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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA
सुनवाई क� तार�ख / : 08.11.2017 Date of Hearing घोषणा क� तार�ख / : 05.02.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-5, Mumbai dated 03.04.2017 and pertains to the assessment year (A.Y.) 2012-13.
(A.Y.2012-13) The India Sugar & Refineries Ltd. vs. ITO 2. Brief facts of the case are as under: The assessee is engaged in business of manufacture of sugar. During computation, Assessing Officer disallowed amount debited Rs.43,30,011/- paid to Sugar Cane growers. With respect to this expense in audit report in form no. 3 CD in point 22(b) i.e. particulars of income or expenditure of prior period credited or debited to the profit and loss account, it is mentioned that cane liability of prior year paid in the year 2011-12 Rs.43,30,011/- has been charged to profit and loss account.
On Assessing Officer’s enquiry as to why the same should not be disallowed u/s. 35, the assessee submitted as under:
As regards to your query regarding amount of Rs.43.30 lacs paid to the farmers on gratuitous basis for the season 2006-07, kindly note that there was an ongoing dispute as regards to the sugarcane price for the season 2002-03, 2003- 04 and 2006-07. Pending resolution of the said dispute, the farmers from the surrounding areas who were though legally obliged to supply sugarcane from the reserved areas to our client were diverting sugarcane to other companies and to other areas. Owing to the said diversion, our client was not getting adequate supply of sugarcane, which is the major raw material for production of sugar. Therefore, in order to stop this practice and for ensuring adequate and regular supply of raw material our client entered into an agreement (photocopy enclosed) with association of farmers and thereby agreed to pay the alleged arrears for the season 2006-07.
However, the Assessing Officer was not convinced. He distinguished the case laws relied upon by the assessee and observed as under:
The assessee's above submission is considered but the same is not accepted. In this connection, I would like to refer to the "Notes to Accounts forming part of Accounts", in point no. 24(8)(ii), wherein it is clearly mentioned that ...... "Pending the dispute as aforesaid for season 2006-07, the company has paid and charged to prom and loss accounts an amount of Rs.43.30 lacs
(A.Y.2012-13) The India Sugar & Refineries Ltd. vs. ITO disbursed to cane growers who has supplied cane for 2011-12 season on a gratuitous basis. This is not withstanding the continuing dispute with regard to the dues". From the above it is seen that the assessee has paid an amount of Rs.43,30,011/-, pending the decisions of the various courts. The expenditure claimed by the assessee is not actually paid during the current accounting year relevant to the assessment year 2012-13. Therefore the same is riot allowed. Further pending decision of the court, the payment is contingent in nature.
5.3 As per the agreement submitted by the assessee, it is agreed that the payment of alleged arrears is confined only to the season 2006-07 and the said payment is in lieu of full and final settlement of all the alleged arrears for the seasons 2002-03, 2003-04 and 2006-07 seasons. Further, it has been agreed by both the parties that all the Court Cases including Injunction Suit No. O.S. 101/2007, and as well as relating to the payment of alleged arrears should be withdrawn by the respective parties pending before the Hon'ble High Court of Karnataka/Director of Sugar and Cane Commissioner by filing appropriate applications or joint Memos towards settling the issues amicably. As per the agreement, the payment is made for ensuring regular supply of sugarcane every year in future.
5.5 Therefore, it is evident that the payment made has not been crystalized during the year and hence contingent in nature. Therefore, this expenditure of Rs.43.30 lacs is disallowed as being not pertaining to the year under consideration i.e. assessment year 2012-13 and also being contingent in nature and hence added to the total income of the assessee.
Upon the assessee’s appeal the ld. Commissioner of Income Tax (Appeals) confirmed the addition by observing as under:
2.3 According to appellant, there was ongoing dispute as regards to the sugarcane price for the season 2002-03, 2003-04 and 2006-07 so pending resolution of the said dispute, the farmers from surrounding areas were diverting sugarcane to other companies and other areas. In order to stop this practice and ensuring adequate and regular supply of raw material, appellant had paid Rs.43.30 lacs to farmers on gratuitious basis, in order to secure adequate supply of raw material, notwithstanding settlement of the pending dispute. According to appellant, payment was made wholly for the purpose of appellant and out of business and commercial expediency. So according to appellant, this liability is accrued and arisen by virtue of agreement entered into with the sugarcane growers. But when we examine details submitted by (A.Y.2012-13) The India Sugar & Refineries Ltd. vs. ITO appellant and also dispute as regards to sugarcane price for the season 2002-3, 2003-04 and 2006-07, it shows that the amount paid by virtue of the agreement by cane growers belongs to prior period shows that this expense is not belong to this assessment year but of previous year in which appellant had dispute with cane growers. Though appellant has paid amount this year, it is not expense of this year. further, auditor has audited account of appellant so he will be fully knowing each entry debited to P & L account. Auditor clearly stated that in audit report this payment is of earlier year so it is prior period expenditure.
Against the above order, the assessee is in appeal before the ITAT.
I have heard both the counsels and perused the records. The ld. Counsel of the assessee submitted that the said payment was meant for the business of the company.
If the said payment was not done, the business would have come to stand still. Hence, he pleaded that the expenditure should be allowed.
Per contra, the ld. Departmental Representative relied upon the order of the authorities below.
Upon careful consideration, I find that there is no dispute that this payment is for the purpose of the business. However, the case of the Revenue is that the payment does not relate to the period covered under the present assessment year. The documents and paper submitted by the assessee also clearly show that these payments relate to prior/earlier period. It is settled law that in mercantile system of accounting payments are allowed as expenditure for the period to which they relate. It is not disputed that the assessee is following mercantile system of accounting. Admittedly, these payments relate to prior period. They have been so identified and certified by (A.Y.2012-13) The India Sugar & Refineries Ltd. vs. ITO the auditor also. In such factual background it is clear that these are prior period expenses not allowable in the current assessment year. The case law from Hon'ble jurisdictional High Court referred by the assessee in the case of CIT vs. Mahanagar Gas Ltd. [2014] 42 taxmann.com 40 (Bom) was on the proposition that prior period expenses which would crystallize during the assessment year on receipt of bills even though the assessee was following the mercantile system of accounting are allowable. I find that there is no such case in the present appeal that the impugned liability has crystallized in the current assessment year upon receipt of the bills. Hence, this case law does not support the case of the assessee.
Accordingly, I do not find any infirmity in the orders of the authorities below and I uphold the same.