DEPUTY COMMISSIONER OF INCOME TAX, CHENNAI vs. JEPPIAAR FISHING HARBOUR MUTTOM PRIVATE LIMITED, CHENNAI

The brief facts of the case are that the assessee, M/s.Jeppiaar Fishing Harbour Muttom Private Limited, is a company engaged in the business of fishing, operation of fish hatcheries and fish farms and rendering services incidental to fishing. The assessee filed its return of income for the AY 2016- 17 on 01.07.2017, declaring a total loss of Rs.5,49,23,797/-. The case was selected for scrutiny under CASS. The original assessment was completed u/s.143(3) of the Act on 20.12.2018, determining the total loss at Rs.4,27,50,709/-.

Subsequently, the AO noticed from the financial statements that the opening balance of Capital Work-in-Progress was Rs.29,15,03,400/-, whereas an amount of Rs.24,98,21,352/- had been capitalised during the relevant previous year. The AO was of the view that the difference of Rs.4,16,82,048/- had not been capitalised and, therefore, ought to be treated as revenue expenditure and brought to tax. The AO further noticed that the opening balance in the account of Pre-operative Expenses was Rs.9,58,64,491/-, out of which

After obtaining the requisite sanction u/s.151 of the Act, notice u/s.148 of the Act was issued on 31.03.2021. In response to the notice, the assessee filed its return of income on 05.04.2021, by declaring the same loss of Rs.5,49,23,797/-. Thereafter, notice u/s.143(2) was issued and the reasons recorded for reopening the assessment were supplied to the assessee. The assessee filed objections against the reopening, which were disposed of by the AO by an order communicated vide letter dated 11.03.2022. The AO issued a show-cause notice dated 17.03.2022, proposing the following additions: Rs.4,16,82,048/-, representing the difference between the opening • balance of Capital Work-in-Progress and the amount capitalised during the year; and Rs.8,62,08,410/-, representing the adjustment made in the Pre-operative • Expenses account, which was proposed to be treated as amortisation of expenditure. 1 6. The assessee filed a detailed reply dated 23.03.2022, explaining the accounting entries and objecting to the proposed additions. The AO, however, was not satisfied with the explanation furnished by the assessee. He completed the reassessment u/s.147 of the Act on 28.03.2022 by making both the additions. Consequently, the taxable income was determined at Rs.8,51,39,749/-, and a demand of Rs.4,84,17,775/-, including interest under section 234B of the Act, was raised.

It was specifically contended that none of the impugned entries had been routed through the Profit and Loss Account and no deduction had been claimed by the assessee in computing its taxable income. After examining the documentary evidence and the explanations furnished by the assessee, the ld.CIT(A) held that the AO had proceeded on an erroneous understanding of the accounting treatment. The ld. CIT(A) found that the impugned entries were balance sheet adjustments and did not result in any debit to the Profit and Loss Account or any claim of revenue expenditure. The ld. CIT(A), therefore, deleted both the additions by order dated 30.01.2026.

Aggrieved by the relief granted by the ld. CIT(A), the Revenue is in appeal before us. The ld.DR strongly supported the reassessment order passed by the AO. In respect of the first addition of Rs.4,16,82,048/-, the ld. DR submitted that there was a clear difference between the opening balance of Capital Work-in- Progress amounting to Rs.29,15,03,400/- and the amount of Rs.24,98,21,352/- capitalised during the relevant previous year. According to the ld.DR, the ld.CIT(A) erred in accepting the assessee’s explanation that the difference represented rectification of duplicate accounting entries without properly appreciating the findings recorded by the AO. The ld.DR contended that the assessee had not furnished satisfactory evidence to prove that the impugned

Regarding the second addition of Rs.8,62,08,410/-, the ld.DR submitted that there was a substantial reduction in the opening balance of Pre-operative Expenses during the relevant previous year. The ld.DR argued that the AO had correctly treated the said reduction as amortisation of expenditure. According to the ld.DR, the ld.CIT(A) erred in accepting the assessee’s explanation that the adjustment represented transfer of capital expenditure and reversal of duplicate entries. The ld.DR further submitted that the assessee had failed to establish conclusively that no part of the amount had been claimed as expenditure in the Profit and Loss Account or while computing taxable income. Accordingly, the ld.DR prayed that the order of the ld.CIT(A) be reversed and both the additions made by the AO be restored.

