M/s. National Buildings Construction Corporation Ltd., New Delhi V. ACIT, New Delhi

ITA 1239/DEL/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7194 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 12-07-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P DAM KANUNJNA
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E: NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER, AND SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER. ITA NOS. 1238 & 1239/DEL/2014 [ASSESSMENT YEAR: 2008-09 & 2009-10] M/S NATIONAL BUILDINGS CONSTRUCTION LTD VS. THE A.C.I.T NBCC BHAWAN, LODHI ROAD, CIRCLE 13(1) NEW DELHI NEW DELHI PAN: AAACN 3053 B [APPELLANT] [RESPONDENT] DATE OF HEARING : 12.07.2016 DATE OF PRONOUNCEMENT: 02.09.2016 ASSESSEE BY : SHRI RAKESH GUPTA , ADV SHRI SOMIL AGGARWAL, ADV REVENUE BY : SHRI P. DAM KANUNJ NA, SR. DR ORDER PER CHANDRA MOHAN GARG, JUDICIAL MEMBER THE ABOVE TWO APPEALS HAVE BEEN FILED BY THE ASSESS EE DIRECTED AGAINST THE ORDER OF THE CIT(A)-XVI, DELHI DATED 28/01/2014 PASSED IN FIRST APPEAL NOS. 153/2010-11 AND 313/11- 12 FOR A.YS 2008-09 AND 2009-10 RESPECTIVELY. SINCE THE ISSUES INVOLVED IN BOTH THESE APPEALS ARE SIMILAR AND THE APPEALS WERE HEARD TOGETHER, SO THESE ARE BEING DISPOSED OFF BY THIS C ONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2 ITA NO. 1238/DEL/2014 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED AS MANY AS FIVE GROUNDS OF APPEAL. GROUND NO. 5 IS GENERAL AND GRO UND NO. 4 IS CONSEQUENTIAL. GROUND NOS. 2 AND 3 ARE ARGUMENTATI VE AND SUPPORTIVE TO THE MAIN GROUND NO. 1 WHICH READS AS UNDER: 1. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT FULLY DELETING THE DISALLOWANCE OF RS. 18,48,519/- MADE BY THE AO U/S 14A BY APPLYING THE PROVISIONS OF RULE 8 D AND HAS FURTHER ERRED IN SUSTAINING THE SAME TO THE EXT ENT OF RS. 12 LAKHS THAT TOO WITHOUT CONSIDERING THE SUBMI SSION AND EVIDENCES OF THE ASSESSEE. 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D CAREFULLY PERUSED THE RELEVANT MATERIAL PLACED ON R ECORD BEFORE US INTER ALIA THE ASSESSMENT ORDER, APPELLATE ORDER AND THE ASSESSEES PAPER BOOK SPREAD OVER 211 PAGES. THE LD . COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS RELEVANT PA RAS 4.1 TO 4.8 OF THE ASSESSMENT ORDER AND CONTENDED THAT THE AO R ECORDED SATISFACTION ON WRONG PREMISE AND APPLIED RULE 88D OF THE I.T. RULES, 1962 MECHANICALLY WITHOUT ANY SUBSTANTIAL AL LEGATION. THE LD. AR FURTHER SUBMITTED THAT THE CIT(A) IN PARA 3. 