4,07,10,983/- under the head “business” and Rs. 35,03,489/- under the head “capital gains”. There was also a long term capital loss brought forward from the assessment year 2002- 03 which was also allowed to be carried forward to the subsequent years.

3. On 31.07.2008 the CIT issued notice under section 263 of the Act proposing to revise the assessment on the ground that the assessment order passed by the Assessing Officer was erroneous and prejudicial to the interest of the revenue. In particular, he stated in the notice that the allowance of Rs. 16,46,917/- on account of “cost of improvement of leasehold assets written off” and Rs. 40,20,388/- debited on account of “advances against rental properties written off” was erroneous since these expenses were not revenue in nature. He relied on Schedule `N’, para-6 of the notice forming part of the assessee’s accounts in which it was stated that the company had surrendered the leasehold properties and therefore the cost of improvement of the leasehold assets have been written off and debited to the profit and loss account. According to the CIT, omission to disallow the aforesaid two amounts aggregating to Rs. 56,67,305/- had resulted in excess computation of the loss in the assessment. The CIT also considered that the allowance of prior period expenses of Rs. 7,42,653/- was also erroneous and that after setting off the prior period income of Rs. 1,81,990/-, the net amount of Rs. 5,60,663/- represented under-assessment of income. According to the CIT, such under-assessment was also to be revised under section 263.

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