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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश /O R D E R
Per G. MANJUNATHA, AM:
This appeal filed by the Revenue is directed against order of learned Commissioner of Income Tax (Appeals)-3, Coimbatore, dated 27.10.2016 and pertains to assessment year 2011-12.
The Revenue has raised the following grounds of appeal:-
“1. On the facts and in the circumstances of the case the learned CIT(A) erred by deleting the disallowance of prior period expenses relating to the Subsidiary without appreciating the fact that the assessee company was well aware about the expense and could had booked it regularly had there been an agreement with the Subsidiary company regarding reimbursement of those expenses.
2. On the facts and in the circumstances of the case the learned CIT(A) erred by directing the Assessing Officer to allow depreciation at higher rate in respect of assets/articles installed in the Guest House without appreciating the fact that these assets/articles installed in the Guest House are integral part of the Guest House Building and therefore eligible for depreciation at the rated fixed for Guest House Building.
The Hon’ble ITAT is requested to cancel the order of the learned CIT(A)-3, Coimbatore and uphold the order of the Assessing Officer.
The Hon’ble ITAT is requested leave to add, amend or modify the grounds of appeal, if necessary, in future.”
3. The brief facts of the case are that the assessee company is engaged in the business of manufacturing of egg powder, poultry farm, poultry cattle feeds and trading in branded eggs, filed its return of income for the assessment year 2011-12 on 30.09.2011, admitting total loss of Rs.17,00,21,018/- The assessment has been completed u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) on 25.03.2015, determining total loss at Rs.13,83,67,749/- by making additions towards disallowance of prior period expenses amounting to Rs.2,26,09,204/- and disallowance of depreciation on guest house building including plant & machinery, etc., at Rs.13,70,165/-. The assessee carried the matter in appeal before the first appellate authority.
4. The ld.CIT(A) for the reasons stated in his appellate order dated 27.10.2016 deleted addition made by the AO towards disallowance of prior period expenses, however partly allowed addition made towards disallowance of depreciation by restricting depreciation on guest house building at 5%, but allowed 15% depreciation on other assets like plant & machinery, kitchen equipment, etc. Aggrieved by the CIT(A) order, the Revenue is in appeal before us.
The first issue that came up for our consideration from Ground No.1 of Revenue appeal is deletion of disallowance of prior period expenses. The facts with regard to the impugned dispute are that the assessee company is engaged in the business of poultry products has a subsidiary in Netherlands under the name M/s. SKM Europe BV. The assessee held 85% share capital of M/s. SKM Europe BV and remaining 15% share
capital is held by agents. The assessee is exporting goods to Netherlands through its subsidiary, which is a separate legal entity. The goods are sold to customers by M/s. SKM Europe BV. The assessee had an agreement with the agents at Netherlands, who was looking after the subsidiary, as per which all expenses of storage and transportation of goods to the final destination point should be paid by the assessee holding company. During the year under consideration, the assessee has claimed revenue expenses of Rs.2,26,09,204/- on account of reimbursement of expenses pertaining to financial years 2007-08 to 2009-10 in the nature of transportation and other selling expenses incurred by the subsidiary on behalf of the assessee The said expenditure was incurred by the subsidiary and pertains to previous financial years. The assessee claimed that due to certain dispute regarding sharing of expenses, those expenses were not accounted in the books of accounts of the assessee for the relevant assessment years and further, when the dispute was resolved between the assessee and its subsidiary, during the year under consideration the same has been accounted in the books of accounts. As per details furnished by the assessee, the 4,52,510 Euros out of which, 70,905 Euros has been paid in the month of April 2010 and balance 3,73,520 Euros was shown as payable as on 31.03.2011. The AO disallowed deduction claim towards expenditure on the ground that it is in the nature of prior period expenses and does not pertain to accounting period and hence, cannot be allowed as deduction. The AO has discussed the issue at length in light of Accounting Standard-5, issued by the ICAI for treatment of prior period items in the books of accounts of assessee and observed that when the assessee is having knowledge of particular expenses, he ought to have provided the same in the books of accounts of the assessee, when it was following mercantile system of accounting. Therefore, he opined that only prior period items which occurs as a result of errors and omissions in preparation of financial statements of one or more years is allowed as deduction, whereas adjustment necessitated by circumstances, which though related to prior periods, are determined in the current period is not allowed as deduction. Since, the expenditure provided in the books of accounts towards reimbursement of certain expenses to subsidiary company is not occurred on account of errors or omissions, but for failure of the assessee to make provisions in the books of accounts of the assessee and hence, disallowed the claim of the assessee.
The ld.DR submitted that the ld.CIT(A) has erred in deleting disallowance of prior period expenses relating to the subsidiary without appreciating the fact that the assessee company was well aware about the expenses and could have booked it regularly as and when it accrued on the basis of agreement with the subsidiary company regarding reimbursement of those expenses. The ld.DR referring to the decision of Hon’ble Delhi High Court in the case of Delhi Tourism & T.D.C. Ltd., vs. CIT, [2006] 285 ITR 114 submitted that the assessee has failed to account certain expenditure in the books of accounts, even though it was known to the assessee, then the claim of the assessee towards deduction of expenditure in subsequent years cannot be allowed. In this case, as per facts brought on record by the AO, the assessee claims that it had an agreement with subsidiary for reimbursing transportation and other storage expenses for goods exported to Netherlands and thus, the assessee ought to have provided
the same in the books of accounts of the assessee irrespective of the fact that there is a dispute between the parties for sharing expenses.
The ld.AR for the assessee on the other hand, strongly supporting order of the ld.CIT(A) submitted that the ld.CIT(A) after considering the facts that dispute between the parties was settled during the impugned assessment year, has categorically held that liability towards expenses is crystallized and hence, the expenditure cannot be considered as prior period expenses even though, the same pertains to earlier financial years. The ld.AR further submitted that it is an admitted fact that the AO has not disputed the nature of expenditure incurred by the assessee and its deductibility, but denied deduction only on the ground that said expenditure is prior period expenses and pertains to earlier financial years, ignoring the fact that liability towards expenditure was crystallized during the year, when dispute between the parties was settled. The ld.CIT(A) after appraising relevant facts has rightly deleted addition made by the AO and his 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 fact that the assessee is in the business of exporting poultry products to Netherlands, had an agreement with its subsidiary for reimbursing transportation and storage expenses of goods to the final destination point. It is also not in dispute that there is a dispute between the assessee and its subsidiary company for reimbursement of expenses. The said dispute was resolved during the impugned assessment year and thus, the assessee has made provision for reimbursement of expenses to its subsidiary for earlier financial years 2007-08 to 2009-10. The AO has denied deduction only on the ground that said expenditure pertains to earlier financial years and further it is in the nature of prior period expenses. The AO has given various reasons to disallow reimbursement of expenses to subsidiary. We have gone through the reasons given by the AO in light of various arguments of the assessee and we ourselves do not subscribe to the reasons given by the AO, for the simple reason that when a particular expenditure is incurred wholly and exclusively for the purpose of business, the same needs to be allowed as deduction, irrespective of the fact that said expenditure pertains to earlier financial year or current financial year. The only point that needs to be considered is whether particular expenditure is accrued or crystallized during the financial year or not. The payment of expenditure is not relevant. In this case, the claim of the assessee that although expenditure pertains to earlier financial years, because of certain dispute regarding reimbursement of expenses, the same was not provided in the books of accounts of the assessee. We find merit in the arguments of the assessee for the simple reason that any expenditure is deductible as and when it accrued to the assessee irrespective of the fact whether it was paid or not. In this case, the assessee has filed necessary evidences to prove that the expenditure was accrued and crystallized during the current financial year, after resolving dispute with its subsidiary company. Therefore, we are of the considered view that once any particular expenditure is crystallized during relevant accounting period, the same needs to be allowed as deduction irrespective of the fact that said expenditure pertains to earlier financial year and paid in subsequent financial years. In this case, the ld.CIT(A) has recorded categorical finding that the liability towards expenditure was crystallized during the current year and hence, it does not constitute prior period expenses. We further noted that it is not a case of the AO that expenditure claimed by the assessee is not deductible at all. In fact, the AO has not made any adverse comments about deductibility of expenses. As regards, case law relied upon by the ld.DR in the case of Delhi Tourism & T.D.C. Ltd., vs. CIT, supra, we find that facts of the case before Hon’ble Delhi High Court was entirely different, where in that case it was the findings of the Hon’ble High Court that although the assessee known certain expenditure, it could not discharge its duty of providing the same in the books of accounts and hence under those facts, the Hon’ble Delhi High Court held that known expenditure of earlier financial years cannot be allowed in subsequent assessment years. In this case, on perusal of facts available on record, we find that although expenditure pertains to earlier financial years but the same was accrued and crystallized during current assessment year and hence, we are of the considered view that there is no error in the findings recorded by the ld.CIT(A) to delete addition made by the AO
towards reimbursement of expenses to subsidiary company. Hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue.