1.1 NOTED THE FACTS OF THE CASE AND THEREAFTER IN PARA 4.1 DREW A N INCORRECT 3 CONCLUSION DESPITE THE FACT THAT THE FIRST APPELLAT E AUTHORITY NOTED THAT INVESTMENT AS APPEARING IN THE SCHEDULE 5 OF THE BALANCE SHEET ARE JOINT VENTURES, THE INCOME FROM W HICH ARE DULY TAXABLE UNDER THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'. THEREFORE THE SAID INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT. THE LD. AR FURTHER POINTED OUT THAT IN VIEW OF THE ABOVE, THE AO HAS ERRED IN MAKING THE DISALLOWANCE U/S 14A OF THE ACT BY TA KING INTO CONSIDERATION THE INVESTMENTS AS PER SCHEDULE 5 OF THE BALANCE SHEET. THE LD. AR VEHEMENTLY POINTED OUT THAT DESP ITE THE FACT THAT THE CIT(A) OBSERVED THE ENTIRE RELEVANT FACTS PERTAINING TO THIS ADDITION, BUT AFTER RECORDING THE FACTS UPHOLD THE ADDITION ON INCORRECT AND UNJUSTIFIED PREMISE. THEREFORE, TH E SAME MAY BE DIRECTED TO BE DELETED. 4. IN APPEAL, THE CIT(A) NOTED FROM THE BALANCE SHE ET THAT THERE WAS NO SECURED LOAN AS ON THE BEGINNING AND I N THE END OF THE FINANCIAL YEARS. UNSECURED LOANS HAVE COME DOWN FROM RS. 6713.57 LAKHS AS ON 31.3.2007 TO RS. NIL AS ON 31.3 .2008. THEREFORE, THERE WAS NO NEW INTEREST BEARING SECURE D AND UNSECURED LOANS DURING THE PREVIOUS YEAR RELEVANT T O A.Y 2008-09 AGAINST THE TAX FREE INVESTMENTS MADE DURING THE RE LEVANT PERIOD. THEREFORE, NO DIRECT OR INDIRECT EXPENSES CAN BE 4 DISALLOWED U/S 14A R.W.R. 8D(2)(II) OF THE RULES ON ACCOUNT OF HT TAX FREE INVESTMENT. THE LD. AR POINTED OUT THAT TH E DISALLOWANCE OF INDIRECT INTEREST EXPENDITURE OF RS. 5.03 LAKHS MADE BY THE AO CANNOT BE SUSTAINED. THE LD. AR FURTHER POINTED OU T THAT WHEN THE AO HAS NOT POINTED OUT ANY DEFECT ABOUT THE COR RECTNESS OF THE FINANCIAL STATEMENT SUBMITTED BY THE ASSESSEE A ND SATISFACTION HAS BEEN RECORDED ON WRONG PREMISES AN D INCORRECT FACTS MECHANICALLY MADE BY THE AO AND UPHELD BY THE CIT(A), CANNOT BE HELD AS SUSTAINABLE. THUS THE SAME MAY B E KINDLY DELETED. TO SUPPORT THIS CONTENTION, THE LD. AR PL ACED RELIANCE ON THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. TAISHIKA ENGINEERING REPORTED AS 370 ITR 338 [D EL]. 5. THE LD. DR STRONGLY SUPPORTED THE ACTION OF THE AO AS WELL AS THE IMPUGNED ORDER AND SUBMITTED THAT RULE 8D OF THE RULES IS APPLICABLE FROM A.Y 2008-09 ONWARDS, THEREFORE, THE AO WAS QUITE JUSTIFIED IN INVOKING RELEVANT PROVISIONS OF THE ACT TO MAKE ADDITION U/S 14A OF THE ACT. 6. ON VIGILANT READING OF THE DECISION OF THE HON'B LE HIGH COURT OF DELHI IN THE CASE OF TAISHIKA ENGINEERING [SUPRA ] WE NOTE THAT THEIR LORDSHIPS, IN APPEALS PERTAINING TO A.YS 2008 -09 AND 2009- 10 HELD THAT IF AND ONLY IF THE AO IS NOT SATISFIED WITH THE 5 CORRECTNESS OF THE DISALLOWANCE OR NIL DISALLOWANCE MADE BY THE ASSESSEE, THEN ONLY, THE AO IS ENTITLED AND AUTHORI SED TO COMPUTE DEDUCTED U/S 14A R.W.R. 8D OF THE