DY. C.I.T. CENTRAL CIR.-1(3), Nagpur V. M/S SPACEWOOD FURNISHERS PVT. LTD , Nagpur

ITA 163/NAG/2019

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 5817 (ITAT-NAGPUR)
• Duration Of Justice: 5 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-07-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 30-06-2024
• Assessment Year: 2013-2014
• Appeal Filed On: 20-06-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ABHAY Y. MARATHE
• Keywords: Depreciation; Rectification of order
• Section: 147; 154; 143(3); 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI K.M. ROY, ACCOUNTANT, MEMBER ITA no.163/Nag./2019 (Assessment Year : 2013–14) Dy. Commissioner of Income Tax Central Circle–1(3), Nagpur ................ Appellant v/s M/s. Spacewood Furnitures Pvt. Ltd. T–48, MIDC, hingna, Nagpur PAN – AACCS4955R ................ Respondent Assessee by : Shri Abhay Agrawal Revenue by : Shri Abhay Y. Marathe Date of Hearing – 02/07/2024 Date of Order – 11/07/2024 O R D E R PER V.DURGA RAO, J.M. The present appeal has been filed by the Revenue challenging the impugned order dated 29/04/2019, passed by the learned Commissioner of Income Tax (Appeals)–3, Nagpur, [“learned CIT(A)”], for the assessment year 2013–14. 2. In its appeal, the Revenue has raised following grounds:– “1. On the facts and circumstances of the case, the Ld. CIT(Appeals) has erred in holding that the disallowance amounting to Rs.17,65,162, of prior period expenses cannot be subject matter of rectification order u/s 154 of the Act without appreciating the fact that the Auditor himself in the Tax Audit Report has reported the amount c prior period expenses as per clause 22.b, Annexure E of Form 3CD of his report hence the fact is apparent from records. 2. On the facts and circumstances of the case, the Ld.CIT(Appeals) ha erred in directing the AO to delete the addition of Rs.17,65,162/ without appreciating M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 2 the fact that otherwise also the prior period expenses are not an allowable expenditure unless a provision is mad for the same. The AO was therefore justified in disallowing the period expenditure amounting to Rs.17,65,162/-. 3. Any other ground which may be taken with the permission of the Hon'ble Tribunal.” 3. Facts in Brief:– The assessee is engaged in the business of manufacturing, import, export, trading and dealing in all kinds of furniture, office systems and furnishings. For the year under consideration, the assessee filed its return of income on 29/11/2013, declaring total income of ` 3,24,67,290. The Assessing Officer had concluded the assessment proceedings under section 143(3) vide order dated 21/03/2016 and made disallowance of expenditure in respect of detention / demurrage charges of ` 4,07,737. It appears that the then CIT(A)-3 had deleted the disallowance of ` 4,07,737, vide order dated 25/09/2017. Subsequently, the Assessing Officer has issued a show cause notice under section 154 of the Act dated 09/03/2018 proposing to rectify a mistake and thereby sought disallowance of prior period expenses of ` 17,65,162. The Assessing Officer passed the order under section 154 of the Act dated 26/03/2018, by disallowing amount of ` 17,65,162, as prior period expenses. Aggrieved against the order passed under section 154 of the Act, the assessee filed appeal before the first appellate authority. 4. The learned CIT(A), considering the facts and circumstances and judicial precedents cited, held that the disallowance of prior period expenses of ` 17,65,162, cannot be a subject matter of rectification under section 154 of the Act. His observations are reproduced below:– M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 3 “5.2 I have considered the submissions of the appellant that, the assessment proceedings of Spacewood Furnishers Pvt Ltd (assessee) and Spacewood Office Solutions Pvt Ltd (SOS) (i.e. sister concern) were before the same Assessing officer namely DCIT Central Circle-1(3) and hearings were scheduled on the same dates and time. In the case of SOS, the then AO had issued show cause notice dated 26th of February 2016 asking to show cause as to why prior period expenses debited to the profit and loss account should not be disallowed. The appellant submitted that, similarly, without issuing separate show cause notice, the appellant was asked to furnish details and replies in respect of prior period expenses of Rs. 17,65, 162/-. The appellant also submitted that it had filed submission in the case of SOS on 8th March 2016 providing its explanation as to why the prior period expenses were deductible in F.Y. 2012-13 and the AO did not make any additions for prior period expenses in case of SOS. The appellant further submitted that, it had produced relevant details relating to prior period expenses and no additions were made in the case of appellant considering the submission made in the case of SOS. Thus the AO was satisfied with appellant's submission and did not make any disallowance during the assessment proceedings. 5.3 On merits, the appellant submitted that it has an arguable case that prior period expenses were quantified and crystallized during A.Y. 2013-14 and hence, are deductible in A.Y. 2013-14 (i.e. year under consideration). The appellant has clarified that, certain files containing the bills and vouchers of general nature, i.e., local purchases, transport expenses, consultancy fees, octroi, plant repairs and maintenance pertaining to financial year 2011-12 were misplaced in stores Department and did not reach the accounts department before the close of financial year 2011-12. It was only when the vendor parties made reminder calls to the appellant for release of payment, efforts were made to locate the files and it was found that, the expenses amounting to Rs.16,30,873/- inadvertently remained to be accounted during financial year 2011-12. The appellant submitted that, such expenses were considered and approval was given by the management to account for the same during financial year 2012-13 and payment was released. The appellant has argued that under the aforesaid circumstances, the expenses though related to the earlier year but the corresponding liability had crystallized during financial year 2012-13 only. Therefore, the expenses should not be treated as prior period expenses. The appellant further submitted that, there was no prejudice caused to the Income Tax 19 Department since, the appellant was chargeable to tax at maximum rates for both the relevant financial years. The appellant placed reliance on following decisions:  CIT v. Indian Petrochemicals Corporation Ltd (74 Taxmann.com 163) (Gujarat HC);  Toyo Engg. India Ltd v. JCIT (100 TTJ 373) (Mumbai ITAT). 