Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI “E” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, & SHRI RAJESH KUMAR. Dr. Annie Besant Road, Worli
अपीलाथ� क� ओर से /By Appellant : Shri Vachaspati Tripathi, D.R. ��यथ� क� ओर से/By Respondent : Shri Kirit Kamdar, A.R. सुनवाई क� तार�ख/Date of Hearing : 06.06.2016 घोषणा क� तार�ख/Date of Pronouncement : 24.06.2016 ORDER PER SHAILENDRA KUMAR YADAV, J.M: This appeal has been filed by Revenue against the order of Commissioner of Income-Tax (Appeals)-13, A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 2 Mumbai, dated 18.03.2013 for A.Y. 2009-10 on following grounds. “i) The Learned CIT (A) has erred on fact and in law in directing the Assessing officer to delete addition made under section 40A (2) (b) without appreciating the fact that the assesse had incurred unusually high and excessive payments to its holding company for purchases made and has thereby suffered loss. ii) The Learned CIT (A) has erred on facts and in law in holding that prior period expenditure disallowed by the Assessing Officer crystallized during the year without appreciating the fact that the assesse failed to prove that these expenses could not be provided in the year to which they relate. iii) The Learned CIT (A) has erred on facts and in law in deleting the addition made by the Assessing Officer on account of prior period expenditure without appreciating the fact that in the mercantile system, the assesse is required to claim expenditure on payable basis and where such provisions are not made, to prove that the event requiring the payments of such expenditure occurred in later period.”
Briefly stated facts are that the assessee has e-filled its return of income on 28/09/2009 declaring total income at Nil. The case was selected for scrutiny and subsequently, notices u/s 143 (2) and 142 (1) of the Act were issued and served to the assessee. The assessee company is in the business of manufacturing of fertilizers and agrochemicals and also trading in pesticides. First issue is with regards to disallowance u/s. 40A(2)(b) of the Act of Rs. 1,70,11,301/-. Assessing Officer (vide para 5.6 of Assessment Order) A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 3 disallowed the purchases made by the assesse U/s 40A(2)(b) of the Act at Rs. 1,70,11,301 holding that : “The purchases from M/s United Phosphorus Ltd were highly inflated thereby causing loss to the assesse in the trading activity. In fact no benefit has been derived by the assessee by transacting with M/s United Phosphorous Ltd and by making unusually high and excessive payments for purchases made from this party the assesse has incurred loss. Further, no explanation has been offered by the assesse to explain the loss. Considering the facts of the case the purchases made from M/s United Phosphorus Ltd are treated to be at an excessive an unreasonable rate and 1% of the purchases made are disallowed U/s 40A (2) (b) of the Act. Such disallowance works out to Rs.1,70,11,301/-.”
2.1 Aggrieved from the order of the Ld. Assessing Officer, the assesse filed an appeal before the CIT (A) who deleted the addition made by Assessing Officer U/s 40A(2)(b) of the Act, vide para 4.5 of the order of CIT (A) which reads as under:
“4.5 As it is understood that disallowance under section 40A (2) (b) of the Act can only be made when it is found that expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assesse or the benefit derived by or accruing to him thereform, so much of the expenditure as is so considered by him to be excessive or unreasonable cannot be allowed as deduction. Here instant case the assessing officer has not brought any comparable rate of fertilizers sold by A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 4 M/s United Phosphorus Ltd to others at lower rate and proving that appellant have made purchases from the said company at an excessive rate and thus liable for disallowance under section 40A (2) (b). As in the case of appellant entire purchases are made from M/s United Phosphorus Ltd, only, this was required on the part of assessing officer to prove that purchases of these very fertilizers have been made by the appellant at excessive rates when same was available in the market at lesser rate. As this basic exercise has not been undertaken by the assessing officer, I am in agreement with the appellant that in absence of the same disallowance under this section cannot be made. It is altogether a different reason that assessing officer has worked out profit and loss account of different segments, which however being faulty due to inclusion of excise duty, again cannot be relied upon with and thus are of no help to A.O. to prove that appellant have purchased the fertilizers at a rate higher than the rate of sale of these items. In view of this, the estimated disallowance at the rate of 1% on the purchases made, an amount Rs. 1,70,11,301/- disallowed under section 40A (2) (b) of the I.T. Act being not sustainable are deleted herewith. The ground number 2 is allowed.”
2.2 Aggrieved from the order of the Ld. CIT(A), the Revenue is in appeal before us on this issue inter alia submitted that CIT(A) was not justified in deleting that addition in question. So, same should be set aside and order of Assessing Officer on this issue be restored. On the other hand, ld. Authorized Representative supported the order of CIT(A) on the issue.
2.3 We have heard both the parties and gone through the facts and circumstances of the case. The ld. Departmental Representative has argued that the purchases from M/s United Phosphorus Ltd were highly inflated thereby A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 5 causing loss to the assesse as the assesse has made excessive payments for purchases, therefore order of the Assessing Officer should be restored. On the other hand the ld. Authorized Representative of the assessee has explained that Ld. Assessing officer did not bring on record or establish the comparable price for the same purchases from third party so that it could be concluded that price charged for purchases was excessive and higher. Just to say that excessive payments were made for purchases does not work unless the comparable price for the similar goods from third party is demonstrated. Section 40A(2)(b) of the Act clearly says that the Assessing Officer should disallow the expenditure if the expenditure is excessive or unreasonable having regard to the fair market value of the goods. In the instant case the Assessing Officer failed to work out the fair market value of the goods. Hence in the instant case the assessing officer has not brought any comparable rate of fertilizers sold by M/s United Phosphorus Ltd to others at lower rate and proving that appellant have made purchases from the said company at an excessive rate. The Ld. Assessing officer did estimate only and did the guess work. In view of above discussion, we do not hesitate to uphold the order of the CIT (A). Same is dismissed.
3. Next issue is with regards to Prior Period Expenses of Rs.14,60,099/-. The prior period expenses disallowed by Assessing Officer holding that: “Since the assessee is A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 6 following mercantile system of accounting, prior period expenses claimed by the assessee is not allowable. It was also observed that the assessee has not made any provision for the above expenses in earlier years. Accordingly, the prior period expenses of Rs. 14,60,099/- was disallowed and added to the total income of the assessee.”
3.1 Aggrieved from the order of Assessing officer, assessee filed an appeal before the CIT(A), who has deleted the said addition ( Vide para 7.1) by observing as under:
“7.1 I have considered that the appellant have stated that they are detention charges (Demurreage charges paid for imports pertains to earlier years) an amount Rs. 2,70,445/- then VAT audit fee ( VAT audit fee paid to auditors for VAT audit pertains to earlier years) an amount of Rs. 1,12,106/- and excise on finished goods return of an amount of Rs. 10,77,546/- in all total Rs.14,60,099/-. The appellant have stated that these expenses were debited during the period relevant to assessment year 2009-10, the subject matter of this appeal for the reason that the accrual/liability of aforesaid expenses got crystallized then only. Then appellant have relied upon decisions given in the case of CIT versus Jagatjeet Industries Ltd, given by Honorable High Court of Delhi and Nagri Mills Co Ltd given by Honorable High Court of Bombay. I have gone through the same and having found that these are the expenses though pertaining to prior period to the previous year relevant to the assessment year 2009-10, it is not disputed that the liabilities got accrued and crystallized only in the financial year relevant to assessment year 2009-10. It is not the case that these liabilities pertaining to the respective financial years got crystallized and thus were ascertained but not claimed by the appellant in those assessment years, and had been claimed in the assessment year 2009-10 without A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 7 any reason. I find that the plea of the appellant in this regard for these amounts debited under various heads is directly covered by the decision given by the Honorable Bombay High Court in the case of Nagri Mills Co Ltd, cited and relied upon by the appellant also. In view of this, disallowances made of an amount Rs. 14,60,099/- being not sustainable is deleted herewith. The ground number 5 is allowed.”
3.2 Aggrieved from the order of CIT(A), Revenue is in appeal before us inter alia stated that order of CIT(A) is not justified on the issue. Accordingly, same should be set aside. On the other hand, ld. Authorized Representative supported the order of CIT(A) on the issue.
We have heard both the parties and gone through the facts and circumstances of the case. Revenue authorities have stated that since the assessee is following the mercantile system of accounting, therefore prior period expenses claimed by the assessee is not allowable and also argued that the assessee has not made any provision for the above expenses in earlier years. On the other hand the ld. Authorized Representative of the assessee stated that these expenses though pertaining to prior period to the previous year relevant to the assessment year 2009-10, but the liabilities got accrued and crystallized only in the financial year relevant to assessment year 2009-10. In this case the liability became known for the first time when such claim was made by the assessee therefore the same is allowable in the year in which the liability got crystallized. A.Y. 09-10 [ITO vs. M/s. Swal Corporation Ltd.] Page 8 In fact and circumstances, we are not inclined to interfere in the order of CIT(A). Same is upheld.
In the result, appeal of Revenue is dismissed as discussed above.
Pronounced in the open Court on this the 24th day of June, 2016.
Sd/- Sd/- (RAJESH KUMAR) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai: Dated 24/06/2016 True Copy S.K.SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार, आयकर अपील�य अ�धकरण, मुंबई ।