2012 (6) TMI 325 - AT - Income Tax

Unexplained expenditure - addition - source and veracity of expenditure stands explained by assessee - Held that - CIT(A) has rightly held that provisions of Sec.69C will not be applicable as the Assessee has explained the source of the expenditure debited in the P/L A/c which was the amount adjusted payable to SG Takshila Enterprise Company Pvt.Ltd. which the latter agreed to be treated as contribution towards monies payable for acquiring shares of the assessee. Further, AO, after verifying the bills produced by assessee has failed to bring on record any material to suggest that any of such expenditure was bogus or not for the purpose of setting up of the business. Also, once the nature of the expenses is found to be in relation to the business then the quantum of such expenses cannot be as a general rule be enquired into by the AO. Dis-allowance u/s 40(a)(ia) - pre-operative expenses - Held that - Once it is accepted that the payments were reimbursements and were at actual then the question of deduction of tax at source will not arise. Copies of the quarterly TDS returns reveal that requisite TDS has been deducted and paid wherever required. Dis-allowance stand deleted. Dis-allowance u/s 40A(3) - Held that - Provisions of Sec.40A(3) were also not applicable as the payments were made by the assessee by cheques - Decided in favor of assessee

Summary

Issues Involved:
1. Deletion of addition under section 69C for unexplained expenditure.
2. Applicability of sections 40(a)(ia) and 40A(3) to pre-commencement expenses.

Detailed Analysis:

1. Deletion of Addition under Section 69C for Unexplained Expenditure
The primary issue was whether the CIT(A) erred in deleting the addition of Rs. 31,09,281/- made under section 69C of the Income Tax Act, 1961, as unexplained expenditure. The assessee, incorporated on 12/12/2006, had filed a return declaring nil income for the assessment year 2007-08, with no operational income. During the assessment proceedings, the Assessing Officer (AO) scrutinized the preoperative expenses shown under Current Liabilities, which included various expenses like Business Promotion, Foreign Travel, Miscellaneous Expenses, Professional Fees, Rent, and Traveling Expenses. Despite the assessee producing ledger copies and bills, the AO deemed the expenses unrelated to business setup and treated the amount as unexplained expenditure under section 69C.

Before CIT(A), the assessee argued that the addition under section 69C was unwarranted as the source of expenditure (share capital and share application money) was satisfactorily explained and accepted by the AO. The CIT(A) agreed, noting that the AO had verified the bills and found the expenses genuine. The CIT(A) emphasized that the lack of justification for expenditure does not render it unexplained if the source and genuineness are not in doubt. Consequently, the CIT(A) directed the deletion of the addition, which was upheld by the Tribunal, confirming that the provisions of section 69C were not applicable as the source of expenditure was explained.

2. Applicability of Sections 40(a)(ia) and 40A(3) to Pre-Commencement Expenses
The second issue was whether the CIT(A) was justified in holding that the provisions of sections 40(a)(ia) and 40A(3) do not apply to pre-commencement expenses. The AO had contended that the reimbursement to M/s. Takshila Builders Pvt. Ltd. involved a profit element, necessitating TDS under section 194C, and that the payment through journal entry violated section 40A(3). The assessee countered that the reimbursements were made on an actual basis without any profit element and that TDS had been duly deducted by M/s. Takshila Builders Pvt. Ltd. The assessee also argued that section 40A(3) applies only to actual payments, not constructive ones like journal entries.

The CIT(A) accepted the assessee's submissions, stating that the expenses were genuine, supported by bills, and the source of expenditure was not in doubt. The Tribunal concurred, noting that the AO had verified the bills and found no material suggesting the expenses were bogus or unrelated to business setup. The Tribunal also agreed that the provisions of sections 40(a)(ia) and 40A(3) were inapplicable as the payments were reimbursements without a profit element, and TDS had been appropriately deducted. Thus, the Tribunal upheld the CIT(A)'s decision to delete the addition and dismissed the revenue's appeal.

Conclusion
The Tribunal confirmed the CIT(A)'s order, holding that the addition under section 69C was unjustified as the source of expenditure was explained and the expenses were genuine. The Tribunal also upheld that sections 40(a)(ia) and 40A(3) were not applicable to the pre-commencement expenses in question. The appeal by the revenue was dismissed.