SH. PARVEEN KUMAR,LUDHIANA vs. ACIT, LUDHIANA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘B’, CHANDIGARH BEFORE MS.DIVA SINGH, JUDICIAL MEMBER AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER

ITA No.498/Chd/2016 (Assessment Year : 2012-13) Sh.Parveen Kumar Aggarwal, Vs. The A.C.I.T., Prop. M/s M.K.Processing, Circle-1, C-234, Focal Point, Ludhiana. Ludhiana. PAN: ADDPA2087K (Appellant) (Respondent)

Appellant by : Shri Pankaj Bhalla, CA Respondent by : Shri Manjit Singh, Sr.DR Date of hearing : 24.01.2018 Date of Pronouncement : 20.04.2018

ORDER PER ANNAPURNA GUPTA, A.M.: This appeal has been preferred by the assessee against

the order of Ld. Commissioner of Income Tax(Appeals)-I,

Ludhiana (hereinafter referred to as (‘Ld.CIT(Appeals)’ dated

25.2.2016 relating to assessment year 2007-08.

ground Nos.2 and 3. Ground No.2 raised by the assessee

reads as under:

“2. That the Ld. C1T(A) erred in law & fact by confirming addition of Rs.1,11,700/- under head "Excise Duty debited to Purchase Yarn Account" without any base and reasons thereof. 2.1 That the Ld. CIT(A), Ludhiana erred in law & facts by adjudicating it to be a "prior period expense' ignoring fundamental Accounting Principles, conventions and standards. 2.2 That the contention of Ld. CIT(A) that the expense claimed is in violation of matching concept is bad in law &. facts of the case.

Rs.1,11,700/- on account of claim of excise duty for

purchase of yarn. During the course of assessment

proceedings, the Assessing Officer noticed that the excise

duty receivable at Rs.1,11,700/- had been debited in the

purchase yarn account for the year and further noted that

the Tax Auditors had qualified their report with the remarks

that Excise Duty Receivable Rs.1,11,700/- relevant to

previous year had been debited in purchase yarn account

during the year since excise duty was abolished on cloth

w.e.f. 08.07.2004. The assessee was asked as to why this

excise duty irrecoverable, debited to purchase of yarn

account should not be added back to the income of the

assessee as this was an expenditure incurred not in the

relevant financial year. The Ld. counsel for assessee replied

that the payment of excise duty was made by the assessee

in the year 2003 on account of certain dispute with the

excise authorities and the payment of Rs.1,11,700/- was

made by the assessee under protest and further that since

this amount could not be recovered back from the Excise

Department therefore it had been charged to yarn account

as being irrecoverable. The Assessing Officer was not

satisfied with the reply of the assessee and made the

addition of Rs.1,11,700/- to the income of the assessee.

submissions reproduced at para 3.1 of the order submitting

that the excise duty was relatable to the impugned year

only since it was paid in advance as per guidelines of the

Excise Act to be adjusted against future excise duty liability

and since the impugned assessment year was the last year

of operation of the assessee firm, since it was acquired by a

company M/s M.K. Aggarwal Hosiery Pvt. Ltd. on 1.4.2007,

the excise duty was written off in the Profit & Loss Account

of the impugned year since no benefit of the same could

have been availed by the assessee thereafter. It was also

submitted that write off was as per the guidance note on

accrual basis of accounting issued by the Institute of

Chartered Accountants of India, as per which revenue was

required to be recognized as it is earned and costs are to be

matched either against the Revenue or against relevant time

period and further that the costs which are not charged to

income but are carried forward and kept under continuous

review and have lost their utility or power to generate

future revenue, are to be written off as a loss. The assessee

contended that since this cost of excise duty paid in earlier

year had lost its utility in the impugned year ,the same had

been rightly written off in the Profit and Loss account for

the year. The Ld.CIT(Appeals) dismissed all the contentions

of the assessee and upheld the disallowance made by the

AO in this regard, holding the expenses to be prior period

as under:

“3.2 I have considered that facts of the case, the basis of disallowance made by the Assessing Officer and the arguments of the AR during the course of the assessment as well as the appellate proceedings. The appellant has debited excise duty receivable amounting to Rs.1,11,700/- in the 'Purchase Yarn Account' since the amount could not be

recovered back from the excise department. The said amount pertains to F.Y 2002-03 which is in violation of matching principle of accountancy according to which expenditure has to be claimed in the year in which revenue is recognized. Further, 'purchase of yarn' account cannot be debited by an expenditure incurred earlier i.e. 4 years back. Thus, it is a prior period expense-not allowable in the year under consideration. Without prejudice to the same, as per provisions of the sec 28 to 44 of the Act, which deals with profits and gains of business and profession, excise duty irrecoverable does not constitute an expense allowable against profits and gains of business. Further, the said claim does not fall within the purview of the sub-sections 36 and 37 of the Act also. The case law relied upon by the appellant of the Hon'ble ITAT Chandigarh in the case of Mohan Spinning Mills vs ACIT in ITA No. 1212(Chd) of 2011 relates to Cenvat Credit and is distinguishable on facts. Therefore, the Assessing Officer was justified in disallowing the said amount of excise duty irrecoverable debited to purchase yarn account. This ground of appeal is dismissed.” 6. Before us, the Ld. counsel for assessee reiterated the

contentions made before the Ld.CIT(Appeals), while the Ld.

DR relied upon the order of the CIT(Appeals).

have gone through the orders of the authorities below. We

find merit in the contention of the Ld. counsel for assessee.

It is not disputed that the impugned excise duty paid in

earlier years was paid in advance/protest to be adjusted

against future excise duty liability. The contention made in

this regard by the Ld. counsel for assessee time and again

before the lower authorities has not been controverted by

the Revenue before us. It is also not disputed that the

impugned year was the last year of operation of the

assessee firm. Contentions made in this regard by the Ld.

counsel for assessee have remained uncontroverted before

us. Thus, it stands to reason that the impugned excise of

Rs.1,11,700/-, had lost its utility to derive any benefit to

the assessee in the impugned year and therefore the

impugned excise duty crystallized as expense or loss of

the assessee in the impugned year only. It could not be

treated, therefore by any stretch of logic as a prior period

expenses. In fact, the preceding year in which the said

advance was made, the nature of the same was advance and

not expense or cost. The Revenue has not brought on record

anything in support of its claim to the contrary that the

expense had crystallized in the earlier year. Therefore, it

could not be said to be cost relatable to that year. It was

only in the impugned year when the said advance lost its

utility of deriving any benefit, since no further adjustment

of excise duty payable could be made against it as the

assessee firm had stopped its operation, that the said

advance got converted or crystallized into a loss or cost and

the point of time when this happened being the impugned

year, the cost is said to be relatable to the impugned year

and liable to be set off against the income of the impugned

year only. We, therefore, find no merit in the contention of

the Revenue that the said expenses related to earlier year

and thus was a prior period expense.

receivable of Rs.1,11,700/-, written off during the year,

was cost or expense of the impugned year and, therefore,

was to be allowed to be set off against the income of the

impugned year.

Ground of appeal No.2 raised by the assessee therefore

stands allowed.

“ 3. That the Ld. A.O. erred in law &. facts by confirming addition of Rs.75,000/- on account of interest disallowed on advance of Rs.5,00,000/- made to M/s. Shakti Dyeing & Bleaching House without any base & reasons thereof.” 10. This ground of appeal relates to addition of

Rs.1,95,000/- on account of interest free advance made.

During the course of assessment proceedings, the Assessing

Officer noticed that the assessee had given advances to M/s

Shakti Dyeing & Bleaching House and M/s Gaurav Fabrics

of Rs.5,00,000/- & Rs.8,00,000/- respectively for purchase

of plot. The assessee was asked to justify commercial

expediency for making the said advances. Due reply was

filed by the assessee. Not being satisfied with the same ,the

AO disallowed interest @ 15% of the given advances and

added back the same to the income of the assessee

amounting to Rs.1,95,000/-, by holding that there was no

commercial expediency regarding the advances given.

Ld.CIT(Appeals) who held the advance made to M/s Shakti

Dyeing and Bleaching House to be commercially expedient

and justified and, therefore, deleted the disallowance of

interest relating to the same, while the advance made to

M/s Gaurav Fabrics was held to be unjustified and interest

paid relating to the same was held to be disallowable by the

CIT(Appeals).

assessee was that it had sufficient own funds to make

advance of Rs.5 lacs to M/s Gaurav Fabrics and in the light

of the same, the presumption was that the advance had

been made out of its own funds warranting no disallowance

of interest. Reliance was placed on a number of decisions

of the Hon'ble Jurisdictional High Court in the case of

Bright Enterprises Pvt. Ltd. vs CIT ,Jalandhar (2016) 381

ITR 107, CIT vs Kapsons Associates ITA No.354 of

2013(O&M) dt.4-8-2015.

not being commercially expedient, disallowance of interest

u/s 36(1)(iii) of the Act had been rightly upheld by the

Ld.CIT(Appeals).

agreement with the contentions of the Ld. counsel for

assessee that where sufficiency of own funds is

established, advance made are to be presumed to have been

made out of the interest free funds warranting no

disallowance of any interest u/s 36(1)(iii). Reliance placed

by the Ld.Counsel for the assessee in this regard on the

decisions of the Hon'ble Jurisdictional as cited above is apt.

Considering the same we find that in the present case this

contention though has been taken by the assessee before

the Ld.CIT(A) but has not been dealt with by him. The facts

relevant to the issue therefore, of availability of sufficient

funds has not been examined and verified by the lower

authorities. We, therefore, consider it fit to restore this

issue back to the file of the CIT(Appeals) to adjudicate the

issue afresh in the light of the proposition laid down by the

Hon'ble Jurisdictional High Court in the case of Bright

Enterprises & Kapson Associates(supra) and after duly

verifying the facts in the present case. We may add that

the assessee be given due opportunity of hearing in this

regard. This ground of appeal is, therefore, allowed for

statistical purposes.

statistical purposes.

Order pronounced in the Open Court. Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 20th April, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR Assistant Registrar, ITAT, Chandigarh