5.4 The appellant alternatively submitted that, issue regarding the allowability or otherwise of prior period expenses can only be decided by making full investigation and examination of the nature of expenses and only then it could be decided after such due process of reasoning given by any authority. Thus, in any case the issue at best can be said to be debatable in nature and hence, cannot be a subject-matter of a mistake apparent from the record, which is rectifiable under section 154. M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 4 5.5 I am in agreement with the appellant's contentions. The appellant has contended that the then AO has examined the issue of prior period expenses and being satisfied did not make any disallowance in this regard. The appellant has submitted that a separate show cause notice was issued in appellant's sister concern case, on the same issue while both scrutiny assessments were pending before the same AO. However, no separate show cause notice was issued in appellant's case though, the appellant contends that it had filed similar documents before the AO. I find that the appellant has mentioned the aforesaid facts before the present AO in its reply against the section 154 notice, against which the AO has not taken any objection (copy of submission dated 19/03/2018 is placed on record at pages 2-6 of factual Paper Book). Therefore, the appellant's contention cannot be simply brushed aside and thus, if a particular expense been verified during the course of assessment proceedings, provisions of section 154 cannot be invoked for making disallowance of same expense which will amounts to change of opinion or review which is not permissible under the Act. 5.6 The powers of AO while invoking section 154 are restricted to make only those rectifications which are apparent on record. Even on merits, the issue at best can be said to be debatable in nature requiring further analysis and reasoning. I also find force in appellants alternative submission that, merely because the expenses related to the previous year, that by itself cannot be a basis to hold that the prior period expenses debited in the profit and loss account are prima facie not allowable unless and until an enquiry has been made to verify and ascertain as to when these expenses have actually been crystallized and ascertained. Therefore, I find that, disallowance of prior period expenses under the garb of rectification is beyond the ambit of section 154 since, only apparent mistakes can be rectified and not debatable issues which requires verification and analysis. The appellant's reliance on following judicial precedents have been found to be proper and supports appellant's contention: 1. ACIT v. Indian Farmer Fertilizer Co-operative Ltd (51 SOT 112) (Delhi ITAT) "It is well-settled that merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallized in that year on the basis of maintaining accounts on the mercantile method. In each case, where the accounts are maintained on the mercantile basis, it has to be found in respect of any claim, whether such liability was crystallized and quantified during the relevant previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a payment and its acceptance by the assessee and such liability has been actually claimed and paid in the later years, it cannot be disallowed as a deduction merely on the basis the accounts are maintained on mercantile basis and is related to a transaction of the earlier year. [Para 16] In these circumstances, it is, therefore, held that allowability or otherwise of prior period expenses claimed in the profit and loss account is a debatable matter and, therefore, it does not come within the purview of section 154. [Para 17]" (Emphasis Supplied) M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 5 2. CIT v. Hackbridge Hewittic & Easun Ltd (220 Taxman 171) (Mad HC) ITO v. Volkart Brothers (82 ITR 50) (SC). 4. CIT v. R. K. Shrivastav (HUF) (298 ITR 53) (Delhi HC). 5.7 Considering the facts and circumstances and judicial precedents cited, the appellant deserves to succeed as the disallowance of prior-period expenses of Rs.17,65,162/- cannot be subject matter of rectification under section 154 of the Act. Therefore, the AO is directed to delete the addition of Rs.17,65,162/-. Therefore, Ground Nos. 1, 2 and 4 are allowed.” 5. Having heard the rival arguments and on a perusal of the material available on record, we find that identical issue on similar facts and circumstances, the Co–ordinate Bench of the Tribunal in Atul Shirodkar & Associates v/s ITO, ITA no.1480/Mum./2021, order dated 07/07/2022, has decided the issue in favour of the assessee and against the Revenue. The relevant findings of the Tribunal are reproduced below:– “9. We have considered the rival submissions and perused the material available on record. In the present case, the proceedings resulting in the present appeal is pursuant to the order passed by the Assessing Officer under section 154 of the Act. After passing the assessment order under section 143(3) r/w section 147 of the Act, the Assessing Officer found that the assessee has debited prior period expenses of Rs.17,72,713, to the Profit & Loss Account and Rs.60,243, on account of loss on sale of RMC, which according to the Assessing Officer are not allowable. We find that the Co– ordinate Bench of the Tribunal, on similar issue in ACIT v/s Indian Farmer Fertilizer Co–operative Ltd., ITA no.1154 & 1605/Del./2011, vide order dated 22/07/2011, observed as under:– “12. We have heard the learned counsel for the assessee. No one was present for the department. However, an adjournment application from the department was placed on record but looking to the issue involved in this appeal, we find it proper to dispose of this appeal as well established proposition of law was involved herein. 