Per contra, the ld.AR supported the order of the ld.CIT(A). The ld.AR submitted that the AO had made both the additions merely on the basis of differences appearing in balance sheet accounts, without examining the actual ledger entries or appreciating the accounting treatment adopted by the assessee. The ld.AR contended that no expenditure corresponding to either of the additions had been debited to the Profit and Loss Account and no deduction had been claimed while computing the taxable income.

The ld.AR submitted that the opening balance of Capital Work-in- Progress was Rs.29,15,03,400/-. During the year, the entire amount was transferred or adjusted through the following entries:

The ld. AR submitted that the amount of Rs.3,19,50,280/- relating to Sundaram Finance Loan represented a duplicate accounting entry. It was explained that while availing a refinancing facility, the earlier loan had already been squared up. However, because of an inadvertent accounting error, the corresponding liability continued to remain reflected in the books. The error was subsequently rectified by reversing the duplicate entry. The ld.AR further submitted that the issue relating to the Sundaram Finance Loan had already been considered by the Tribunal in the assessee’s own case for the AY 2015- 16, wherein the corresponding addition was deleted.

The ld. AR further explained that the amount of Rs.5,98,16,593/- relating to M/s.Chirag Ice Factories also represented duplicate accounting entries passed in earlier years. These errors were noticed during the process of capitalisation of the project and were consequently reversed by debiting the respective party account and crediting the Capital Work-in-Progress account. The remaining amount represented capitalisation of fixed assets, including Plant and Machinery, Land, Office Building and Harbour. The ld.AR emphasised that the entire accounting treatment was confined to balance sheet accounts. Neither the reversal of duplicate entries nor the transfer of Capital Work-in- Progress to the fixed asset accounts resulted in any debit to the Profit and Loss Account. It was therefore submitted that the AO fundamentally erred in treating the difference of Rs.4,16,82,048/- as revenue expenditure liable to tax.

In respect of addition relating to Pre-operative Expenses of Rs.8,62,08,410/-, the ld.AR submitted that the opening balance of Pre-operative Expenses amounting to Rs.9,58,64,491/- represented capital expenditure

Out of the total transfer entries, an amount of Rs.3,61,23,584/- represented reversal of duplicate liabilities created in earlier years. The balance represented transfer of project-related capital expenditure to the respective fixed asset accounts upon capitalisation. The ld. AR submitted that none of the entries was routed through the Profit and Loss Account. The assessee had not claimed any deduction in respect of the impugned amount. Accordingly, the AO's assumption that the reduction in the Pre-operative Expenses account represented amortisation of expenditure was factually incorrect and contrary to the books of account.

The ld.AR submitted that the ld.CIT(A), after examining the ledger accounts, audited financial statements and reconciliation statements, correctly deleted both the additions. It was further submitted that the Revenue had not produced any contrary accounting evidence to rebut the factual findings recorded by the ld.CIT(A). The ld. AR therefore prayed that the order of the ld.CIT(A) be confirmed and the appeal filed by the Revenue be dismissed.

We have heard the rival submissions and carefully considered the orders of the authorities below, the written submissions, reconciliation statements,

The first addition of Rs.4,16,82,048/- arose from the difference between the opening balance of Capital Work-in-Progress and the amount which, according to the Assessing Officer, was capitalised during the year. The second addition of Rs.8,62,08,410/- arose from the reduction in the balance of Pre- operative Expenses, which the AO presumed to be amortisation of expenditure. The primary question for consideration is whether the impugned entries resulted in any expenditure being debited to the Profit and Loss Account, any deduction being claimed by the assessee, or any income accruing or arising which could lawfully be brought to tax.

We first take up the addition of Rs.4,16,82,048/- relating to Capital Work- in-Progress. The AO noticed that the opening balance of Capital Work-in- Progress was Rs.29,15,03,400/-, while the fixed assets capitalised during the year were stated to be Rs.24,98,21,352/-. On this basis, the AO inferred that the difference represented revenue expenditure. In our considered view, the inference drawn by the AO is not supported by the accounting records. The assessee furnished a complete reconciliation of the opening balance of Capital Work-in-Progress. The reconciliation demonstrates that the entire amount of Rs.29,15,03,400/- was accounted for through capitalisation of fixed assets and reversal of duplicate entries. The entries relating to Plant and Machinery, Land and Office Building and Harbour represent transfer of capital work accumulated during the project implementation stage to the respective fixed asset accounts upon the assets being put to use or otherwise becoming ready for capitalisation. Such transfer is a movement from one balance sheet asset account to another balance sheet asset account. It does not constitute a debit to the Profit and Loss Account and cannot be treated as revenue expenditure.

