2012 (7) TMI 104 - AT - Income Tax

Unexplained Investment - advance for construction of vessel - addition made on ground of difference in value shown as advance in balance sheet of assessee and amount shown in books of holding foreign company - rejection of books of accounts - Held that - In present case, assessee in its books of accounts has recorded the investment of ₹ 18.85 crores and such investment is fully supported by relevant material, simply because M/s Coeclerici Logistics S.P.A. has recorded different amount i.e. ₹ 23.22 crores in its balance sheet for the year ended on 31st March 2006 on the basis of its own accounting method and considering the fact that the assessee was not required to make such payment before the delivery of the vessel and further the assessee has filed relevant material to show that such payment was made by the assessee as per the terms of the agreement in the subsequent assessment years which has also accepted by the Revenue in the said assessment years, we are of the view that in the absence of any material to show that the assessee has made such payment of ₹ 4.36 crores during the FY relevant to AY under consideration, the A.O. was not justified in rejecting the books of accounts and in making such addition. Section 69 is attracted when investment is not recorded in books of accounts, assessee fails to explain or explanation is found unsatisfactory. None of conditions are existing. Order of CIT(A) deleting addition upheld - Decided in favor of assessee. Preliminary expenses - establishment expenses - dis-allowance on ground that assessee has not commenced its business activities and as such the question of claiming deduction u/s 35D does not arise - Held that - Since agreement with M/s Coeclerici Logistics S.P.A. has taken place on 11-2-2006, therefore, business of the assessee has commenced on 11-12-2006 i.e. the year under consideration and hence both the claims made by the assessee are allowable - Decided in favor of assessee.

Issues Involved:
1. Deletion of addition made under Section 69 of the Income Tax Act.
2. Allowance of preliminary expenses under Section 35D and establishment expenses incurred prior to commencement of business.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Made Under Section 69 of the Income Tax Act:
The primary issue revolves around the addition of Rs. 4,36,93,000/- made by the Assessing Officer (AO) under Section 69 of the Income Tax Act, 1961, which was subsequently deleted by the Commissioner of Income Tax (Appeals) [CIT(A)].

Facts and Arguments:
- The AO observed a discrepancy between the value of a vessel shown in the assessee's balance sheet (Rs. 18.85 crores) and the holding company's balance sheet (Rs. 23.22 crores). The AO added the difference of Rs. 4,36,93,000/- as unexplained investment under Section 69.
- The assessee argued that the amount was not expended by them but by their holding company, M/s. Coeclerici Logistic S.P.A., towards other equipment. They provided detailed submissions, including invoices, correspondence, and reconciliation statements.
- The CIT(A) found that the AO's addition was unjustified as the payment was to be made upon delivery of the vessel, which had not occurred within the relevant financial year. The CIT(A) noted that the assessee had disclosed the investment in subsequent years and that the AO had accepted this in those years.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, stating that the AO did not provide contrary material evidence. The Tribunal noted that the assessee had filed all relevant documents, including a reconciliation statement and a confirmation letter from the holding company.
- The Tribunal emphasized that Section 69 applies only when investments are not recorded in the books of accounts and the assessee fails to explain the nature and source of the investment. In this case, the assessee had recorded the investment and provided satisfactory explanations.
- The Tribunal concluded that the AO's addition was not in accordance with the law and upheld the deletion of Rs. 4,36,93,000/-.

2. Allowance of Preliminary Expenses Under Section 35D and Establishment Expenses Incurred Prior to Commencement of Business:
The second issue pertains to the disallowance of preliminary expenses of Rs. 4,40,568/- under Section 35D and establishment expenses of Rs. 5,02,240/- incurred before the commencement of business.

Facts and Arguments:
- The AO disallowed these expenses, arguing that the assessee had not commenced its business activities and thus could not claim deductions under Section 35D.
- The CIT(A) observed that the assessee had received a certificate of commencement of business on 18th July 2006 and had entered into an agreement for the erection of a vessel on 11th December 2006. Therefore, the CIT(A) concluded that the business had commenced within the relevant financial year.
- The CIT(A) allowed the preliminary expenses under Section 35D and treated the establishment expenses as revenue expenditure, following the Delhi High Court's decision in CIT vs. ESPN Software India (P) Ltd.

Judgment:
- The Tribunal upheld the CIT(A)'s decision, agreeing that the business had commenced in the financial year 2006-07. The Tribunal cited the ESPN Software India (P) Ltd. case, which held that business commencement is marked by the acquisition of necessary licenses or agreements.
- The Tribunal confirmed that both the preliminary expenses and establishment expenses were allowable deductions, as the business had indeed commenced during the relevant assessment year.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The deletion of the addition under Section 69 was justified as the assessee had provided sufficient evidence and explanations regarding the investment. The allowance of preliminary and establishment expenses was also upheld, as the business had commenced within the relevant financial year.

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