13. It is not in dispute that prior period expenses and depreciation 60% on the computer items has been disallowed by the AO by way of order passed under sec. 154 of the Act. It is also not in dispute that originally, the assessment was completed under sec. 143(3) of the Act, which was revised in pursuance to the order passed under sec. 250 of the Act. Section 154 provides that with a View to rectifying any mistake apparent from the record an Income-tax authority referred to in section 116 may amend any order passed by it under the provisions of this Act. So, as could be seen from the provisions of sec. 154 of the Act, it is only in case if a mistake has crept into the order, which is apparent from the record, that the AO has got the authority to amend the order passed by him under the provisions of sec. 154 of the Act. It is well M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 6 settled that in order to invoke the provisions of sec. 154 of the Act to rectify the mistakes, the subject matter must be beyond doubt or debate and in such circumstances, only the mistake committed could be amended. In other words, a debatable matter does not come within the purview of sec. 154 of the Act. 14. In the present case, the assessee debited a sum of Rs.721.15 lakhs in the profit & loss account under the head "Prior period expenditure". Whether prior period expenditure claimed in the profit & loss account is allowable in the year in which it is debited in the Profit & Loss Account, it is to be determined as to when the expenses were actually crystallized. Merely because the expenses related to the prior period, that by itself cannot be a basis to hold that the prior period expenses debited in the profit & loss account are prima facie not allowable unless and until an enquiry has been made to verify and ascertain as to when these expenses have actually been crystallized and when the legal liability to pay these amounts has actually been crystallized and ascertained. Therefore, in order to disallow prior period expenses debited in the profit & loss account, the AO has to examine and verify the nature of these expenses and then to ascertain as to when the assessee's liability to pay these expenses has actually been crystallized so as to allow the same as deduction in case where the assessee follows mercantile system of accounting. In other words, the issue regarding allowability or otherwise of prior period expenses can only be decided by making full investigation and examination of the nature of expenses and then it can be decided only after a due process of reasoning given by any authority. In this view of the matter, the allowability of prior period expenses or otherwise, cannot be a subject matter of a mistake apparent from the record, which is rectifiable u/s 154 of the Act. 15. The question is as to whether the assessee is entitled for deduction on account of prior period expenses debited in the Profit & Loss Account or not, is a matter to be decided on the merits after examining and verifying the nature of expenses and after ascertaining when the expenses were actually crystallized or when the liability to pay these expenses was crystallized and it thus, cannot be said to be an error apparent on record so as to rectify the same under see. 154 of the Act. 16. It is well settled that merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallized in that year on the basis of maintaining accounts on the mercantile method. In each case, where the accounts are maintained on the mercantile basis, it has to be found in respect of any claim, whether such liability was crystallized and quantified during the relevant previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a payment and its acceptance by the assessee and such liability has been actually claimed and paid in the later years, it cannot be disallowed as a deduction merely on the basis the accounts are maintained on mercantile basis and is related to a transaction of the earlier year. 17. In these circumstances, we, therefore, hold that allowability or otherwise of prior period expenses claimed in the profit & loss account is a debatable matter and, therefore, it does not come within the purview of sec. 154 of Act.” 10. The Hon'ble Supreme Court in T.S. Balram, ITO v/s Volkart Brothers, [1971] 82 ITR 50 (SC) held that for initiating proceedings under section 154 of the Act, the mistake apparent from record must be an obvious and patent mistake and not something which can be established by long drawn process of reasoning on points on which there may conceivably be two opinions. In view M/s. Spacewood Furnitures Pvt. Ltd. ITA no.163/Nag./2019 Page | 7 of the above, as is evident from the facts available on record, the issue of prior period expenses, inter–alia, on which rectification under section 154 of the Act was done by the Assessing Officer in the present case is open to divergent views and the same requires long drawn process of examination, therefore, we are of the view that rectification order passed under section 154 of the Act on this issue clearly falls beyond the ambit of expression “mistake apparent from the record”. Consequently, ground no.2, raised in assessee’s appeal is allowed.” 6. The learned Departmental Representative could not adduce any corroborative evidence to enable this Bench to take a view other than the view taken by the Co–ordinate Bench of the Tribunal cited supra, respectfully following the above judicial precedence and consistent with the view taken therein, we uphold the order passed by the learned CIT(A) by dismissing the grounds raised by the Revenue. 7. In the result, Revenue’s appeal is dismissed. Order pronounced in the open Court on 11/07/2024 Sd/- K.M. ROY ACCOUNTANT MEMBER Sd/- V. DURGA RAO JUDICIAL MEMBER NAGPUR, DATED: 11/07/2024 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Nagpur; and (5) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Sr. Private Secretary ITAT, Nagpur