RULES. IN THE PR ESENT CASE, AS NOTED BY THE AO IN PARA 4.1, THE ASSESSEE HAS NOT D ISALLOWED ANY EXPENDITURE IN RESPECT OF INCOME WHICH DOES NOT FOR M PART OF TOTAL INCOME, THUS THE PRESENT CASE IS PERTAINING T O NIL DISALLOWANCE BY THE ASSESSEE. IN PARA 4.2, THE AO NOTED THAT THE ASSESSEE MADE INVESTMENT OF RS. 5357.59 LAKHS IN EQ UITY AND PREFERENCE SHARES CAPITAL OF COMPANIES, DIVIDEND IN COME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCO ME AND IN THE SUBSEQUENT PARA, THE AO, REFERRING TO THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOY CE MFG, CO. LTD VS. DCIT ITA NO. 626/10 AND W.P. NO. 758/10 OBS ERVED THAT RULE 8D IS CONSTITUTIONALLY VALID AND THE AO HAS TO ENFORCE THE PROVISIONS OF SUB-SECTION 1 OF SECTION 14A OF THE A CT. FOR THIS PURPOSE, THE AO IS DUTY BOUND TO DETERMINE THE EXPE NDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. THESE OBSE RVATIONS OF THE AO DO NOT STATE ANY KIND OF DISSATISFACTION REG ARDING CORRECTNESS OF THE NIL DISALLOWANCE BY THE ASSESSEE AND AS WE HAVE NOTED ABOVE, THE CIT(A), IN PARA 4.1 OF THE IM PUGNED ORDER, DEALT WITH THE ISSUE AND GRANTED RELIEF TO THE ASS ESSEE. 6 HOWEVER, THE ADDITION OF RS. 12 LAKHS U/S 14A R.W.R . 8D(2)(II) OF THE RULES WAS UPHELD WITH THE FOLLOWING OBSERVATION S: 4.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F HT LD. AR OF THE APPELLANT COMPANY , THE FACTS OF THE CASE AS WELL A S THE FINDING OF HT A.O. GROUND NO. 1ND AND 4 OF APPEAL ARE GENERAL IN NATURE AND NOT PRESSED FOR BY THE APPELLANT. THEREFORE, NO ADJUDI CATION IS CALLED FOR. GROUND NO. 2 OF APPEAL IS DIRECTED AGAINST DI SALLOWANCE OF RS. 18,48,519/- MADE BY THE AO U/S 14A OF THE IT ACT AS THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EARNING OF EXEM PT INCOME. THE APPELLANT HAS EARNED DIVIDEND ON MUTUAL FUND/SHARES OF RS. 2.50,51,655/- AND CLAIMED IHE SAME AS EXEMPT U/S 10 (33)/] 0(34) OF IT ACT IN THE COMPUTATION OF INCOME BUT NO DISALLOW ANCE U/S 14A OF IT ACT TO EARN THIS EXEMPT DIVIDEND INCOME WERE OFF ERED FOR TAXATION. SECTION 14A READ WITH RULE 8D PROVIDES FO R DISALLOWANCE OF EXPENDITURES INCURRED IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE IT ACT. IN THIS REGAR D IT IS SEEN THAT THE AO HAS DISALLOWED RS. 18,48,519/- TREATING THE INVE STMENTS AS PER SCHEDULE 5 OF THE BALANCE SHEET AS INVESTMENTS FROM WHICH .EXEMPT DIVIDEND INCOME OF RS. 2.50 CRORES WAS EARNED. FROM THE SUBMISSION OF THE APPELLANT IT IS EVIDENT THAT THE INVESTMENTS AS APPEARING IN THE SCHEDULE 5 OF THE BALANCE SHEET ARE JOINT VENTU RES, THE INCOME FROM WHICH ARE DULY TAXABLE UNDER THE IT ACT. THERE FORE, THE ABOVE INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A