INCOME TAX OFFICER - 11(1)(1), MUMBAI, MUMBAI vs. VENUS RECORDS AND TAPES LLP, MUMBAI

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ITA 4927/MUM/2026Status: DisposedITAT Mumbai29 September 20269 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal held that the disallowance made by the Assessing Officer solely on the ground that the liability remained unpaid at the close of the relevant previous year could not be sustained. It noted that the assessee followed the mercantile system of accounting and the expenditure in question did not fall under the specific categories of liabilities covered by Section 43B of the Act. The CIT(A) had correctly considered the allowability of the expenditure on the basis of accrual of liability under the mercantile system. The Tribunal found that the liability had been recorded in the books pursuant to the assessee’s arrangement with the investors, and the Assessing Officer had not provided material to establish that the liability had not accrued or ceased to exist. Furthermore, details evidencing subsequent discharge of the outstanding liabilities during FY 2023-24 and FY 2024-25 were furnished, which constituted a relevant factual circumstance. The Tribunal upheld the CIT(A)'s decision, finding it to be in accordance with applicable legal principles. The addition of Rs. 3,23,75,351/- was deleted.

What were the facts?

The Revenue appealed against an order of the CIT(A) for AY 2022-23, which deleted an addition of Rs. 3,23,75,351/-. This amount represented the unpaid 'share of profit in overflow' claimed as an expenditure by the assessee, Venus Records and Tapes LLP. The assessee, following the mercantile system of accounting, had claimed a total expenditure of Rs. 8,46,52,408/-, out of which Rs. 5,22,77,057/- was paid. The Assessing Officer disallowed the unpaid portion, Rs. 3,23,75,351/-, on the grounds that it remained unverified and unpaid at the close of the financial year. The assessee had stated its bank balance was insufficient to discharge this liability. The CIT(A) deleted the addition, relying on the mercantile system and Supreme Court judgments.

What were the issues?

1. Whether, on the facts and in law, the CIT(A) was justified in deleting the addition of Rs. 3,23,75,351/- on account of unpaid 'share of profit in overflow', when the liability remained unverified and unpaid at the close of FY 2021-22, rendering it contingent and not deductible under the mercantile system of accounting, as per Section 145 of the Income Tax Act, 1961, and the principle laid down in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC). 2. Whether the CIT(A) was justified in relying on Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) for deleting the addition, when that judgment was distinguishable on facts as the liability in the present case was contingent due to insufficient funds, unlike the certain and unconditional liability in Bharat Earth Movers. Assessee's contentions: The assessee contended that the liability had accrued during the relevant previous year under the mercantile system of accounting and could not be disallowed merely because payment was not made. It relied on confirmations and other documents to substantiate the liability and cited the judgment in Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) and CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC). Revenue's contentions: The Revenue argued that the unpaid liability was contingent due to insufficient funds, making the CIT(A)'s reliance on Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) misplaced. It sought to restore the disallowance made by the Assessing Officer.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144B,Section 145,Section 43B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “F” BENCH, MUMBAI

Before: SHRI CHALLA NAGENDRA PRASAD, JM & SHRI ARUN KHODPIA, AM

For Appellant: Shri Prakash Jhunjhunwala
For Respondent: Shri Bal Krishna Yadav, Sr. DR
Hearing: 29.09.2026

आयकर अपीलीय अिधकरण �ायपीठ मुंबईम�। IN THE INCOME TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI CHALLA NAGENDRA PRASAD, JM & SHRI ARUN KHODPIA, AM I.T.A. No. 4927/Mum/2026 (Assessment Year: 2022-23) Income Tax Officer – 11(1)(1), Venus Records and Tapes LLP Mumbai 106/1, Blue Diamond, Opp SNDT Vs. Mumbai-400020 College, Juhu Tara Road, Santacruz (West), Mumbai-400049 PAN: AAMFV7252R Revenue - अपीलाथ� / Appellant Assessee -��थ�/ Respondent :

Assessee by : Shri Prakash Jhunjhunwala Revenue by : Shri Bal Krishna Yadav, Sr. DR : 24.07.2026 Date of Hearing : 29.09.2026 Date of Pronouncement

O R D E R Per Arun Khodpia, AM: This appeal is preferred by the Revenue, directed against the order of the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 02.02.2026 for the Assessment Year (AY) 2022-23, arises from the assessment order under section 143(3) of the Income Tax Act, 1961 [in short, “the Act”] dated 23.03.2024, passed by Assessment Unit, Income Tax Department [in short, “the Ld. AO”].

