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आदेश/ O R D E R f �ǐ��k ���¡ �ȡन, �ȯ�ȡ� �è���ȯ�ɮ�ȡ�ȡ / PER S. RIFAUR RAHMAN: This appeal by the assessee is directed against order of learned CIT(A)-9, Mumbai dated 14.10.2019 and pertains to Assessment Year 2011-12.
Page 2 of M/s Hindustan Organic Chemical Ltd; AY 11-12 2. Brief facts of the case are, the assessee filed its return of income on 30.09.2011 declaring Nil Income. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘Act’). After accepting the return of income, the case was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Act were issued and served to the assessee. In response, the assessee filed the details as called for.
The assessee is engaged in the business of manufacturing of chemicals. During the course of assessment proceedings, the Assessing Officer observed from the financial statements and tax audit report that assessee has wrongly claimed deductions on various expenses hence, disallowed and added back the same to the return income of the assessee. Aggrieved, assessee preferred the appeal before learned CIT(A) and learned CIT(A) partly allowed the appeal filed by the assessee. Aggrieved with the above order, assessee is in appeal before us, raising the following grounds of appeal: -
1. The Ld. Commissioner of Income Tax (Appeals)-9, Mumbai, [hereinafter referred to as the Ld. CIT(A)] erred in directing the Ld. A.O. to make disallowance of Rs.3,28,002/- on account of an expenditure incurred with respect to leave encashment without appreciating the facts and circumstances of the case.
Page 3 of M/s Hindustan Organic Chemical Ltd; AY 11-12 2. The Ld. CIT (A) erred in upholding the disallowance of Rs.3,00,000/- under section 40(a)(ia) of the Act without appreciating that the said amount is nothing but the reimbursement made to the bank. Thus, the provisions of section 40(a)(ia) of the Act shall not attract in the present case. Hence, the disallowance made under section 40(a)(ia) of the Act is not justified and the same may be deleted.
3. The Ld. CIT (A) erred in confirming the disallowance of Rs.52,01,000/- being interest expenditure treating the same as prior period expenses without appreciating that the said expenditure has been accrued during the year under consideration. Thus, the same is allowable in the relevant assessment year.
4. The Ld. CIT (A) erred in confirming the disallowance of Rs.73,000/- being expenses incurred on material consumption and raw material treating the same as prior period expenses without appreciating the facts and circumstances of the case.
5. The Ld. CIT(A) erred in upholding the disallowance of ₹5,17,000/- being expenses incurred on account of repairs and maintenance treating the same as prior period Page 4 of M/s Hindustan Organic Chemical Ltd; AY 11-12 expenses without appreciating the facts and circumstances of the case.” We shall deal with the issues ground wise.
With regard to ground No.1, the relevant facts are, during assessment proceedings, the Assessing Officer observed that as per tax audit report, the total leave encashment expenses incurred during the year is ₹4,16,38,970/- but leave salary paid by assessee before due date of filing of income tax return is ₹3,24,06,272/- and a sum of ₹92,32,726/- was remained unpaid as on the due date of filing of return for the said assessment year. The Assessing Officer asked the assessee to file the journal entries for creation of provision in respect to leave encashment. The assessee has submitted only the details of payments made during the year. The Assessing Officer relying on the observation of the tax auditor and observed that the assessee has not paid the above said amount before filing the return of income. Accordingly, he made the above said disallowance. Aggrieved, assessee preferred the appeal before CIT(A) and made detailed submissions before him.
After considering the submissions of the assessee, the learned CIT(A) observed that assessee made the submissions that there was error in the compilation of leave encashment figure in the form 3CD due to non-consideration of payment of leave encashment for Kochi Unit. He observed that assessee has submitted the leave encashment Page 5 of M/s Hindustan Organic Chemical Ltd; AY 11-12 of ₹89,04,724/- was paid by Kochi Unit then the disallowance should have been to the extent of Rs. 3,28,002/- only. The learned CIT(A) observed that the issue involved the factual verification and accordingly, he directed the Assessing Officer to verify the claim of the assessee and if found credible, the same may be allowed and accordingly, he restricted the disallowance of ₹3,28,002/-. Aggrieved, now assessee is in appeal before us.
Before us, the learned AR took us through the order of learned CIT(A) and submitted that assessee’s Rasayani and Kochin units had made the payments during the Financial Year 2010-11 and assessee had submitted all the relevant papers before tax authorities and also submitted that the expenditure incurred by the assessee is allowable under section 37(1) Read with section 43B(f) of the Act. He further submitted that since the learned CIT(A) remitted this issue back to the file of the Assessing Officer to verify the claim of the assessee and he directed only payment made by kochi unit. He prayed that the assessee has made complete payments during this year including Rasayani Unit, the Assessing Officer may be directed to verify the complete detail and allow the expenditure to the extent of payment made by the assessee including Kochi, Rasayani unit.
Considered the submissions of both the parties we noticed that since, this issue has already remitted back to Assessing Officer and this issue requires factual verification, we direct the Assessing Officer Page 6 of M/s Hindustan Organic Chemical Ltd; AY 11-12 to verify the payments made by the assessee for all the units during this year. Needless to say that an opportunity may be granted to the assessee to submit in detail and we direct the Assessing Officer to allow the payments made during this assessment year including Rasayani and Kochi Unit. If found credible, proper deduction may be allowed. Accordingly, the ground raised
by the assessee is allowed for statistical purposes.
8. With regard to ground No.2, the relevant facts are, the Assessing Officer observed from form No.3CD that the assessee has paid a sum of ₹3 lacs to M/s Sigma Engineering (Rasayani Unit) of which assessee has failed to deduct TDS as applicable. Accordingly, he disallowed the sum under section 40(a)(ia) of the Act. Aggrieved, assessee filed the appeal before CIT(A) and submitted before him that assessee availed credit facilities from State Bank of India by mortgaging assets. The SBI had appointed valuer M/s Sigma Engineering Consultant for submitting valuation report of the assets to secure their advances. M/s Sigma engineering raised the bill for ₹3,30,900/- which includes service tax. The SBI made the above said payments to Sigma engineering consultant and debited the sum from assessee’s account of ₹3 lacs. It was submitted before CIT(A) that provisions of Section 194A(3)(iii) payment to any banking company to which Banking Regulation Act, 1949 applies, no TDS is liable to be deducted. The Assessing Officer wrongly invoked the provision of Section 40(a)(ia) of the Act. After considering the submissions of the assessee, learned CIT(A) observed Page 7 of M/s Hindustan Organic Chemical Ltd; AY 11-12 that he has gone through the letter issued by SBI and the bill of M/s Sigma Engineering Consultant for provision of services. The role of SBI was to arrange for the payments and assessee’s effort to distance itself from the transaction in order to get rid of liability as per section 40a(ia) of the Act are not justifiable. Accordingly, he sustained the addition made by the Assessing Officer. Aggrieved, now assessee is in appeal before us.
Before us, the learned AR brought to our notice page No.25 of the assessee’s paper book which is intimation of SBI to recover the amount of ₹3 lacs from the assessee and he also brought our notice to page Nos. 26 and 29 of the assessee’s paper book which is the copy of bill submitted by the consultant. After considering these documents, it is clear that the services of the consultant were utilised for the purpose of SBI in order to secure the assets mortgaged to the bank. This consultant was appointed by SBI and after submission of the report only, bank has settled the professional fees and recovered the same from the assessee. It is clear that no doubt the charges were ultimately collected from the assessee but the services were provided exclusively for the purpose of securing the mortgage property assigned to the bank. The services were assigned and respective payments were made by the bank directly. Since, the assessee is neither appointed the consultant nor paid the consultancy charges to them. Therefore, the TDS provisions will be applicable only when the services are utilized, respective payments made directly to the service provider.
Page 8 of M/s Hindustan Organic Chemical Ltd; AY 11-12 In this case, assessee is only the observer and the respective payments were made by the bank and recovered from the assessee. Therefore, provisions of section 40(a)(ia) of the Act is not applicable in the present case. Accordingly, the ground raised by the assessee is allowed.
10. With regard to ground No.3, during the assessment proceedings, the Assessing Officer perused the computation of total income submitted by the assessee and he observed that assessee has deducted following expenditure from its total income i.e. “expenses settled during the year but shown under prior period items which includes interest payment of Rs.52,01,000/-. The Assessing Officer observed that the assessee has debited the above stated expenses which relates to previous years and assessee intimated the Assessing Officer that the above expenses was settled during the year hence they have claimed the expenses in the current year. The Assessing Officer rejected the contentions of the assessee and observed that the assessee has maintained its books of account on mercantile basis and deduction on account of above expenditure is to be allowed in the year in which the expenditure is incurred as the liability to pay the expenses was crystallized in the earlier assessment year, deduction on account of same cannot be allowed in this assessment year. Accordingly, he disallowed the expenses. Aggrieved, assessee preferred the appeal before CIT(A) and submitted that the assessee is purchasing raw material Benzene and MOL SuL from Bharat Petroleum Corporation Page 9 of M/s Hindustan Organic Chemical Ltd; AY 11-12 Ltd. (BPCL) during the financial year 2005-06 to 2008-09 (Assessment Year 2006-07 to 2009-10) against letter of credit. The bank had debited BPCL account for their bank charges. During the FY 2010-11 (Assessment Year 2011-12) BPCL had raised debit note for aforesaid bank charges of Rs.52,01,000/-. The assessee has submitted year wise bank charges payable before CIT(A) in the form of assessee’s paper book at pages 166 to 170. During this assessment year expenditure was debited to the profit and loss account under the head prior period items since the expenditure crystallized during the assessment year 2011-12. Therefore, it is allowable business expenditure. After considering the submissions of the assessee, learned CIT(A) sustained the above addition and made observation that he examined the primary documents submitted by the assessee including the general vouchers showing the details of bank charges on account of letter of credit raised by BPCL. It is evident that the expenses were related to the earlier period ranging from FY 2005-06 to 2008-09. The narration in the journal vouchers mentioned the expenses as prior period since the expenses were related to the transactions in the earlier years and it arose in the earlier years therefore, the Assessing Officer has rightly disallowed the above said expenses. Aggrieved, assessee is in appeal before us.
At the time of hearing, the learned AR submitted that it is a settled issue in favour of the assessee and he relied on the decision of Page 10 of M/s Hindustan Organic Chemical Ltd; AY 11-12 Hon’ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. vs. CIT [1995] 213 ITR 523 (Gujarat).
On the other hand, the learned DR vehemently relied on the orders of lower authorities.
Considering the rival submissions and materials on record, we find that in similar situation in the case of Saurashtra Cement & Chemical Industries Ltd (supra), wherein Hon’ble Gujarat High Court has decided the issue in favour of the assessee. The relevant held portion is reproduced below :
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. In each case where the accounts are maintained on mercantile basis, it has to be found in respect of any claim whether such liability was crystallized and quantified during the previous year as required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years, it cannot be disallowed as deduction merely on the basis that accounts are maintained on mercantile basis and that it relates to a transaction of the previous year. The true profit and gain of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want Page 11 of M/s Hindustan Organic Chemical Ltd; AY 11-12 of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relates, the mercantile system does not call for an adjustment in the books of account on estimate basis. It is actually known income or expenses, right to receive or liability to pay which has come to be crystallized is to be taken into account under mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as contingency item but not as an accrued income or liability of that year. Thus, the Tribunal was not justified in holding that the impugned expenditure was not allowable in the relevant previous year on the ground that the liability had arisen in the earlier years.
Hence, respectfully following the same, this issue of assessee appeal is allowed.
With regard to ground Nos.4 & 5, the material consumption of ₹ 73,000/- & ₹ 5,17,000 on account of repairs and maintenance, the Assessing Officer observed that assessee has not submitted any evidence to prove that these are of current year consumption, accordingly, he made addition. Aggrieved, assessee preferred the appeal before CIT(A). Before learned CIT(A), assessee has submitted that expenditure crystallized during the year should be allowed as deduction and has not submitted any other details in support of the above claim. The learned CIT(A) sustained the additions made by the Assessing Officer. Aggrieved, now assessee is in appeal before us.
Page 12 of M/s Hindustan Organic Chemical Ltd; AY 11-12 Even before us, the learned AR has not submitted any relevant document to prove that material consumption relates to current assessment year. Accordingly, these grounds of appeal are dismissed.
16. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 30.09.2021.