IN VIEW OF THE ABOVE, THE AO HAS ERRED IN M AKING THE DISALLOWANCE U/S I4A BY TAKING INTO CONSIDERATION T HE INVESTMENTS AS PER SCHEDULE 5 OF THE BALANCE SHEET. FROM THE SUBMI SSIONS OF THE APPELLANT, THE ACCOUNT STATEMENT OF DIVIDENDS AND T HE BALANCE SHEET IT IS EVIDENT THAT THE EXEMPT DIVIDEND INCOME IS EA RNED FROM INVESTMENT OF RS. 4,800 LACS IN LIQUID FUND CASH PL AN AS PER SCHEDULE 7 8 OF THE BALANCE SHEET. THEREFORE, THE INVESTMENT O F R. 4,800 LACS MADE DURING THE RELEVANT PREVIOUS YEAR IS REQUIRED TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DISALLOWANCE OF EX PENDITURE INCURRED IN RELATION OF EXEMPT INCOME. FROM THE BAL ANCE SHEET IT IS ALSO SEEN THAT THERE WAS NO SECURED LOAN AS ON THE BEGINNING AND IN THE END OF FINANCIAL YEAR. UNSECURED LOANS HAVE COM E DOWN FROM RS. 6713.57 LACS AS ON 31.03.2007 TO RS. NIL AS ON 31.0 3.2008. THEREFORE, IT IS APPARENT THAT THERE IS NO NEW INTE REST BEARING SECURED AND UNSECURED LOANS DURING THE PREVIOUS YEA R RELEVANT TO AY 2008-09 AGAINST THE TAX FREE INVESTMENTS MADE DURIN G THE RELEVANT PERIOD. IT IS SEEN THAT THE INTEREST EXPENDITURES A RE INCURRED ON CURRENT LIABILITIES OF INTEREST BEARING MOBILIZATIO N ADVANCES TAKEN FROM CLIENTS. THE MOBILIZATION ADVANCES ARE IN TURN RELEASED TO CONTRACTORS/SUB-CONTRACTORS ON INTEREST AND SUCH IN TEREST INCOME FORMS PART OF THE TOTAL INCOME UNDER THE. IT ACT. I NTEREST EXPENDITURE ARE ALSO INCURRED TO MEET OBLIGATION TO CONTRACTORS UNDER ARBITRATION PROCEEDING. THERE WAS ALSO SUFFIC IENT INTEREST FREE OWN FUND IN THE FORM OF SHARE NO. 2 OF APPEAL IS DI RECTED AGAINST DISALLOWANCE OF RS. 18,48,519/- MADE BY THE AO U/S 14A OF THE IT ACT AS THE AMOUNT OF EXPENDITURE INCURRED IN RELATI ON TO EARNING OF EXEMPT INCOME. THE APPELLANT HAS EARNED DIVIDEND ON MUTUAL FUND/SHARES OF RS. 2,50,51,655/- AND CLAIMED THE SA ME AS EXEMPT U/S 10(33)/10(34) OF IT ACT IN THE COMPUTATION OF I NCOME BUT NO DISALLOWANCE U/S 14A OF IT ACT TO EARN THIS EXEMPT DIVIDEND INCOME WERE OFFERED FOR TAXATION. SECTION 14A READ WITH RU LE 8D PROVIDES FOR DISALLOWANCE OF EXPENDITURES INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE IT ACT. IN THIS REGARD IT IS SEEN THAT THE AO HAS DISALLOWED RS. 18 ,48,519/- TREATING THE INVESTMENTS AS PER SCHEDULE 5 OF THE BALANCE SH EET AS INVESTMENTS FROM WHICH ,EXEMPT DIVIDEND INCOME OF R S. 2.50 CRORES WAS EARNED. FROM THE SUBMISSION OF THE APPELLANT IT IS EVIDENT THAT 8 THE INVESTMENTS AS APPEARING IN THE SCHEDULE 5 OF T HE BALANCE SHEET ARE JOINT VENTURES, THE INCOME FROM WHICH ARE DULY TAXABLE UNDER THE IT ACT. THEREFORE, THE ABOVE INVESTMENTS CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A. IN VIEW OF THE ABOVE, THE AO HAS ERRED IN MAKING THE DISALLOWANCE U/S I4A BY TAK ING INTO CONSIDERATION THE INVESTMENTS AS PER SCHEDULE 5 OF THE BALANCE SHEET. FROM THE SUBMISSIONS OF THE APPELLANT, THE ACCOUNT STATEMENT OF DIVIDENDS AND THE BALANCE SHEET IT IS EVIDENT THAT THE EXEMPT DIVIDEND INCOME IS EARNED FROM INVESTMENT OF RS. 4, 800 LACS IN LIQUID FUND CASH PLAN AS PER SCHEDULE 8 OF THE BALANCE SHE ET. THEREFORE, THE INVESTMENT OF R. 4,800 LACS MADE DURING THE REL EVANTT PREVIOUS YEAR IS REQUIRED TO BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION OF EXEMPT INCOME. FROM THE BALANCE SHEET IT IS ALSO SEEN THAT THERE W AS NO SECURED LOAN AS ON THE BEGINNING AND IN THE END OF FINANCIAL YEA R. UNSECURED LOANS HAVE COME DOWN FROM RS. 6713.57 LACS AS ON 31.03.20 07 TO RS. NIL AS ON 31.03.2008. THEREFORE. IT IS APPARENT THAT THERE IS NO NEW INTEREST BEARING SECURED AND UNSECURED LOANS DURING THE PREVIOUS YEAR RELEVANT TO AY 2008-09 AGAINST THE TAX FREE IN VESTMENTS MADE DURING THE RELEVANT PERIOD. IT IS SEEN THAT THE INT EREST EXPENDITURES ARE INCURRED ON CURRENT LIABILITIES OF INTEREST BEA RING MOBILIZATION ADVANCES TAKEN FROM CLIENTS. THE MOBILIZATION ADVAN CES ARE IN TURN RELEASED TO CONTRACTORS/SUB-CONTRACTORS ON INTEREST AND SUCH INTEREST INCOME FORMS PART OF THE TOTAL INCOME UNDER THE IT ACT. INTEREST EXPENDITURE ARE ALSO INCURRED TO MEET OBLIGATION TO CONTRACTORS UNDER ARBITRATION PROCEEDING. THERE WAS ALSO SUFFIC IENT INTEREST FREE OWN FUND IN THE FORM OF SHARE CAPITAL AND RESERVES & SURPLUS WHICH HAS GONE UP FROM RS. 15,103 LACS AS ON 31.03.2007 T O RS. LACS AS ON 31.03.2008. IN VIEW OF THE ABOVE, NO INDIRECT INTER EST EXPENDITURES CAN BE DISALLOWED U/S 14A READ WITH RULE 8D(2)(II) ON ACCOUNT OF THE TAX FREE INVESTMENT. THEREFORE, THE DISALLOWANCE OF INDIRECT 9 INTEREST EXPENDITURE OF RS. 5.03 LAKHS MADE BY THE AO CANNOT BE SUSTAINED. THE AO HAS HELD THE AMOUNT OF EXPEND ITURE DIRECTLY RELATED TO EXEMPT INCOME AS NIL. THEREFOR E, NO INTERFERENCE IS CALLED FOR ON THE ACCOUNT. CONSIDER ING THE ADMINISTRATIVE AND MANAGERIAL EXPENSES INCURRED IN RELATION TO EXEMPT INCOME, 0.5% OF AVERAGE VALUE OF INVESTMENT WHICH EXEMPT I EARNED CALLS FOR DISALLOWANCE UNDER RULE 8 D(2)(II) OF THE RULES WHICH WORKS OUT TO RS. 12 LAKHS [0.5% OF [4800 +0]/2 = 2400 LAKHS]. IN VIEW OF THE ABOVE, THE TOTAL DISAL LOWANCE MADE BY THE AO U/S 14A IS REDUCED FROM RS. 18.48 LAKHS T O RS. 12 LAKHS. THEREFORE, THIS GROUND OF APPEAL IS PARTLY ALLOWED. 7. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED O PINION THAT THE A.O HAS NOT COMPLIED WITH THE REQUIREMENT OF SECTION 14 A OF THE ACT FOR MAKING DISALLOWANCE IN THIS PROVISION. AS PER SUB-SECTION (2) OF SECTION 14A OF THE ACT, IF THE A.O HAVING DOUBTS ABOUT THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT, VIZ., SUO MOTO DISALLOWANCE OR NIL DISALL OWANCE MADE BY THE ASSESSEE. AT THIS JUNCTURE, IT WOULD BE APT TO CON SIDER THE RATIO OF THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TAISHIKA ENGINEERING WHEREIN IT WAS HELD THAT WHERE DISALLOWANCE OR NIL DISALLOWANCE MADE BY THE ASSESSEE IS FOUND TO UNSAT ISFACTORY ON EXAMINATION OF ACCOUNTS, THE A.O IS ENTITLED AND AUTHORIZED TO COMPUTE DEDUCTION U/R 8D OF THE RULES AND THIS PRECONDITION AND STIPULATION IS ALSO MANDATED IN SUB RULE (1) OF RULE 8D OF THE RULES. IN THE PRESENT C ASE, FROM THE RELEVANT 10 OPERATIVE PART OF THE ASSESSMENT ORDER PARA 4.1 TO 4.5, WE ARE UNABLE TO SEE ANY OBSERVATIONS AND CONCLUSION OF THE A.O WHICH ST ATES THAT THE A.O WAS NOT SATISFIED WITH THE CORRECTNESS OF NIL DISALLOWA NCE CLAIM OF THE ASSESSEE AND THUS, AS PER SUB-SECTION (2) OF SECTION 14A OF THE ACT, THE A.O CANNOT PROCEED TO DETERMINE THE AMOUNT OF EXPENDITURE INCU RRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOM E UNDER THIS ACT IN ACCORDANCE WITH THE METHOD AS PRESCRIBED IN RULE 8D OF THE RULES. THE LD. COUNSEL OF THE REVENUE SUBMITTED THAT THE LD. CIT(A ) IN PARA 4.1 OF THE IMPUGNED ORDER HAS CATEGORICALLY RECORDED DISSATISF ACTION RECORDING NIL DISALLOWANCE CLAIM OF THE ASSESSEE AND THE LD. CIT( A) HAS COTERMINOUS POWERS WITH THE A.O. THEREFORE, THE OBSERVATIONS A ND CONCLUSION OF THE LD. CIT(A) COMPLIED WITH THE REQUIREMENT OF SUB SECTION (2) OF SECTION 14A OF THE ACT. IN OUR HUMBLE UNDERSTANDING AND LANGUAGE USED BY THE LEGISLATURE IN SECTION 14A OF THE ACT. THE WORD A.O HAS BEEN USED AND WE ARE UNABLE TO SEE ANY INTENTION OF THE LEGISLATURE WHICH MANDA TES THAT COMPLIANCE OF SUB-SECTION (2) OF SECTION 14A OF THE ACT CAN BE MA DE AT THE FIRST APPELLATE STAGE BY THE LD. CIT(A). THUS, WE DECLINE TO ACCEP T THE CONTENTION OF THE LD. COUNSEL OF THE REVENUE. ON THE BASIS OF FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE DISALLOWANCE MADE BY TH E A.O AND PARTLY UPHELD BY THE LD. CIT(A) U/S 14A R.W.R. 8D(2)(II) OF THE RULES IS NOT SUSTAINABLE IN VIEW OF THE PROPOSITION LAID DOWN BY THE HON'BLE H IGH COURT OF DELHI IN THE CASE OF TAISHIKA [SUPRA] AND THUS WE DEMOLISH THE S AME. ACCORDINGLY, THE SOLE EFFECTIVE GROUND OF THE ASSESSEE FOR A.Y 2008- 09 IS ALLOWED. 11 ITA NO. 1239/DEL/2014 8. IN THIS APPEAL FOR A.Y 2009-10, THE ASSESSEE HAS RAISED AS MANY AS FOR GROUNDS OF APPEAL. EXCEPT FOR GROUND N O. 1, ALL OTHER GROUNDS ARE ARGUMENTATIVE AND SUPPORTIVE TO T HE MAIN GROUND NO. 1 WHICH READS AS UNDER: 1. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT DELETING THE DISALLOWANCE MADE BY THE AO AS PRIOR P ERIOD EXPENSES ON THE PRELIMINARY GROUND THESE WERE NOT I N FACT IN THE NATURE OF PRIOR PERIOD EXPENSES. 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D CAREFULLY PERUSED THE RELEVANT MATERIAL PLACED ON R ECORD BEFORE US INTER ALIA THE ASSESSMENT ORDER, APPELLATE ORDER AND THE ASSESSEES PAPER BOOK. THE LD. COUNSEL FOR THE ASSE SSEE CONTENDED THAT THE IMPUGNED CLAIM OF THE ASSESSEE W AS ALLOWED IN THE EARLIER AND SUBSEQUENT YEARS AND THESE ARE A CTUALLY EXPENDITURE WHICH GOT CRYSTALLISED DURING THE YEAR UNDER CONSIDERATION ONLY AND THUS NOT PRIOR PERIOD EXPENS ES AND THEREFORE, THE AO MAY KINDLY BE DIRECTED TO DELETE THE ADDITION. TO SUPPORT THIS CONTENTION, THE LD. AR PLACED RELIA NCE ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT I N THE CASE OF CIT VS. DINESH KUMAR GOEL REPORTED AT 331 ITR 10 [D EL] AND 12 SUBMITTED THAT WHEN THE ASSESSEE IS FOLLOWING THE M ERCANTILE SYSTEM OF ACCOUNTING, THEN THE FEES FOR FULL COURSE OR PACKAGE RECEIVED IN ADVANCE CANNOT BE TAXED IN THE YEAR OF RECEIPT AND WHEN SERVICES THERE AGAINST ARE TO BE RENDERED IN T HE NEXT F.Y. THEN THE INCOME SHOULD BE RECOGNIZED IN THE YEAR OF RECEIPT UNLESS SERVICES ARE RENDERED AND IN THIS SITUATION, INCOME DOES NOT ACCRUE TO THE ASSESSEE IN THE YEAR OF RECEIPT. THE LD. AR POINTED OUT THAT THIS ANALOGY AND PROPOSITION ALSO APPLIES TO CASES OF EXPENSES ESPECIALLY WHEN THE AO HAS NOT RA ISED ANY DOUBT ABOUT THE CORRECTNESS AND QUANTUM OF CLAIMING OF EXPENSES AND THE AO HAS NOT ALLEGED CLAIMED EXPENDITURE AS B OGUS. 10. THE LD. DR REPLIED THAT IN THE MERCANTILE SYSTE M OF ACCOUNTING, CLAIM OF ASSESSEE CANNOT BE ALLOWED AND THE AO WAS WELL WITHIN HIS POWER TO DISALLOW THE CLAIM. THE L D. DR STRONGLY SUPPORTED THE FIRST APPELLATE ORDER AND CONTENDED T HAT THE CIT(A) WAS QUITE JUSTIFIED AND CORRECT IN UPHOLDING THE CO RRECT ADDITION MADE BY THE AO. 11. ON CAREFUL CONSIDERATION OF THE ABOVE SUBMISSIO NS, AT THE VERY OUTSET, WE OBSERVE THAT IN PARA 3.2 OF THE ASSESSMENT ORDER THE A.O MADE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE IS A LI MITED COMPANY AND IT IS REQUIRED TO MAINTAIN ITS BOOKS OF ACCOUNTS AS PER P ROVISIONS OF SECTION 145(1) 13 OF THE ACT EITHER ON CASH BASIS OR ACCRUAL BASIS AN D THE ASSESSEE CANNOT ADOPT MIXED SYSTEM OF ACCOUNTING. THE A.O FURTHER OBSERVED THAT THE ASSESSEE BEING A LIMITED COMPANY IS REQUIRED TO KEE P ITS BOOKS OF ACCOUNTS ON ACCRUAL BASIS MANDATORILY AND IN AUDIT REPORT IN FORM 3CA IT HAS BEEN STATED THAT THE ASSESSEE MAINTAINS ITS BOOKS ON MER CANTILE BASIS. THE A.O FURTHER OBSERVED THAT THE