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Income Tax Appellate Tribunal, CHANDIGARH BENCH ‘A’, CHANDIGARH
Before: SMT.DIVA SINGH & SHRI VIKRAM SINGH YADAV
Per Vikram Singh Yadav, Accountant Member:
This is an appeal filed by the assessee against the order of Learned Commissioner of Income Tax (Appeals)-1, Chandigarh [in short the ‘Ld. CIT(A)’] passed u/s 250(6) of the Income Tax Act, 1961 (in short ‘the Act’) dated 12.04.2019 relating to assessment year 2010-11, wherein the assessee has taken the following grounds of appeal:
2 ITA No.1023/Chd/2019 A.Y.2010-11
“1. That the facts, circumstances and legal position of the case, the Worthy CIT in its order dated 12.04.2019 has erred in passing that order in contravention of the provisions of Section 250(6) of the Income Tax Act, 1961. 2. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO in making disallowance of Rs. 30,45,000/- as prior period expenses without considering the fact the expense was paid at a later date due to pending negotiation with the landlord. 3. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO in making disallowance of Rs. 6,86,317/- u/s 40(a)(ia) of the Income Tax Act on account of non deduction of TDS out of which the amount of Rs.2,73,503/- pertain to the purchase of material and not services as such these are not liable to TDS and the amount of Rs. 4,12,814 pertains to payments made through credit card for online advertisement which was in the nature of business profit on which no TDS was deductible and more-so when Income could not even be deemed to accrue or arise in India. 4. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the action of Ld. AO in making disallowance of Rs. 2,82,317/- out of general charges on account of prior period expenses without considering the fact that the expense was incurred wholly and exclusively for the purposes of business of the company and the same is allowable u/s 30 and 37 of the Income tax Act, 1961.” 2. Ground of appeal No.1 is general and does not require
any specific adjudication.
In Ground of appeal No.2, the assessee has challenged
the sustenance of disallowance of Rs.30,45,000/- as prior
period expenses. In this regard, briefly, the facts of the case
3 ITA No.1023/Chd/2019 A.Y.2010-11
are that the AO observed that the assessee has debited a sum
of Rs.30,45,000/- under the head “prior period expenses” and
the assessee was asked to show cause as to why this expense
should not be disallowed being related to prior period. In its
response, the assessee submitted that this expense pertains
to rent payment for the stores at JW Marriot Hotel, Mumbai
and pending negotiation with the landlord and the brand
owners for a possible remission in rent due to poor
performance of the store, the lease rent was not paid earlier
and the final settlement was reached in August, 2009 and
lease rent was thereafter paid as per the modified terms. The
submissions so filed were considered but not found acceptable
to the AO and the amount of Rs.30,45,000/- was held not
allowable and disallowed and added to the income in the
hands of the assessee.
Being aggrieved, the assessee carried the matter in
appeal before the Ld.CIT(A) and the submissions made before
the AO were reiterated and it was also submitted that though
the rent pertains to earlier year, the settlement was made
during the financial year relevant to the impugned assessment
year and, therefore, the liability has crystallized during the
year and, therefore, the same should be allowed in the hands
of the assessee. In support, copies of the communications
with the landlord with regard to the remission of rent were
4 ITA No.1023/Chd/2019 A.Y.2010-11
submitted during the course of appellate proceedings which
were sent to the AO and Remand Report was called for. In his
rejoinder, the assessee submitted that the AO in his Remand
Report has acknowledged that as per letter dated 17.8.2009
issued by the landlord, there is a reduction of licence fee from
Rs.7 lacs to Rs.3 lacs which indicates that there were
negotiations going on for settlement of rent. Had the assessee
paid the rent earlier, there would not have been any
settlement. It was submitted that this process of settlement
was going on from prior period and when the final settlement
was done in August, 2009, the amount was paid and the
expenses were booked. It was further submitted that the AO
has not questioned the commercial expediency and the nature
of the business expenditure and the issue is tax neutral as
the expenses have to be allowed in the earlier year or in the
current year. Further reliance was placed on the decision of
the Hon'ble Delhi High Court in the case of CIT Vs. Modipon
Limited Ltd 334 ITR 102. The submissions of the assessee as
well the Remand Report of the AO were considered by the
Ld.CIT(A). The Ld.CIT(A) thereafter returned a finding that the
appellant has filed certain letters exchanged with JW Marriot
and the appellant deferred the payment of rent on its own
sweet will in financial year 2008-09. It was further held by the
Ld.CIT(A) that since the assessee is following mercantile
5 ITA No.1023/Chd/2019 A.Y.2010-11
system of accounting, it shall not be allowed any expense
which pertain to any previous year other than the concerned
previous year except those expenses which are specifically
allowed under the Act. Further reliance was placed on the
decision of ITAT Chandigarh Benches in the case of M/s
Haryana State Electronics Development Corporation Ltd. Vs.
DCIT, 78 Taxmann.com 268 and addition made by the AO was
confirmed.
Against the said findings, the assessee has come up in
appeal before us. During the course of hearing, the Ld. AR
reiterated the submissions made before the lower authorities
and took us through various letters and communications
exchanged with the landlord M/s Juhu Beach Resorts Limited,
in particular, our reference was drawn to letter dated
12.8.2009 and 17.08.2009 wherein the particulars of the
revised licence fee have been mutually agreed upon and
countersigned by both the parties. Further our reference was
drawn to the revised rent agreement signed with Juhu Beach
Resorts Limited dated 13.8.2009. It was accordingly submitted
that the liability towards the rent has crystallized during
financial year relevant of the impugned assessment year and
even though the assessee is following mercantile system of
accounting, the assessee shall be eligible for claim of
expenses which has crystallized during the year. It was
6 ITA No.1023/Chd/2019 A.Y.2010-11
accordingly submitted that the addition so made by the AO
and confirmed by the Ld.CIT(A) be deleted.
Per contra, the Ld. DR relied upon the findings of the
lower authorities.
We have heard the rival contentions and purused the
material available on record. It is no doubt true that it is
incumbent upon the assessee to account for the expenses in
respective financial year in which they are incurred or the
liability towards such expenses has accrued which is in line
with the mercantile system of accounting as well as concept of
matching accounting principle where the revenues and
corresponding expenses are accounted for in the respective
years. At the same time, there are business exigencies where
at times, the parties either disputes either the supply of goods
or availment/rendering of services or the quantification and
or remission of amount payable and the same are settled in
subsequent financial year(s). To take care of such exigencies,
what is relevant to determine is the crystallization of liability
or in other words, when the amount has actually become due
and payable. The principle of crystallization of liability in
inherent in the mercantile system of accounting and has been
well accepted by the Courts while allowing the claim towards
the expenses and has been understood to mean where the
7 ITA No.1023/Chd/2019 A.Y.2010-11
liability has become due and payable. In other words, where
the other person can make a lawful claim against the assessee
and in the event of default, the matter may be agitated before
the appropriate legal forum. Secondly, from the Revenue’s
perspective, what is equally relevant is that there are no
changes in the maximum marginal rates of taxation and there
is no loss of revenue where the expenses are booked in
subsequent financial year. In the instant case, we find that
the assessee right from the initial show-cause during the
assessment proceedings and thereafter, during the appellate
proceedings has submitted that this expense pertains to rent
payment for the stores at JW Marriot Hotel, Mumbai and
pending negotiation with the landlord and the brand owners
for a possible remission in rent due to poor performance of
the store, the lease rent was not paid earlier and the final
settlement was reached in August, 2009 and lease rent was
thereafter paid as per the modified terms. The AO has not
returned any specific finding as to why the submissions so
filed by the assessee were not found acceptable besides merely
reiterating that these are prior period expenses. No doubt the
assessee didn’t corroborate its submissions before the AO
during the assessment proceedings, however, during the
appellate proceedings, the relevant documentation in form of
communications exchanged with M/s Juhu Beach Resorts as
8 ITA No.1023/Chd/2019 A.Y.2010-11
well as revised rent agreement were submitted and the AO had
an occasion to examine the same. As submitted by the ld AR,
the AO in his remand report has acknowledged the fact that
as per letter dated 17.8.2009 issued by M/s Juhu Beach
Resorts, there is a reduction of licence fee from Rs.7 lacs to
Rs.3 lacs which indicates that there were negotiations going
on for settlement of rent. Further, during the course of
hearing, our reference was drawn to letter dated 12.8.2009
and 17.08.2009 wherein the particulars of the revised licence
fee have been mutually agreed upon and countersigned by
both the parties which again demonstrate that the action was
not unilateral. Further our reference was drawn to the
revised rent agreement signed with Juhu Beach Resorts
Limited dated 13.8.2009. Therefore, the factum of negotiation
between the assessee and the landlord and an agreement
towards the revised licence fee as happened in the month of
Aug 2009 is clearly borne out of records and the liability
towards the rent/licence fee though pertaining to the earlier
period has crystallized during the year and is allowable in the
hands of the assessee. We therefore find that these expenses
are duly allowable in the hands of the assessee as settled
during the year and in any case, there are no changes in the
tax rates and thus, no prejudice is caused to the Revenue and
as held by the Courts, such an exercise of disallowing
9 ITA No.1023/Chd/2019 A.Y.2010-11
otherwise allowable expenses treating as mere prior period
expenses will only result in an academic discussion without
any tangible results.
Further, the Revenue has not disputed the fact that the
expenses have been incurred for the purposes of assessee’s
business and the only question which has been raised is the
year of allowability which leads us to another facet of the
matter which is that the aforesaid expenses in nature of
rental payments are subject to TDS u/s 194I and the
provisions of section 40(a)(ia) are equally attracted which
provides for the allowability of expenses in the year in which
the TDS has been deducted and paid. In the instant case, it is
a matter of record that the assessee has paid and accounted
for these expenses in the books of accounts in the financial
year relevant to the impugned assessment year and has
deducted and deposited TDS in the financial year relevant to
the impugned assessment year and not in the earlier
assessment year. Therefore, even from the perspective of
harmonious construction of all relevant provisions, the
assessee deserves an allowance towards these expenses in the
year under consideration.
In light of aforesaid discussion and in the entirety of
facts and circumstances of the case, the disallowance of
10 ITA No.1023/Chd/2019 A.Y.2010-11
Rs. 30,45,000/- is hereby directed to be deleted and ground
no. 2 of assessee’s appeal is allowed.
In ground of appeal No.3, the assessee has challenged
the action of the Ld.CIT(A) in confirming the disallowance of
Rs.6,86,317/- u/s 40(a)(ia) of the Act. In this regard, briefly,
the facts of the case are that during the course of assessment
proceedings, the AO observed that the assessee has not
deducted TDS under the head “Advertisement and publicity”
on certain transactions as required u/s 194C of the Act. The
assessee was issued a show cause notice and after
considering the submissions so filed by the assessee and not
finding the same acceptable, the AO made a disallowance of
Rs.8,90,551/- as no TDS has been deducted on such expenses
u/s 40(a)(ia) of the Act r.w.s. 194C of the Act.
Being aggrieved, the assessee carried the matter in
appeal before the Ld.CIT(A). The submissions so filed by the
assessee were considered and the Remand Report called for
from the AO. Thereafter the Ld.CIT(A) has returned a finding
that the AO in Remand Report has accepted the assessee’s
explanation for the payments of Rs.72,210/-, Rs.27,156/- and
Rs.79,868/- as TDS is not deductible on these payments.
Further, the assessee has deducted TDS on Rs.25,000/-,
hence, no addition is required to be made on these amounts.
11 ITA No.1023/Chd/2019 A.Y.2010-11
However, in respect of balance additions made by the AO, the
same were confirmed for the reason that the assessee has not
filed any evidence and failed to rebut the findings of the AO
during assessment proceedings.
Against the additions so confirmed by the Ld.CIT(A), the
assessee is in appeal before us. During the course of hearing,
the Ld. AR took us through the order of the Ld.CIT(A) and our
reference was drawn to para 10.1 wherein it was submitted
that in respect of payments totalling Rs.2,73,503/-, no TDS
was deductible at source as the payment was made towards
purchase of material and not towards availing any service and
in support, relevant supporting invoices were also submitted.
It was submitted that the Ld.CIT(A) has failed to consider the
same. It was further submitted that in respect of credit card
payment to Facebook amounting to Rs.4,12,814/-, the same
was paid to Facebook for online advertisement which was in
the nature of business profit, on which no TDS was deductible
and more-so, when the income could not even be deemed to
accrue or arise in India and it was submitted that a copy of
the sample invoice was also submitted during the course of
appellate proceedings, which the Ld.CIT(A) failed to consider.
It was accordingly, submitted that the findings of the
Ld.CIT(A) that the assessee has not filed any evidence in
support of his contention that the said payment does not
12 ITA No.1023/Chd/2019 A.Y.2010-11
require any TDS, is not borne out from the record. It was
further submitted that since the assessee has duly
demonstrated that the payments are towards purchase of
material and not services and secondly, the payments have
been made to Facebook, which does not accrue or arise in
India, there is no basis for sustaining the disallowance so
made and confirmed by the Ld.CIT(A).
