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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-3, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143 of the Income Tax Act 1961, (the ‘Act’).
The grounds raised by the assessee in this appeal read as under: “Dy. CIT & CIT(A) both wrongly disallowed Rs.7,42,184/- on account of provisions for expenses as provided in the accounts by the assessee. These provisions are reversed back on the first day of the next accounting year and the actual bills are received in same time amounting to Rs.7,78,934/- more than provisional expenses claimed. Both Dy. CIT & CIT(A) failed to understand that such provision is not contingent in nature. It is a concept of accrual of liability. Important point is that both had accepted the genuineness of expenses only point of debate is only the year of claim of expenses. So addition of Rs.7,42,183/- deserve to be deleted.”
Briefly stated, the facts of the case are that during the course of assessment proceedings, the Assessing Officer (AO) asked the assessee to justify the claim of provision of Rs.7,42,183/- on account of bonus, travel allowance and medical reimbursement. The assessee vide submission dated 19.12.2013 submitted the relevant details and break- up of provisions which are produced as under:
S.N Head of exp. Liability Actual Excess/shor Bill Name of the vendor created amount t liability booked/pai exmployee on 31st of bill created d date March received 2011 1. Telecommunication 37252 20517 16732 12- Apr- 11 Tata Teleservices Reliance 2. Office and General 2599 2562 37 12-Apr-l1 Pest control, Xerox etc. 3 Security 72091 77485 (5394) 12-Apr-l1 Radiant Guard Services P. Ltd.
Housekeeping & 30084 45156 (15072) 12-Apr-l1 Soham Enterprises Mtrl Handling 5. Contract Labour 62480 48404 14076 12-Apr-l1 Soham Enterprises 6. Water 18200 17585 615 26-Apr-11 MIDC Ranjangaon & Abhishek Water supply 7. Staff shuttle bus 93758 95668 (1910) 12-Apr-ll Rajmudra Tours & Travels 8. Electricity 18400 18400 -- 29-Apr-l 1 Transformer Repairs 9. Foreign Travel 43000 67162 (24162) 12 -Apr- 11 Rahul Jha Bom/HK/Bom Tour 10. Conveyance & car 50931 87658 (36727) 7- APR- 11 Avin hire Nigam/Veeresh Manrai/Sunil Paranjpe
Domestic travel 46814 47234 (420) 7- Apr- 31 Avin Nigam/Veeresh Manrai/Sunil Paranjpe 12. Food exp. 4861 4861 -- 7 -Apr-11 Avin Nigam/Veeresh 13. Lodging & boarding 38232 58232 -- 7 -Apr- 11 Manrai 14. Motor vehicle 653 653 -- 7-Apr-11 Veeresh Manrai tour 15. Group gratuity 32309 32309 -- 24-Jun-11 Employee Gratuity payables 16. Consulting 30520 3500 27020 29-Apr-11 Excise, PF, ETDS, VAT consultant 17. Audit & tax 160000 171548 (11548) 7-Dec-11 Rajesh Rajeev Associates Rs.94,338/-, Khanolkar Rs.77,210/- 18. Total as per 742184 778934 (36750) balance sheet The AO observed that these amounts were mere provisions and the actual bills were received by the assessee in subsequent financial year. Therefore, he disallowed the above sum of Rs.7,42,183/- and added it to the total income of the assessee.
4. Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) agreed with the reasons given by the AO and dismissed the appeal with the following reasons:
“4.4 I have considered the rival submissions on the issue of provision made by the appellant and disallowed the same by the Assessing Officer as actual bills are received by the appellant in the subsequent financial year. It is well settled law that no deduction can be allowed under the Act simply because payment has been made de hors liability.
4.5 Section 43B of the IT Act, 1961 in itself is not a provision providing for deduction of any item of expenditure which is otherwise not allowable under any of the provisions of the Act-even Explanation 2 to Section 43B of the IT Act, 1961 will not justify the appellant to claim deduction because under the said provision only liability incurred by the appellant during the previous year is allowable on payment basis. In view of the discussion that the appellant had made provision the expenditure which was crystallized in the subsequent year on receipt of the actual bills, the claim of expenses being provisions in the nature is not allowable under the Income Tax Act. The appellant is at liberty to claim the same in the subsequent assessment year on payment basis. Therefore, I did not find any reason to interfere on the action of the Assessing Officer. The disallowance of Rs.742,183/- on account provision is confirmed.”
Before us, the Ld. counsel of the assessee submits that the Ld. CIT(A) while arriving at his conclusion has made a remark that “the appellant is at liberty to claim the same in the subsequent assessment year on payment basis”. It is stated by him that the assessee has filed a rectification application u/s 154 with the AO on 24.11.2015 and 28.12.2015 for making a claim of the expenditure disallowed during the AY 2011-12 to be allowed on payment basis as per the direction of the CIT(A) dated 19.10.2015. The Ld. counsel further submits that the Tribunal may send back the file to the concerned AO with a direction to either allow the expenditure on the basis of provision made for AY 2011-12 as the assessee-company has been following mercantile basis of accounting or on the basis of payment during the subsequent assessment year i.e. 2012-13 as per the direction of the Ld. CIT(A).
On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. There is no dispute that the assessee was following mercantile system of accounting during the impugned assessment year. As per the chart depicted hereinbefore the liability was created by the assessee on 31.03.2011. The Hon’ble Bombay High Court in the case of Taparia Tools Ltd. v. JCIT [2003] 260 ITR 102 has described the mercantile system of accounting as follows: "The mercantile system of accounting is based on accrual. Basically, it is a Double Entry System of accounting. Under the mercantile system of accounting, profits arising or accruing at the date of the transaction are liable to be taxed notwithstanding the fact that they are not actually received or deemed to be received under the Act. Under the mercantile system of accounting, therefore, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income. The system postulates the existence of tax in so far as monies due and payable by the parties to whom they are debited [see Keshav Mills Ltd. v. CIT (1953) 23 ITR 230, 239 (SC)]. Therefore, under the Mercantile System of Accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed [expenses]. Under the mercantile system of accounting, this matching is required to be done on accrual basis. Under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in-flow, is required to be compared with expenses incurred during the same period, irrespective of actual outflow of cash.”