The next issue that came up for our consideration from Ground No.2 of Revenue appeal is disallowance of depreciation on guest house.
The assessee has claimed depreciation @ 10% on guest house, which is applicable to factory and office buildings. The assessee had also claimed depreciation @ 15% on plant & machinery, kitchen equipments and electrical fittings. The AO has allowed depreciation @ 5% on total amount spent towards guest house including plant & machinery, kitchen equipments, electrical fittings, on the ground that guest house was used for residential purpose and hence, depreciation as per the Act is allowable @ 5% but, not 10% / 15% as claimed by the assessee. On appeal, the ld.CIT(A) has restricted depreciation on building to 5% by holding that the AO was erred in restricting depreciation on other assets installed in guest house, which are eligible for higher depreciation of 15% by Appendix-I to Rule 5 of Income Tax Rules, 1962.
The ld.DR submitted that the ld.CIT(A) has erred in directing the AO to allow depreciation at higher rates in respect of assets / articles installed in guest house without appreciating the fact that these assets / articles installed in the guest house are integral part of guest house building and therefore eligible for depreciation at the rate applicable for guest house building.
The ld.AR for the assessee, on the other hand strongly supporting order of the ld.CIT(A) submitted that Income Tax Act provides for different rate of depreciation for different assets on the basis of their functionality and hence clubbing of assets into buildings and restricting depreciation to the rate applicable to building is incorrect.
We have heard both the sides, perused materials available on record and gone through orders of the authorities below. Admittedly, each asset has separate rate of depreciation on the basis of their functions as per Appendix-I of Rule 5 of Income
Tax Rules, 1962, as per which residential buildings are eligible for 5% depreciation, whereas factory and office buildings are eligible for 10% depreciation. The other assets like plant & machinery, furniture & fittings and electrical fittings are entitled for 15% depreciation. In this case, the assessee has claimed 10% depreciation on building and 15% depreciation on other assets installed in the building like plant & machinery, kitchen equipment and electrical fittings on the ground that guest house building was used for the business of the assessee. The AO has restricted depreciation to 5% on total assets including building and other assets installed therein on the ground that those assets are integral part of building and further the building was used for residential purpose. The ld.CIT(A) has recorded categorical finding that each item of asset is to be classified independently by applying functional test especially when specific categorization is made in Appendix-I to Rule 5 of Income Tax Rules and further cannot be correlated to any other asset on the basis of their place of installation. In this case, there is no doubt with regard to the fact that other assets installed in guest house building like plant & machinery, furniture & fittings and electrical installations are entitled for 15% depreciation. Once, a particular asset is entitled for higher depreciation as per the Act, the AO was erred in restricting depreciation on said assets to 5%, which is applicable to residential building merely because those assets are installed in guest house building. The CIT(A) after considering relevant facts, has rightly directed the AO to allow depreciation as per Appendix-I to Rule 5 of Income Tax Rules, 1962 on assets, on the basis of their functional test. We do not find any error in the findings of the ld.CIT(A) and hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.