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP 2. The grounds of appeal raised by the Revenue are as under: “1. Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) was justified in deleting the addition of Rs.3,23,75,351/- on account of unpaid 'share of profit in overflow', when the said amount remained unverified and unpaid at the close of FY 2021-22 and the assessee itself had admittedly stated before the AO that its bank balance was insufficient to discharge the outstanding liability, thereby rendering the liability contingent upon future availability of funds and not a present and certain obligation deductible under the mercantile system of accounting as mandated by the Hon'ble Supreme Court in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC). 2. Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) was justified in placing reliance upon the judgment of the Hon'ble Supreme Court in Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC) for deleting the addition of Rs.3,23,75,351/-, when the said judgment is clearly distinguishable on facts inasmuch as the ruling in Bharat Earth Movers was expressly premised on the liability being certain and unconditional, whereas in the present case the assessee's own admission of insufficient bank balance conclusively demonstrates that the discharge of the said liability was contingent upon future availability of funds and therefore the essential factual foundation of the said judgment was wholly absent. 3. Whether on the facts and in the circumstances of the case, and in law, the Ld. CIT(A) was justified in holding that a liability recorded in the books of account on accrual basis can be held to be a deductible expense under the mercantile system of accounting within the meaning of Section 145 of the Income Tax Act, 1961, when the assessee itself has admitted its inability to pay the said liability due to insufficiency of bank balance, thereby demonstrating that the liability had not unconditionally crystallised during the relevant previous year.” 3. The assessee, Venus Records and Tapes LLP, is a Limited Liability Partnership engaged in the business of production, sale, distribution and exhibition of films, acquisition and exploitation of film rights, and creation/acquisition and exploitation of music/audio rights. For AY 2022-23, the assessee filed its return of income on 21.10.2022, declaring total income of Rs.9,33,05,980/-.

4.

The return was selected for scrutiny under CASS for examination of, inter alia, large other expenses, large-value refund claimed, and mismatch between taxable receipts from other sources and receipts reported in the return. 2

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP Accordingly, notice under section 143(2) was issued on 02.06.2023, followed by further notices during the assessment proceedings.

5.

The assessee maintained its books of account on the mercantile/accrual basis. During the relevant previous year, it claimed expenditure of Rs.8,46,52,408/- towards “share of profit in overflow” payable to the concerned parties. Out of the said amount, Rs.5,22,77,057/- was actually paid during the year, while Rs.3,23,75,351/- remained outstanding at the end of the year.

6.

The Assessing Officer, while accepting the payment of Rs.5,22,77,057/- after verification with the bank statements, disallowed the balance amount of Rs.3,23,75,351/- on the ground that the amount had not been paid during the relevant previous year and remained merely payable. Accordingly, assessment was completed under section 143(3) read with section 144B on 23.03.2024, determining the total income at Rs.12,56,81,331/- after making the aforesaid addition.

7.

Aggrieved by the assessment order, the assessee preferred an appeal before the Ld. CIT(A), NFAC. The assessee contended that the liability towards the share of profit in overflow had accrued during the relevant previous year under the mercantile system of accounting and could not be disallowed merely because payment had not been made during the year. It also relied upon confirmations and other documents relating to the recipients, including their computation of income and return acknowledgments, to substantiate the corresponding liability. 3

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP

8.

The Ld. CIT(A), after considering the assessment order and submissions of

the assessee, observed that the Assessing Officer had not disputed the

allowability of the expenditure itself but had denied deduction solely on the

ground that the outstanding amount remained unpaid. The NFAC further

observed that the expenditure did not fall within the categories specified under

section 43B of the Act and, accordingly, held that the same was allowable on

accrual basis under the mercantile system. Relying, inter alia, upon the decisions

of the Hon’ble Supreme Court in Bharat Earth Movers v. CIT (2000) 245 ITR

428 (SC) and CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC), the

NFAC deleted the addition of Rs.3,23,75,351/- and allowed the appeal.

9.

