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Facts
The assessee, an event management company, organized an event in Norway for a Singapore-based company. The assessee showed the total budget of the event as revenue and the budgeted expenses in its books. The AO disallowed the expenses, treating them as hypothetical, while the CIT(A) deleted the addition.
Held
The Tribunal held that crediting and debiting 'budgeted/hypothetical income and expense' to the Profit and Loss Account does not result in real income or expense accruing to the assessee. Real income, not notional income, is subject to tax. The AO misinterpreted the notes to accounts and based the addition on conjectures.
Key Issues
Whether budgeted expenses, not actually incurred by the assessee but part of a notional entry in the books, can be disallowed by the AO. Whether the AO correctly interpreted the accounting entries and notes to accounts.
Sections Cited
37(1), 40(a)(ia)
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Income Tax Appellate Tribunal, DELHI ‘C’ BENCH,
Before: SHRI YOGESH KUMAR US, & SHRI NAVEEN CHANDRA
ORDER PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order of the ld. CIT(A) - 22, New Delhi dated 07.11.2019 for A.Y 2015-16.
The grounds of appeal raised by the Revenue read as under:
Page 1 of 8 “1. Whether the CIT(A) has erred in deleting the addition of Rs. 4,22,03,463/- without recognizing that the assessee is a company whose accounts have been prepared & audited by professionals and qualified Chartered Accountant and who is bound to prepare accounts & audit report on actual figures and not by taking hypothetical figures.
2. Whether the CIT(A) has erred in deleting the addition without recognizing that the onus to prove the genuineness of expenses debited in Profit & Loss account with documentary evidences lies on assessee and the assessee fails to provide documentary evidence on expenses claimed at Rs. 4,22,03,463/-.
3. The appellant craves leave, to add, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”
Briefly stated, the facts of the case are that the assessee filed its Return of Income on 28.09.2015 declaring an income of Rs.38,89,700/-.
Return was selected for limited scrutiny assessment through CASS and accordingly, statutory notices were issued and served upon the assessee.
The assessee company is an event management company which had organized an event in Norway for a company based in Singapore M/s Studio SOS Production INC, Singapore during the AY 2015-16. The assessee in its books of account had shown the total budget of the event i.e. Rs. 4,37,79,713/- as its revenue and showed total budgeted expense
Page 2 of 8 assessee declared its Professional Management Fees of Rs. 15,34,500/- as its net revenue. The assessee was asked to furnish details of other expenses claimed in the Profit and Loss account and details of Norway Event expenses. The AO ultimately was not satisfied with the explanation of the assessee and disallowed the expenses claimed of Rs 4,22,03,463/- u/s 37(1) as well as 40(a)(ia).
The matter travelled to the CIT(A) who deleted the said addition.
The aggrieved Revenue is before us now.
The ld. DR vehemently contended that the assessee has not produced bills or vouchers for expenses of the above event and there is a possibility that the assessee is concealing the income accrued to it.
The ld. DR further contended that during the course of assessment proceedings as well as in the remand report proceedings, specific query was raised with respect to expenses incurred on the said event which was not produced by the assessee. The ld. DR pointed out that for the event managements, there is reference to an agreement but the assessee failed to produce the written agreement. The ld. DR further
Page 3 of 8 the event and its management.
Per contra, the ld. counsel for the assessee submitted that the entire revenue from the event organised in Norway and the entire expense of the event was accrued/borne by the Singaporean company M/s Studio SOS Production INC, Singapore. The assessee merely organized the event for which the assessee received a commission of Rs 15,34,500/- which was declared in the ROI.
The ld AR submitted that the accounts of the assessee company were duly audited by the registered Auditor and Tax Audit has also been done by the Auditor, but this aspect was not mentioned by the Auditor in its Audit Report which was signed by him for the shareholder. The ld. counsel for the assessee submitted that the Auditor has not questioned regarding non availability of bill, vouchers of Norway Events expenditure during Audit Proceedings.
The ld. counsel for the assessee further pointed out that the department has accepted the entire revenue of Rs. 4.37 crores but has denied the entire expenses related to the said Revenue. Justifying the Page 4 of 8 reiterated that it has merely made a notional entry of income and expenses of the said event in its balance sheet which has been explained by way of notes of accounts and neither the receipt has accrued to the assessee nor the assessee has made any expenditure. The entire revenue and expenditure has been incurred by the Singapore based party for whom the event management was conducted at Norway and the assessee merely received its commission of Rs. 15.34 lakh.
The ld. counsel for the assessee relied upon the following decisions for the proposition that notes on accounts forms part of balance sheet:
Bihar Vs. Ziqitza health Care Ltd 246 Comp Cas 180 2. CIT Vs. Shoorji Vallabhdas and Co. [1962] 46 ITR144 3. Godhra Electricity Co. Vs. CIT 4 SCC 530 4. CIT Vs. Excel Industries Ltd 13 SCC 459
We have heard the rival submissions and have perused the relevant material on record. We find that there is an entry by way of notes to the Account in the balance sheet with regard to receipt of Rs. 4.37 crore and expenses of Rs. 4.22 crore on account of conducting an event at Norway. The relevant extract from the Notes to Accounts under Revenue Recognition reads as follows:
"The company, during the year, managed a Bollywood-themed event in Norway for a fee of USD 25,000. The company, in its books, has shown the Page 5 of 8 Innovations India [A.Y 2015-16] total budget of the event (43,779,713) as its revenue and, correspondingly, the total budgeted expense of the event (42,203,463) as its event management expense. This effectively reflects the management fees of ₹1,534,500 as net revenue. Reporting of budgeted costs in financials has resulted in higher reporting of revenue and expense by 42,203,463 in the Profit & Loss Account for the year."
In view of the Notes to the account as above, the assessee assertion that the company's act of crediting and debiting 'budgeted/hypothetical income and expense' to the Profit and Loss Account do not result in real income accruing to the assessee, are legally valid. There are established principles of law and Judicial pronouncements which have consistently held that what is subject to tax is real income, not notional income. Correspondingly, a notional expense must also be evaluated alongside the notional income. The AO can not disallow and add back the hypothetical expense without reducing the hypothetical income credited on the income side. We therefore find force in the argument of the ld AR that the said disclosure by way of Notes to Accounts makes it evident that no real income accrued to the assessee nor any real expense was incurred by the assessee and that the notional entries were recorded solely for the purpose of reflecting the company’s capacity to handle large scale events.
We also find it strange that the Assessing Officer has quietly considered the entire notional entry of receipt as income of the assessee Page 6 of 8 37(1) as well as u/s 40(a)(ia) of the Income Tax Act on the ground that the assessee has not furnished any documentary evidence to support the expense. We hold that the AO has completely misinterpreted the Notes to account and failed to understand the fundamental nature of accounting entry and that the addition on account of expenses is all based on conjectures and surmises. Our view is further strengthened from the fact that in the remand proceedings, the AO himself, after examining the bank statement and records, found no entries regarding receipts and payments of the said amount. We are therefore of the considered opinion that the hypothetical entries in the balance sheet and Profit and Loss cannot be considered as resulting in real income/expense of the assessee. We therefore find no reasons to interfere with the decision of the ld. CIT(A) and direct the AO to delete the addition so made. The ground 1 and 2 of the appeal is dismissed. dismissed.
The order is pronounced in the open court on 09.04.2025.