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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
PER D.S. SUNDER SINGH, Accountant Member: This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-1, Visakhapatnam vide ITA.No.21/2013-14/DC,C-3(1), Vsp/2017-18 dated 19.04.2017 for the Assessment Year (A.Y.) 2010-11.
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Ground No.1 and 4 are general in nature which does not require specific adjudication.
Ground No.2(a) and 2(b) are related to the prior period expenditure of Rs.3,45,98,000/- disallowed by the Assessing Officer (AO). During the assessment proceedings, the AO found that the assessee debited a sum of Rs.3,45,98,000/- as prior period adjustment to the Profit and Loss account and the breakup of the said prior period adjustment is as under :
(Rs. in lakhs) A. Income Materials 0.00 Demurrages 0.29 Miscellaneous 0.29 B.Expenditure SC Direct Expenses 239.43 SC Direct expenses 8.20 RF Direct Expenses 1.73 Pay revision arrears 0.00 Materials & Freight 45.56 Pay and benefits 0.00 Taxes & Duties 1.23 Repairs and Maintenance 7.28 Others 42.84 346.27 Net Expenditure 345.98
The assessee was asked to explain as to why the said prior period expenditure should not be disallowed as it did not relate to the assessment
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year under consideration. In response, the assessee company submitted explanation stating that the expenses related to the earlier years are actual expenses and could not be claimed in the relevant years due to non- submission / finalization / approval of Bills etc., due to the unavoidable circumstances and certain amounts also include rectification entries pertaining to earlier years. The assessee further submitted that though the expenditure is not related to the year under consideration, the expenditure is allowable expenditure since it was incurred during the course of carrying on business and could not be claimed in the relevant previous years due to reasons beyond the control of the company. The assessee further submitted that in the case of large undertakings like HSL, involving innumerable transactions, laid down certain procedures involving many rules and regulations and there will be delay in clearing and processing of bills/claims etc. hence could not be claimed in the relevant years and claimed in subsequent years, in which the bills have been processed adhering to the procedures. In support of the claim of the assessee relied on the decision of CIT Vs. Marshall Sons Co.(I) Ltd. (1995) (124 CTR 213) and Addl.CIT Vs. Jay Engineering Works Ltd. (1979) (113 ITR 389). The AO considered the submissions of the assessee and observed that the assessee
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is following mercantile system of accounting and as per the system of accounting followed by the assessee, the assessee has to claim the expenditure as well as the income on accrual basis. The AO further observed that the income has to be computed each year independently and every year is an independent unit and expenditure relatable to the earlier years cannot be debited in the subsequent years. Therefore, following the decision of M.S. Raju Vs. DCIT 298 ITR 373 (Andhra Pradesh) and Cairn Energy India Ltd. Vs. JCIT 297 ITR 59 (Mad), the AO held that the prior period adjustments claimed by the assessee in the year under consideration is disallowable, accordingly disallowed the expenditure of Rs.3,45,98,000/- and added back to the income. The AO also placed reliance on the decision of Hon’ble Madras High Court in the case of Madras Fertilizers Ltd. Vs. CIT (Mad) (209 ITR 174).
Against the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition made by the AO stating that the assessee did not furnish any supporting information to show that the present liability was on account of insufficient provision made in the earlier year. In the absence of such evidence, the Ld.CIT(A) confirmed the order of the AO and dismissed the appeal of the assessee.
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Against the order of the CIT(A), the assessee is in appeal before this Tribunal. During the appeal hearing, the Ld.AR submitted that Hindustan Shipyard Ltd., is one of the giant companies having numerous transactions involving lot of procedures for approval and finalization of the bills of service providers. The bills are presented by the various service providers and lengthy procedures are involved for approval of the bills to avoid the fraudulent transactions. Unless the bill is approved and finalized the said bill cannot be finalised and paid. Till such time the bill is finalsed the expenditure is not crystalised. Due to non-submission of the bills in time or non-finalization due procedural difficulties, the expenditure was not crystallized and claimed in the earlier years. The AR further submitted that though the expenditure was related to the earlier years, the expenditure was crystallized and paid in the year under consideration, thus, argued that the expenditure claimed by the assessee under the head prior period adjustment is nothing but the expenditure crystallized during the year under consideration, hence required to be allowed. The Ld.AR further submitted that the expenditure incurred by the assessee is genuine expenditure. Due to overlapping mistakes or non-submission of the bills by the service providers, the expenditure could not be ascertained and the
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assessee made the provisions in the relevant assessment years representing the expenditure. As the provisions are disallowable, the expenditure was claimed as deduction after the receipt of the bills and the expenditure was ascertained. Therefore, submitted that the expenditure is genuine, not claimed in the earlier years, hence requested to allow the same in the year under consideration.
On the other hand, Ld.DR supported the orders of the Ld.CIT(A) and argued that on verification of the paper book submitted by the assessee certain entries clearly shows that though the expenditure was crystallized in the earlier years, the assessee has claimed the same in the year under consideration. Therefore, argued that there is no interference is called for in the order of the Ld.CIT(A) and the same is to be upheld.