The relevant findings of the Ld. CIT(A) are as under:

“5.2.4 I have gone through the assessment order, grounds of appeal, statement of facts, written submission of the appellant and other materials available on record. The undisputed facts are that, the appellant maintains its books of accounts on mercantile/accrual basis. It is also not under dispute that as per the agreement, the appellant was liable to pay ‘share of profit’ to the investors to the tune of Rs.8,46,52,408/- out of which only Rs.5,22,77,057/- was paid during the assessment year under consideration and the remaining part of Rs.3,23,75,351/- remained outstanding at the end of the concerned financial year. The single solitary issue under dispute is that as to whether the outstanding expenses of Rs.3,23,75,351/- was eligible for deduction during the assessment year under consideration or not. The A.O. is of the view that the balance amount ofRs.3,23,75,351/- (Rs. 8,46,52,408/- - Rs. 5,22,77,057/-) had not been paid but was payable only. The A.O. verified the Payment of Rs. 5,22,77,057/- with the bank statement and found to be in order. Hence, the Ld. A.O. drew conclusion that the balance payable amount of Rs.3,23,75,351/- claimed as expenses incurred is not eligible for deduction as expenses. On the other hand, the appellant has contented that the liability of Rs.3,23,75,351/-was genuine and duly accrued under the mercantile system of accounting and it cannot be disallowed merely on the ground that the same remained unpaid during the previous year under consideration. It has further been pleaded that the concerned investors have duly shown the amount in question in their accounts and return of income and all relevant documents were produced before the A.O. for confirmation. On careful consideration of all materials on record including assessment order and submission of the appellant, I find that the A.O. has not doubted allowability of deduction of expenses under the head ‘share of profit out flow’. Even he has allowed the share of profit out flow of Rs.5,22,77,057/- on the ground of genuine payment made to the investor during the year. However, he has disallowed the unpaid but accrued share of profit out flow of Rs.3,23,75,351/- on the ground that the same could not be paid till the end of the respective year. Thus, A.O. was of the view that the share of profit out flow is eligible for deduction but only on payment basis and not on accrual basis. Although the A.O. has not referred to any specific provision of the Act, I find that section 43B of the Act provides a detailed list of expenses which are allowable for deduction exclusively on payment basis and not on accrual basis. For the purpose of ready reference, relevant portion of the provisions of section 43B ofthe Act is reproduced below:

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP

“43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (da) any sum payable by the assessee as interest on any loan or borrowing from a deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company, in accordance with the terms and conditions of the agreement governing such loan or borrowing, or (e) any sum payable by the assessee as interest on any loan or advances from a scheduled bank or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank in accordance with the terms and conditions of the agreement governing such loan or advances, or (f) any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or (g) any sum payable by the assessee to the Indian Railways for the use of railway assets, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return…..” It is evident from the above provisions that only expenses mentioned under clause (a) to (g) of section 43B of the Act is eligible for deduction exclusively on payment basis and not on accrual basis even when an assessee maintains its books as per mercantile system of accounting. Since the expenses under consideration is not listed under section 43B of the Act, in my considered view, the expenses towards ‘share of profit out flow’ is eligible for deduction on accrual basis if an assessee/appellant maintains its books of accounts as per mercantile system of accounting. The appellant has referred to plethora of decisions of the Hon’ble Apex Court and Hon’ble High Courts wherein it has been held that Liability which was accrued during the previous year is deductible even if not actually paid in that year and deduction cannot be denied merely on the ground that payment was not made during the concerned previous year. I find that the case of the appellant is squarely covered with the decision of the Hon’ble Apex Court in the case of Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), wherein the Hon’ble Supreme Court has held that once a liability has definitely arisen in the relevant previous year, relevant deduction cannot be denied merely because the exact quantification is pending or the amount remains unpaid. The Court affirmed the principle that accrued liability is allowable under the mercantile system of accounting and actual payment is not a pre-requisite for claiming deduction. I find further strength from the decision of the Hon’ble Apex Court in the case of CIT v. Excel Industries Ltd. (2013) 358 ITR 295 (SC), wherein it was held that when income is taxed in the hands of one party, corresponding deduction cannot be denied to the other party, as it would amount to double taxation. Based upon the above discussion case laws, in my considered view, the A.O. was not justified in disallowing the amount of Rs.3,23,75,351/- merely on the ground that the same could not be paid till the 5

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP end of the previous year. In light of the above discussion, addition of Rs.3,23,75,351/- is deleted and Ground No. 1 is allowed. 6. In result, the appeal is Allowed. 10. The revenue, aggrieved by the aforesaid decision of the learned CIT(A), is in appeal before us.

11.

At the outset, the learned Sr. DR appearing for the Revenue submitted that the findings of the Ld. CIT(A) were not in accordance with law. It was contended that the liability in question, having remained unpaid, was in the nature of a contingent liability, particularly when the assessee did not have sufficient funds to discharge the same. Accordingly, it was submitted that the decision of the Hon’ble Supreme Court in Bharat Earth Movers v. CIT (supra), relied upon by the Ld. CIT(A), was distinguishable on facts and had no application to the present case. The learned Sr. DR placed reliance upon the assessment order and submitted that the impugned order of the Ld. CIT(A) be set aside and the disallowance made by the Assessing Officer be restored.

12.

Per contra, the learned counsel for the assessee relied upon the findings of the Ld. CIT(A) and submitted that the assessee maintained its books of account on mercantile basis and the expenditure in question was accrued and accounted for in accordance with its regular method of accounting. It was submitted that the expenditure had been disallowed solely because the corresponding payment could not be made during the relevant previous year. The learned AR further submitted that the expenditure did not fall within any of the categories specified

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP under section 43B of the Act and, therefore, could not be denied merely on the ground of non-payment during the year. Accordingly, reliance was placed upon the order of the Ld. CIT(A).

13.

We have considered the rival submissions, perused the material available on record, examined the findings of the Ld. CIT(A) in consideration of judicial pronouncement relied upon by the parties. The material facts indicate that the assessee had accounted for the expenditure towards its share of profit in overflow payable to the investors in terms of the MOU entered into between the parties. The Assessing Officer has not disputed the nature of the expenditure or its accrual as such, even the part expenditure was allowed as they are paid, but has disallowed the amount of Rs.3,23,75,351/- solely on the ground that the same remained unpaid at the end of the relevant previous year.

14.

It is also not in dispute that the assessee follows the mercantile system of accounting. The Ld. CIT(A), after examining the issue, noted that the expenditure in question does not fall within the specific categories of liabilities covered by section 43B of the Act. The Ld. CIT(A), accordingly, considered the allowability of the expenditure on the basis of accrual of liability under the mercantile system of accounting and relied upon the ratio of the Hon’ble Supreme Court in Bharat Earth Movers v. CIT (supra).

15.

The contention of the Revenue that the liability was contingent merely because it remained unpaid and the assessee did not have sufficient funds, in our 7

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP considered view, requires examination with reference to the nature and crystallisation of the liability rather than merely the fact of non-payment. In the present case, the liability had been recorded in the books pursuant to the assessee’s arrangement with the concerned investors, and the Assessing Officer has not brought any material on record to establish that the liability had not accrued or had ceased to exist during the relevant previous year.

16.

We further note that, before us, the learned AR furnished details evidencing subsequent discharge of the outstanding liabilities to Mr. Chetan Jain and M/s Armaan Ventures Private Limited during FY 2023-24 and FY 2024-25. Such subsequent payments also constitute a relevant factual circumstance while examining the Revenue's contention that the liability was merely contingent.

17.

In these facts, the disallowance made by the Assessing Officer solely on the ground that the liability remained unpaid at the close of the relevant previous year cannot be sustained, particularly when the liability is otherwise found to have accrued under the mercantile system of accounting and is not shown to be covered by section 43B of the Act.

18.

We, therefore, find that the Ld. CIT(A), upon examination of the issue and the material available on record, has adjudicated the matter in accordance with the applicable legal principles. Accordingly, de horse any submissions, material or decision contradicting such decision, the findings of the Ld. CIT(A) do not call for any interference. 8

ITA No. 4927/Mum/2026 Venus Records and Tapes LLP 19. Accordingly, the grounds raised by the Revenue are rejected and the order of the Ld. CIT(A) is upheld.

20.

In the result, the appeal filed by the Revenue is dismissed, in above terms.

Order pronounced in the open court on 29-09-2026.

Sd/- Sd/- (CHALLA NAGENDRA PRASAD) (ARUN KHODPIA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated : 29-09-2026. Ankit K., Sr. PS

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai

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