The Revenue has also not demonstrated that the assessee claimed the impugned amount as a deduction while computing its taxable income. There is no finding that any expenditure incurred during the relevant previous year escaped disallowance or that any benefit, remission or cessation of liability chargeable to tax arose in favour of the assessee. The addition was made merely because the amount capitalised under fixed asset heads did not numerically correspond to the opening balance of Capital Work-in-Progress. Such numerical difference, without examining the corresponding ledger entries, cannot constitute a valid basis for treating the amount as revenue expenditure or taxable income.

We also note that the explanation regarding the duplicate Sundaram Finance Loan entry was considered by the Tribunal in the assessee’s own case for the preceding AY 2015-16. Although each assessment year is a separate unit, a factual finding concerning the nature of an accounting entry, particularly one originating in an earlier year, cannot be ignored in a subsequent year unless the Revenue brings distinguishing material on record. No such distinguishing material has been placed before us. The ld.CIT(A) examined the reconciliation statements, ledger extracts, audited financial statements and the earlier order of the Tribunal and recorded a categorical factual finding that the disputed amount represented rectification of duplicate accounting entries and transfer of Capital Work-in-Progress to fixed assets. The Revenue has not identified any

We therefore find no infirmity in the conclusion of the ld.CIT(A) that the amount of Rs.4,16,82,048/- did not represent revenue expenditure or taxable income. Accordingly, the order of the ld.CIT(A) deleting the addition of Rs.4,16,82,048/- is upheld. The corresponding grounds raised by the Revenue on this issue are dismissed.

We next take up the addition of Rs.8,62,08,410/- relating to Pre-operative Expenses. The AO noticed that the opening balance of Pre-operative Expenses was Rs.9,58,64,491/- and that transfer or adjustment entries aggregating to Rs.8,62,08,410/- had been made during the year. Without analysing the corresponding entries, the AO presumed that the reduction represented amortisation of expenditure and added the entire amount to the income of the assessee. The assessee explained that the Pre-operative Expenses account represented project-related capital expenditure incurred during the implementation stage. Upon the project assets being ready for use or capitalisation, the corresponding expenditure was transferred to Plant and Machinery and Office Building and Harbour accounts. The transfer of project- related capital expenditure from the Pre-operative Expenses account to the respective fixed asset accounts is only a reclassification within the balance sheet. It is not an amortisation charged to the Profit and Loss Account.

The reconciliation furnished by the assessee also shows that an amount of Rs.3,61,23,584/- represented reversal of duplicate entries relating to Jeppiaar and Automotive Coaches and Components Limited. The balance amount represented capitalisation of Plant and Machinery and Office Building and Harbour. The Revenue has not disputed the relevant ledger accounts. It has not shown that the entries were passed through the Profit and Loss Account

The AO has treated the adjustment as amortisation merely on assumption. However, an addition cannot be sustained on conjecture when the books of account and ledger entries demonstrate that the adjustment was confined to balance sheet accounts. The ld.CIT(A), after examining the Pre- operative Expenses ledger, the corresponding fixed asset ledgers, audited financial statements and the reconciliation furnished by the assessee, recorded a finding that the impugned reduction represented transfer of capital expenditure to fixed asset accounts and reversal of duplicate entries. The Revenue has not brought any contrary material before us to rebut this finding. The burden upon the Revenue in its appeal is not discharged merely by reiterating the assumptions made in the assessment order. The Revenue must demonstrate that the factual findings of the ld.CIT(A) are contrary to the books of account or unsupported by evidence. No such exercise has been undertaken.

We therefore hold that the AO was not justified in treating the sum of Rs.8,62,08,410/- as amortisation of expenditure. Since no amount was debited to the Profit and Loss Account and no deduction was claimed by the assessee, there was no occasion to make an addition to the taxable income. Accordingly, we find no infirmity in the order of the ld.CIT(A) deleting the addition of Rs.8,62,08,410/-. Therefore, the corresponding grounds raised by the Revenue on this issue are dismissed.

In the result, the appeal filed by the Revenue is dismissed.