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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
PER G. MANJUNATHA, ACCOUNTANT MEMBER:
This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-2, Coimbatore, dated 30.08.2017 and pertains to assessment year 2014-15.
2. The assessee has raised the following grounds of appeal: “1. The learned CIT(A) has erred in upholding the disallowance of Rs.16,55,991/-, in the facts and the circumstances of the case and in law.
:-2-: ITA. No:2870/Chny/2017
The learned CITA) ought to have held that alternatively the deduction of Rs.16,55,991/- should be allowed under the proviso to section 40(a)(ia) of the I.T.Act, 1961, during the previous year when the tax was deducted and paid on 25.04.2013, in the facts and the circumstances of the case and in law.
The learned CIT(A) has not found that the expenditure, in question, was not allowable, as a deduction, in computing the income, under the head Business", except on the ground of holding that the same cannot be considered, as having accrued on 25.04.2013, but, during the year 31.03.2013, in the facts and the circumstances of the case and in law. 4. For these and other additional grounds of appeal that may be adduced at the time of hearing, the order of the Commissioner of Income Tax (Appeals)-2, Coimbatore, is opposed to Jaw and unsustainable in the facts and the circumstances of the case.”
3. The brief facts of the case are that, the appellant is a partnership firm engaged in the business of manufacturing of pump sets, filed its return of income for the assessment year 2014-15, declaring a total income of Rs. 7,41,79,100/-. During the financial year relevant to assessment year 2014-15, the assessee debited interest on capital account of outgoing partner amounting to Rs. 16,55,991/-, which pertains to the period from 01.09.2012 to 31.03.2013. The AO had disallowed interest paid to partner’s capital account which pertains to earlier financial year, on the ground that when the assessee is following mercantile system of accounting, expenditure pertains to earlier years should have been claimed in the assessment year 2013-14.
:-3-: ITA. No:2870/Chny/2017 The assessee carried the matter in appeal before the first appellant authority, but could not succeed. The Ld. CIT(A) for the reasons stated in their appellant order, sustained additions made by the AO.
The Ld. Counsel for the assessee submitted that irrespective of method of accounting followed by the assessee, deduction u/s. 36(1)((iii) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) shall be allowed in the assessment year subject to the proviso u/s. 40(a)(ia) of the Act, as per which, when the assessee has deducted TDS and paid expenditure needs to be allowed. Since, the assessee has deducted TDS on interest to capital account of outgoing partner in the assessment year 2014-15, the same needs to be allowed in this year, even if the assessee is following mercantile system of accounting.
The Ld. DR on the other hand supporting the order of the Ld. CIT(A), submitted that there is no dispute that the assessee is following mercantile system of accounting. But, interest pertains to 01.09.2012 to 31.03.2013 has been accrued in the financial year relevant to assessment year
:-4-: ITA. No:2870/Chny/2017 2013-14 and thus, the AO has rightly disallowed expenditure pertains to earlier year and their order should be upheld.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. There is no dispute with regard to the settled legal position of law that when assessee is following mercantile system of accounting, income and expenditure pertains to relevant accounting period is required to be accounted whether or not such expenditure/income is received by the assessee. It is also not in dispute that interest expenditure of Rs. 16,55,991/- pertains to the period from 01.09.2012 to 31.03.2013. Therefore, in principal the assessee should have made a provision in the books of accounts for interest payment to the above period for the financial year relevant to assessment year 2013-14 itself. Be that as it may, but when it comes to deductibility of any expenditure, it is subject to provisions of section 40(a)(ia) of the Act and as per said provision, expenditure debited to profit and loss account cannot be allowed as deduction, in case the assessee has not deducted TDS on said expenditure. The provisio provided to :-5-: ITA. No:2870/Chny/2017 section 40(a)(ia) of the Act further states that said expenditure can be allowed as deduction in the year in which the assessee has deducted TDS and remits to Government account. In this case, assuming for a moment, the assessee has made a provision for interest payment to partner in the earlier assessment year 2013-14, but same cannot be allowed as deduction because of non-deduction of tax at source. Further, it is a tax neutral exercise, because if assessee provides interest in the last financial year, to that extent profits of the assessee would come down and at the same time for non-deduction of TDS if expenses is disallowed then profit would remain same. Therefore, for assessment year 2013-14 there is no net effect on the profit declared by the assessee. Further, as per provisions of section 40(a)(ia) of the Act, even if assessee debited expenditure, but same needs to be allowed as and when the assessee deducts TDS on said expenditure. In this case, the assessee has deducted TDS on impugned expenditure for the assessment year 2014-15, which has to be allowed irrespective of method of accounting followed by the assessee. Therefore, we are of the considered view that the AO as well as the CIT(A) are erred in disallowing interest paid
:-6-: ITA. No:2870/Chny/2017 to outgoing partner’s account and thus, we direct the AO to delete additions made towards disallowance of interest paid on partners capital account.
In the result, appeal filed by the assessee is allowed.