We have heard both the parties and perused the material placed on record. In this case, the assessee has claimed the expenditure under prior period adjustment and argued that the expenditure was crystalized in the year under consideration after completion of the necessary procedures followed by the assessee company. Though the assessee is following the mercantile system of accounting and the income and expenditure required
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to be determined on accrual basis, expenditure cannot be claimed as deduction or allowed as deduction unless the same is crystallized as per the regular system of accounting followed by the assessee. One has to verify the correctness of the expenditure and various procedures followed by the companies for genuine claims of the expenses. Unless all the procedures and regulations are followed and the expenditure is finalised the same cannot be said to be crystallized. In the instant case, the assessee submitted that the company is a giant company, laid down the procedures involving many rules and regulations which causes delay in clearing and processing bills due to which the expenditure could not be claimed in the relevant assessment years. This is common for all the assessment years involved in the assessee’s case. Though expenditure is related to the earlier year it may spill over to subsequent years due to the procedures followed by the company and the same is not an isolate transaction and it is said to be regular practice. We do not dispute that the income of each year is independent and required to be determined on year to year basis separately and the earlier years income and expenditure cannot be assessed in subsequent assessment years. We do not appreciate the procedure laid down by the assessee which delays the process in
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ascertaining the expenditure. The assessee has to make necessary arrangements to claim the expenditure correctly in the relevant previous year. However, if the expenditure is spilled over for the subsequent assessment year due to the circumstances beyond the control of the assessee and crystallized in the subsequent year due to the regular practice or method of accounting followed by the assessee, the same cannot be denied. Hon’ble High Court of Delhi in the case of CIT Vs. Jagat Jit Industries Ltd. [339 ITR 0382] held that as per the business practice, the expenditure spilled over to next year required to be allowed in the subsequent year if the same is consistent practice followed by the assessee. For the sake of clarity and convenience, we extract para No.16 of the order of the Hon’ble Delhi High Court cited supra.
“16. The present factual matrix has to be tested on the touchstone and anvil of the aforesaid enunciation of law. On a scrutiny of the facts that have been brought on record, it is discernible that the assessee has been claiming prior period expenses on the ground that the vouchers of such expenses from the employees/branch employees were received after 31st March of the financial year. It has also come as a matter of fact that the assessee has branch offices throughout the country. The assessee has been debiting the expenditure spilled over to the subsequent years and the AO had been allowing the same. The said accounting practice has been consistently followed by the assessee and accepted by the Department. If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with the same, the doctrine of consistency would come into play. The said accounting system has been followed in a number of years and there is no proof that there has been any material change in the activities of the assessee as compared to the earlier years. Nothing has been brought on record to show that there has been distortion of profit or the books of account did not reflect the correct picture, in the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system, which was
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accepted by the Department in respect of the previous years.”
8.1. Similarly in the case of Saurashtra Cement & Chemical Industries Ltd. [213 ITR 0523], the Hon’ble High Court of Gujarat held as under “Having considered the material on record, we do not find any justification for the disallowances of the claim of the assessee on such abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis.” From the decision of Hon’ble High Court of Gujarat, it is observed that the spillover expenditure required to be allowed as per the business practice followed by the assessee consistently in the subsequent year and it is also observed that the expenditure required to be allowed as and when it is crystallized. From the details filed by the assessee before us in the paper book, it is observed that in certain expenses, bills were submitted during the relevant year itself but claimed in the impugned assessment year. In case of certain expenses, the bills were submitted in subsequent years. The Ld.CIT(A) confirmed the addition stating that the assessee has not furnished the evidence supporting it’s claim that the expenditure was crystallized during the year under consideration. Therefore, we deem it fit to remit the case back to the file of the Ld.CIT(A) with a direction to allow the expenditure, crystallized during the year as per the business practice
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followed by the assessee regularly. Accordingly, the order of the Ld.CIT(A) is set aside and the appeal of the assessee is remitted back to the file of the Ld.CIT(A) to reconsider the issue afresh on merits and to allow the expenditure as and when it is crystalized as per the business practice regularly followed by the assessee. Accordingly, the appeal of the assessee in ground No.2 is allowed for statistical purpose.
Ground No.3 is related to the disallowance of demurrages amounting to Rs.12,59,277/-. The Ld.AR during the appeal hearing did not press this ground. Therefore, Ground No.3 of the appeal is dismissed as not pressed.
In the result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the open court on 1st February, 2019.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर धसंह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER नवशधखधपटणम /Visakhapatnam नदनधंक /Dated : 01.02.2019 L.Rama, SPS
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आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:- 1. ननधधाऩरती/ The Assessee- M/s Hindustan Shipyard Ltd., Gandhigram, Visakhapatnam 2. रधजस्व/ The Revenue – Dy.Commissioner of Income Tax, Circle-3(1), Visakhapatnam 3. The Pr.Commissioner of Income Tax-1, Visakhapatnam 4. Commissioner of Income-Tax (Appeals)-1, Visakhapatnam 5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम /DR, ITAT, Visakhapatnam 6.गार्डफ़ाईि / Guard file आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM