DCIT,BANGALORE vs. M/S VSL STEELS LTD.,,

The assessee is engaged in the business of manufacturing of pig iron. The assessment for the year under consideration was completed by the AO u/s 143(3) of the Act by making various additions. The assessee preferred an appeal before the ld CIT(A), which was partly allowed. The Revenue has filed this appeal challenging the relief granted by the ld CIT(A) on the above said issues:-

The first issue relates to disallowance of prior period expenses. The AO noticed that the assessee has claimed prior period expenses amounting to Rs.55.14 lakhs. Since the assessee was following mercantile systems of accounting, the AO took the view that the same is not allowable and accordingly disallowed the same. The ld CIT(A) however allowed the same by following the decision rendered by Mumbai Bench of Tribunal in the case of Urban Improvement Company Pvt. Ltd., (ITA No.3246/Bang/2006).

The ld DR submitted that the assessee is following mercantile system of accounting and hence prior period expenses are not allowable during the year under consideration. He further submitted that the decision in the case relied on by the CIT(A) was rendered in a different context.

We heard ld AR and perused the record. It is a settled proposition that the expenses relating to earlier years may be allowed during the year, if the same got crystallized during the year under consideration. The Mumbai bench has followed this principle only in the case relied upon by Ld CIT(A). However, we noticed that the assessee has failed to show that the prior period expenses claimed by it did crystallize during the year under consideration. Accordingly we are of the view that the ld CIT(A) was not justified in granting relief. Accordingly we reverse the order passed by ld CIT(A) on this issue.

The next issue relates to disallowance of travelling and loan processing expenses incurred in connection with new project in Dubai. Since the above expenses were incurred for the new project, the AO held them to be capital expenses and accordingly disallowed the same. The ld CIT(A) deleted the same by observing that the AO has not established any base for his statement that the expenditure was incurred for new project.

We heard the parties on this issue. Since the expenditure has been incurred for exploring new business which was considered by the AO as new project, the AO has disallowed the same. We noticed that the ld CIT(A) has deleted the addition by making general observations and not on proper reasons. If the assessee has established new project, then the expenses incurred thereon would be capital expenditure. On the contrary, if the expenses are incurred for expansion of existing business, then the same shall be allowed as revenue expenditure. In the instant case, since the Ld CIT(A) has not given any specific finding and further the relevant details regarding the project are not available, we set aside the order passed by ld CIT(A) on this issue and restore the same to this file for examining it afresh.

The next issue relates to disallowance of donations and charity expenses claimed by the assessee. The AO disallowed the same by holding that the donation and charity expenses do not have any nexus with the business activities of the assessee. The ld CIT(A) however, allowed the same by observing that these kind of expenses are necessary for running the business activity of the assessee.

We heard the parties on this issue and perused the record. We noticed that though the ld CIT(A) has observed that the donations given by the assessee are necessary for carrying on business of the assessee, yet the ld CIT(A) has not shown any nexus between the business activities and expenses of the assessee. Accordingly we are of the view that the ld CIT(A) was not justified in deleting these disallowance. Accordingly we reverse the order passed by the ld CIT(A) on this issue.