EXPENDITURE WHICH HAVE NE ITHER ACCORD NOR INCURRED DURING THE PREVIOUS YEAR RELEVANT TO A.Y 2 009-10 ARE NOT ALLOWABLE AND THEREAFTER HE PROCEEDED TO CONCLUDE PRIOR PERIO D NEGATIVE INCOME AND EXPENDITURE OF RS. 70.62 LAKHS AND RS. 21.90 LAKHS RESPECTIVELY IS BEING DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSE SSEE. FIRST OF ALL, WE MAY POINT OUT THAT FROM A SPECIFIC QUERY FROM THE B ENCH, THE LD. COUNSEL OF THE REVENUE COULD NOT CONTROVERT THIS CONTENTION OF THE ASSESSEE THAT IN SIMILAR FACTS AND CIRCUMSTANCES OF THE CASE, SIMILA R CLAIM OF THE ASSESSEE HAS BEEN ALLOWED IN THE EARLIER AND SUBSEQUENT A.YS. I N PARA 3 OF THE ASSESSMENT ORDER THE A.O HIMSELF NOTED THAT THE ASS ESSEE HAS CLAIMED EXPENSES UNDER THE HEAD PRIOR PERIOD EXPENDITURE BUT THIS AMOUNT IS EXCESS OF SETTLEMENT AMOUNT WITH VENDORS MADE DURIN G HEAR YEAR AND SHORT SETTLEMENT OF CLAIMS OF INCOME FROM CLIENTS IS REFL ECTED AS NEGATIVE PRIOR PERIOD INCOME. IT WAS ALSO NOTED BY THE A.O THAT S INCE THESE EXPENSES/INCOMES ARE FOR THE PROJECTS COMPLETED IN THE PAST YEARS BUT WERE SUBJECTED TO FINAL PAYMENTS TO BE MADE TO THE VENDO R OR RECEIVABLE FROM CLIENTS THESE DIFFERENCE AROSE AND HENCE HAVE BEEN ACCOUNTED FOR DURING THE CURRENT PERIOD. THE A.O HAS NOT CONTROVERTED THE A BOVE EXPLANATION AND 14 SUBMISSION OF THE ASSESSEE AND PROCEEDED TO MAKE DI SALLOWANCE AND ADDITION BY OBSERVING THAT THE ASSESSEE IS MAINTAIN ING ITS BOOKS OF ACCOUNTS ON MERCANTILE BASIS. THEREFORE, THE EXPENDITURE WH ICH IS NEITHER ACCRUED NOR INCURRED IN THE PREVIOUS YEAR RELEVANT TO A.Y 2 009-10 ARE NOT ALLOWABLE. ACCORDINGLY, PAYMENTS MADE TO THE RESPECTIVE VENDOR S IN THIS SITUATION CANNOT BE HELD THAT THESE EXPENSES WERE NOT INCURRE D BY THE ASSESSEE DURING THE PREVIOUS YEAR RELEVANT TO A.Y 2009-10. ON THE BASIS OF FOREGOING DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT T HE CLAIM OF THE ASSESSEE WAS ALLOWED CONSISTENTLY DURING THE EARLIER AND SUB SEQUENT A.Y AND EXPENSES CLAIMED BY THE ASSESSEE WERE SHOWN UNDER THE HEARD OF PRIOR PERIOD EXPENSES BUT IT WAS INCURRED DURING THE PREVIOUS YE AR RELEVANT TO A.Y 2009- 10. THUS THE SAME CANNOT BE DISALLOWED AND ADDED T O THE INCOME OF THE ASSESSEE. THEREFORE, THE A.O IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AND CONSEQUENTLY THE SOLE EFFECTIVE GROUND OF THE A PPELLANT ASSESSEE FOR A.Y 2009-10 IS ALLOWED. 12. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSE E ARE ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 02.09. 2016. SD/- SD/- (J.S. REDDY) (C.M. GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 02 ND SEPTEMBER, 2016 VL/ 15 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI