MEENA CIRCUITS PVT. LTD,VADODARA vs. ACIT, CIRCLE-2(1)(2), VADODARA

This appeal filed by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)-2, Vadodara [“CIT(A)” in short] dated 25.01.2019 passed for Assessment Year 2015-16.

The issue involved in Ground No.1 relates to the disallowance of Rs.32,25,523/- made by the Assessing Officer and confirmed by the learned CIT(A) on account of prior period expenses.

The assessee, in the present case, is a company which is engaged in the business of manufacturing of printed circuit boards. The return of income for the year under consideration was filed on 30.11.2015 declaring total income at Rs. Nil. The said return was selected for scrutiny through CASS and a notice under Section 143(2) of the Income-tax Act, 1961 (“the Act” in short) along with notice under Section 142(1) of the Act was issued by the Assessing Officer to Meena Circuits P. Ltd. Vs. ACIT AY : 2015-16 2 the assessee. During the course of assessment proceedings, it was noticed by the Assessing Officer, on verification of the relevant expenses claimed by the assessee, that a sum to the extent of Rs.32,25,523/- was related to the earlier year. The findings recorded by the Assessing Officer, while arriving at this conclusion, were as under:-

The Assessing Officer did not find merit in the submissions made by the assessee. According to him, the assessee-company was following the mercantile system of accounting; and, since the relevant expenses aggregating to Rs.32,25,523/- were related to the earlier year and not to the year under consideration, the same were not allowable as deduction in computing the income of the assessee for the year under consideration. He accordingly made disallowance of Rs.32,25,523/- on account of prior period expenses in the assessment completed under Section 143(3) of the Act vide order dated 27.12.2017.

The disallowance made by the Assessing Officer on account of prior period expenses was challenged by the assessee in appeal before the learned CIT(A); and, since the submissions made by the assessee-company in support of its case were not found acceptable by him, the learned CIT(A) proceeded to confirm the disallowance made by the Assessing Officer on account of prior period expenses for the following reasons given by him in his impugned order:-

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The learned Counsel for the assessee has submitted that the bills for relevant expenses on account of AMC,

SS Technical Service – AMC for 10.06.2014 91,872 AY 2013-14 2. Carrier Airconditioning & 25.02.2015 85,000 Refrigeration Ltd – AMC from (for 3 months) 01.01.2014 to 30.06.2014-Total Invoice amounting to Rs.1,90,000 3. Carrier Airconditioning & 24.02.2015 1,00,000 Refrigeration Ltd – AMC (for 3 months) from 01.01.2015 to 30.06.2015 from 01.01.2014 to 30.06.2014 – Total Invoice amounting to Rs.2,00,000 4. Anish Kharidia, Company 31.03.2015 72,000 Secretary – Professional work for (for FY 2012- FY 2012-13, 2013-14 and 2014-15 13 & 2013- – Total Invoice from 01.01.2014 to 14) 30.06.2014 – Total invoice amounting to rs.1,24,550 5. UL India Private Limited – 04.04.2014 39,402 Quality check Expenses – Date of visit for Check is 03.01.2014

As is clearly evident from the above details furnished by the learned Counsel for the assessee, the liability for the relevant expenses on account of AMC, professional fees and quality check expenses had arisen and crystallized in the year under consideration when the bills for the same by the concerned parties were raised on the assessee. We, therefore, find merit in the contention of the assessee that, even though the said expenses pertained to the earlier year, the assessee was entitled to claim deduction for the same in the year under consideration when the liability on account of said expenses had arisen and crystallized as a result of the bills/invoices raised by the concerned parties.

Insofar as the sale promotion expenses of Rs.24,86,600/- and commission expenses of Rs.3,50,646/- are concerned, it is observed that the corresponding sales in respect of which the said commission was payable had been made and accounted for by the assessee in the earlier year and the commission payable in respect of the said sales was claimed as deduction in the year under consideration on the basis that the proceeds of the said sale were realized in the year under consideration. In this regard, the learned Counsel for the assessee contended that the said commission actually became payable only when the proceeds in respect of the corresponding sales were actually realized in the year under consideration. She, however, has not been able to produce any documentary evidence either in the form of written agreement with the concerned agents or even in the form of any correspondence to establish that the commission was payable only on realization of corresponding sale proceeds. As rightly contended by the learned Sr. DR, when the assessee was following the mercantile system of accounting, the commission payable on the corresponding sales made in the earlier year at an agreed rate could have been and should have been provided by the assessee-company in that year itself as the liability for the same was ascertainable with greater certainty. Moreover, when the corresponding sales were duly accounted for in the earlier year and recognized as income, the commission payable in respect of the said sales at an agreed rate should have been claimed as deduction by the assessee in that year itself going by matching principle. There is also nothing brought on record to establish that the liability for the said commission pertaining to the earlier year had arisen and crystallized in the year under consideration. We are, therefore, of the view that the sale promotion and sale commission expenses pertaining to the earlier were not allowable in the year under consideration being prior period expenses and the deduction claimed by the assessee for the same is not allowable either in law or even in the facts of the case. We accordingly restrict the disallowance of Rs.32,25,523/- made by the Assessing Officer and Meena Circuits P. Ltd. Vs. ACIT AY : 2015-16 7 confirmed by the learned CIT(A) on account of prior period expenses to Rs.28,37,246/-. This ground of appeal

During the course of assessment proceedings, the claim of the assessee for bad debts written off amounting to Rs.3,90,431/- was examined by the Assessing Officer. On such examination, he found that the unutilized CENVAT amounting to Rs.3,75,787/- and Service Tax credit of Rs.14,644/- were written off by the assessee and the same was claimed as bad debts written off. Since these two amounts did not represent trade debts of the assessee, the Assessing Officer held that the same was not allowable as deduction under Section 36(1)(vii) r.w. Section 36(2) of the Act. He also did not accept the alternate contention of the assessee-company that the said claim be allowed under Section 37 of the Act being the business loss on the ground that it did not pertain to the year under consideration. On appeal, the learned CIT(A) confirmed the disallowance made by the Assessing Officer on this issue.

We have heard the rival submission and also perused the relevant material available on record. As rightly held by the authorities below, the amounts in question representing the unutilized CENVAT and Service Tax credit cannot be considered as trade debts of the assessee and deduction for the same on being written off cannot be allowed under Section 36(1)(vii) r.w. Section 36(2) of the Act. Even the learned Counsel for the assessee has not been able to dispute this position. She, however, has contended that these two amounts having become irrecoverable, the same should be allowed as deduction under Section 37 of the Act being the business loss. She, however, has not been able to bring anything on record to establish that the unutilized CENVAT and Service Tax credit amount in question had become irrecoverable

In the result, the appeal of the assessee is partly allowed.