Per contra, the Ld. DR relied upon the orders of the
lower authorities.
We have heard the rival contentions and purused the
material available on record. We agree with the contention
advanced by the ld AR that the assessee has filed relevant
invoices/documentation in support of its contentions before
the ld CIT(A) and therefore, the ld CIT(A) findings that the
assessee has not filed any evidence in support of his
contention that the said payment does not require any TDS, is
not borne out from the records. Given that the material
available on record has not been examined and no findings on
merits of the additions have been recorded by the ld CIT(A),
we deem it appropriate that the matter be set-aside to the file
of the ld CIT(A) to examine the same on merits after providing
reasonable opportunity to the assessee. The contentions
advanced on the merits have been left open and the assessee
13 ITA No.1023/Chd/2019 A.Y.2010-11
is free to advance the same before the ld CIT(A) as so advised.
In the result, the ground no. 3 is allowed for statistical
purposes.
In ground of appeal No.4, the assessee has challenged
sustenance of disallowance of Rs.2,82,317/-. In this regard,
briefly, the facts of the case are that during the course of
assessment proceedings, the AO observed that the following
expenses which have been debited under the head “general
charges”, do not belong to the period under consideration
and, therefore, he disallowed the same and added to the
income in the hands of the assessee:
Date Amount Narration of the Assessee Descripti on 30.06.2009 Entertainment S 17500/- Being impressed bill received from &M) expenses Victor for period mobile expenses etc. for the month of February 09. Mobile expenses for the March 09, consignment clearing charges - 01.02.2009 to 31.03.2009.
31.03.2010 General Charges 28,125/- Being assets write off as assets Expenses not in use. Ref. JV-0809-1398 dated 31.03.2009. . 200000/- 3 1.03. 2010 General Charges Being provision for expenses for Expenses financial year 2008-09. 31.03.2010 General Charges 36,692/- Being old balance now being written off. Expenses- service tax recoverable Total 2,82,317/-
14 ITA No.1023/Chd/2019 A.Y.2010-11
Being aggrieved, the assessee carried the matter in
appeal before the Ld.CIT(A). The Ld.CIT(A) has returned a
finding that these expenses have been rightly found by the AO
as not pertaining to the year under consideration. It was
further held that where the assessee was following mercantile
system of accounting, it shall not be allowed any expenses
which pertain to any previous year other than the concerned
previous year except those expenses which are specifically
allowed under the Act. In support, reliance was placed at ITAT
Chandigarh Bench decision in the case of M/s Haryana State
Electronics Development Corporation Ltd. Vs. DCIT (supra).
Against the said findings, the assessee has come up in
appeal before us. During the course of hearing, it was
submitted that these expenditure have been incurred wholly
and exclusively for the purpose of business of the assessee
company and the same are duly allowable u/s 30 to 37 of the
Act. In support, reliance was placed on the decision of the
Hon'ble Delhi High Court decision in the case of CIT Vs.
Modipon Limited Ltd.(supra).
Per contra, the Ld. DR has relied upon the findings of
the lower authorities.
We have heard the rival contentions and purused the
material available on record. Going by the nature of expenses
15 ITA No.1023/Chd/2019 A.Y.2010-11
such as assets written off, provisions for expenses and old
balances written off, it is prima facie not very clear whether
these expenses can be claimed as revenues expenses and
allowable under section 30 to 37 of the Act. Since these
contentions have been raised for the first time and in absence
of any findings of the lower authorities, we deem it
appropriate to set-aside the same to the file of the ld CIT(A)
who shall examine the aforesaid contentions so raised besides
examining the matter from the perspective of allowability of
prior period expenses taking into consideration our
discussions on allowability of prior period expenses supra
while disposing off ground no. 3 supra. In the result, the
ground no. 4 is allowed for statistical purposes.
In the result, the appeal of the assessee is partly
allowed for statistical purposes.
Order pronounced on 20.01.2022.
Sd/- Sd/- (DIVA SINGH) (VIKRAM SINGH YADAV) लेखा सद�य/Accountant Member �याय�क सद�य/Judicial Member
Dated: 20.01.2022 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT
16 ITA No.1023/Chd/2019 A.Y.2010-11
आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar
Draft dictated 17/18.01.2022 Sr.PS Draft placed before author .01.2022 Sr.PS Approved Draft comes to the Sr.PS/PS Sr.PS Order signed and pronounced on File sent to the Bench Clerk Sr.PS Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.