Escorts Ltd., Faridabad V. DCIT, New Delhi

ITA 4235/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3323 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 31-05-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 04-08-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R M MEHTA
• Keywords: Transfer pricing; International transaction; Additional evidence
• Section: 92C; 92

Judgement Text

ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 2 : NEW DELHI BEFORE SHRI H.S.SIDHU , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 4235/DEL/2014 (ASSESSMENT YEAR: 2005 - 06 ) ESCORTS LTD, CORPORATE TAXATION, 15/5, MATHURA ROAD, FARIDABAD PAN:AAACE0074B VS. DCIT, CIRCLE - 11(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R . M . MEHTA, CA REVENUE BY: SHRI PIYUSH JAIN, CIT DR DATE OF HEARING 12/12 /2017 DATE OF PRONOUNCEMENT 0 9 / 0 3 / 2018 O R D E R PER PRASHANT MAHARISHI, A. M. 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD CIT ( A) - XX, NEW DELHI DATED 30.06.2014 FOR THE ASSESSMENT YEAR 2005 - 06. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS & CIRCUMSTANCES OF THE CASE & IN LAW, THE ID. TRANSFER PRICING OFFICER (TPO)/LD. ASSESSING OFFICER(AO) HAVE ERRED IN MAKING AN ADDITION OF RS. 27328840/ - AS DIFFERENCE IN ARMS LENGTH PRICE DETERMINED BY THE TPO AND TH E APPELLANT IN RESPECT OF SALE OF TRACTORS TO ASSOCIATED ENTERPRISES, AND THE ID. CIT(APPEALS) HAS ERRED IN UPHOLDING THE ADDITION. IN DOING SO THE TPO/AO/ CIT ( A) HAVE ERRED IN THE FOLLOWING: - 1.1 NOT CONSIDERING THE FACT THAT THE ALP DETERMINED BY THE APPELLANT AT RS. 72.61 CRORE FALLS WITHIN SAFE HARBOUR RANGE OF +/ - 5% OF THE ALP OF 75.34 CRORE DETERMINED BY TPO IN RESPECT OF SALE OF TRACTORS. 1.2 IGNORING THE FACT THAT THE TPO BY USE OF INTERNAL C OMPARABLES ARRIVED AT ARITHMETIC MEAN MARGIN PER TRACTOR EARNED BY EXPORT OF TRACTORS TO UNRELATED PARTIES IN SEVERAL COUNTRIES & THUS OUGHT TO HAVE ALLOWED THE BENEFIT OF 5% SAFE HARBOUR RANGE MENTIONED IN PROVISO TO SECTION 92C(2) OF THE ACT. 1.3 NOT CO NSIDERING THE FACT THAT THE EXPORT OF TRACTORS TO UNRELATED PARTIES IN VARIOUS UNDER - DEVELOPED COUNTRIES IS IN SMALL NUMBERS AS COMPARED TO EXPORT OF BIG QUANTITIES TO CONTROLLED ENTERPRISES IN DEVELOPED COUNTRIES & WHEN VOLUMES ARE HIGH THE MARGINS ARE GE NERALLY LOW & VICE VERSA. THE MARKETING CONDITIONS ALSO VARY IN DIFFERENT COUNTRIES. 2 ON THE FACTS & CIRCUMSTANCES OF THE CASE & IN LAW, THE ID. ASSESSING OFFICER HAS ERRED IN DISALLOWING RS. 102583794/ - ON ACCOUNT OF PRIOR PERIOD EXPENSES AND THE CIT(A) HAS ERRED IN ALLOWING RELIEF OF ONLY RS. 1312018/ - & SUSTAINING THE DISALLOWANCE OF ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 2 THE BALANCE AMOUNT. THE CIT(A) HAS NOT APPRECIATED THE FACT THAT THE SAID EXPENDITURE ACCRUED IN THE RELEVANT ASSESSMENT YEAR AND IS ACCOUNTED FOR AS PER CONSISTENT ACCOUN TING PRACTICE FOLLOWED BY THE APPELLANT. 2. BRIEF FACTS OF THE CASE I S THAT APPELLANT MANUFACTURES TRACTORS PRIMARILY FOR DOMESTIC MARKET AND ALSO MAKES EXPORT TO ITS ASSOCIATED ENTERPRISE IN POLAND AND USA AND ALSO TO NON - ASSOCIATED ENTERPRISE IN SEVERAL OTHER COUNTRIES. ASSESSEE FILED ITS RETURN OF INCOME ON 31/10/2005 DECLARING LOSS OF RS. 119, 39, 92, 230/ , ASSESSMENT UNDER SECTION 143 (3 ) OF THE ACT WAS MADE ON 15/12/2008 AT LOSS OF RS. 73, 44, 21, 077/ . 3. DURING THE YEAR ASSESSEE HAS ENTERED INTO AN INTERNATIONAL TRANSACTION OF RS. 7 8, 13, 27, 584/ WHERE THE LD. TRANSFER PRICING OFFICER HAS PROPOSED AN ADDITION OF RS. 2 732 8840/ . THE BRIEF OF THE INTERNATIONAL TRANSACTION I S THAT ASSESSEE HAS SOLD AGRICULTURAL TRACTOR SPARE PARTS AND AGRICULTURAL TRACTOR S. IT ADOPTED THE RESALE PRICE METHOD (RPM) A S THE MOST APPROPRIATE METHOD. ASSESSEE SELECTED SIX COMPARABLES, COMPUTED THEIR PLI AT 12.12%, AND COMPARED ITS MARGIN OF 21.64 %. THEREFORE, IT WAS STATED THAT INTERNATIONAL TRANSACTION IS AT ARMS LENGT H. THE LD. TRANSFER PRICING OFFICER COMPARED THE MARGIN OF THE SALE OF TRACTORS SOLD TO UNRELATED PARTY AT RS. 76526 / - AND CONSIDERED THE PER UNIT MARGIN FROM SALE OF TRACTORS TO USA AND POLAND TO ITS AE OF RS. 648 2 2/ AND WORKED OUT DIFFERENCE OF MARGIN PER TRACTOR OF RS. 11704/ . THE LD. TRANSFER PRICING OFFICER FURTHER MULTIPLIED THE DIFFERENCE OF THIS MARGIN WITH THE NUMBER OF TRACTORS SOLD TO AE OF 2335 NUMBER OF TRACTORS AND WORKED OUT THE TOTAL ADJUSTMENT OF RS. 27328840 / - ON ACCOUNT OF ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION. 4. ABOVE ISSUE WAS CONTESTED BY THE ASSESSEE BEFORE THE LD. CIT (A) AND SUBMITTED THAT THE ARM S LENGTH PRICE DETERMINED BY THE LD. TRANSFER PRICING OFFICER IS WITHIN THE SAFE HARBOR PERCENTA GE OF _+ 5% OF THE ARMS LENGTH MARGIN DECLARED BY THE APPELLANT AND THEREFORE THE ADDITION IS LIABLE TO BE DELETED ON THIS GROUND. THE ASSESSEE RELIED UPON THE DECISION OF THE COORDINATE BENCH IN CASE OF DCIT VERSUS FOSTER SOFTWARE PRIVATE LIMITED 49 SOT 1 30 (D EL ) . THE LD . CIT (A) DENIED THE BENEFIT 5% SAFE HARBOR HOLDING THAT SINCE ONLY ONE PRICE HAS BEEN USED FOR APPLYING INTERNAL CUP IN THE INSTANT CASE THE BENEFIT OF 5% RANGE WOULD NOT BE AVAILABLE TO THE APPELLANT. THE LD. CIT (A) HAS UPHELD THE ADDIT ION MADE BY THE LD. AO TO THE ARMS LENGTH PRICE. AGGRIEVED WITH THE ORDER OF THE LD. CIT (A) THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD AR SUBMITTED THAT LD CIT (A) HAS COMPLETELY MISINTERPRETED THE ISSUE BY OVERLOOKING THE FACT THAT THE PER TRACTOR MARGIN COMPUTED IN THE CASE OF UNCONTROLLED TRANSACTIONS IS AN AVERAGE OF SEVERAL EXPORT INVOICES RAISED DURING THE YEAR ON EXPORTS TO UNCONTROLLED PARTIES IN VARIOUS COUNTRIES. HE REACHED HIS CONCLUSION ONLY ON THE BASIS OF ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 3 SUMMARY SHEET OF TRANSACTIONS W ITH AES AND NON - AES WHICH SHOWS AVERAGE PER TRACTOR REALIZATION FORM AES AND NON - AES . HE FURTHER SUBMITTED THAT ONCE AN AVERAGE PRICE OR AVERAGE MARGIN IS AVAILABLE IN THE CASE OF COMPARABLES, THE ASSESSEE BECOMES ENTITLED TO THE CONSEQUENTIAL BENEFI T OF THE PROVISO TO SECTION 92C ( 2). HE SUBMITTED THAT IT NEEDS TO BE HIGHLIGHTED THAT THE LAW ON THE QUESTION OF ALLOWING TOLERANCE LIMIT OF 5% IS MORE OR LESS SETTLED WITH A NUMBER OF JUDICIAL PRONOUNCEMENTS ON THE ISSUE. HE SUBMITTED COMPILATION OF T HE JUDGMENTS RELIED UPON. HE MAINLY RELIED UP ON [2017] 79 TAXMANN.COM 246 (DELHI - TRIB.) HI - LEX INDIA (P.) LTD. V. ACIT, GURGAON CIRCLE, GURGAON. , [2012] 26 TAXMANN.COM 102 (MUM.) ACIT, 8(1), MUMBAI V.GENESYS INTERNATIONAL CORPN. LTD. 6. LD DR SUPP ORTED THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT IN ABSENCES OF MULTIPLES PRICES BENEFIT OF 5 % RANGE IS CORRECTLY DENIED TO THE ASSESSEE. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . BRIEF FACTS ARE THAT THE APPELLANT MANUFACTURES TRACTORS PRIMARILY FOR DOMESTIC MARKET. EXPORTS ARE MADE TO ASSOCIATE ENTERPRISES (AES) IN POLAND AND USA AND TO NON - AES IN SEVERAL OTHER COUNTRIES. THE LD AO / TPO COMPUTED THE ALP OF THE INTERNATIONAL TRANSACTION OF SALE OF TRACT ORS BY BENCHMARKED THE INTERNATIONAL TRANSACTIONS WITH AES BY COMPARING AVERAGE PER UNIT TRACTOR MARGIN EARNED ON EXPORTS TO AES WITH SIMILAR MARGIN ON EXPORTS TO NON - AES AS FOLLOWS . - AVERAGE PER TRACTOR MARGIN IN CASE OF AES (A) RS. 64822 - AVERAGE PER TRACTOR MARGIN IN CASE OF NON - AES (B) RS. 76526 - DIFFERENCE IN MARGINS (B - A) RS. 11704 - NUMBER OF TRACTORS EXPORTED TO AES 2335 - TP ADJUSTMENT (11704 X 2335) RS. 27328840 THE LD A O WHILE DETERMINING ALP COMPARED THE MARGINS OF VARIOUS TRACTORS SOLD TO NON AE AND COMPARED IT WITH MARGIN OF 2335 TRACTORS SOLD BY ASSESSEE TO ITS AE. DIFFERENCE OF THAT MARGIN WAS DETERMINED AT ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION WITH AE AND ADJUSTMENT WAS MADE . THE ADJUSTMENT OF 2.73 CRORES IS 3.76% OF THE ALP DECLARED WHEREAS THE SECOND PROVISO TO SECTION 92C ( 2) AS CLAIMED, ENTITLES THE ASSESSEE TO A TOLERANCE MARGIN OF 5%. THE LD. TPO DID NOT CONSIDER 5% SAFE HARBOR AVAILABLE AS PER PROVISO TO SECTION 92C ( 2) BEFORE MAKING ADJUSTMENT TO DECLARED PRICE. ON APPEAL, THE CIT (A) REJECTED THE PLEA OF TOLERANCE MARGINS OF 5% ON THE GROUND THAT ONLY ONE PRICE HAS BEEN DETERMINED FOR ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 4 COMPARABLES ON WHICH NO TOLERANCE MARGIN OF 5% IS AVAILABLE. T HE PROVISION S OF SECTION 92 C (2) PROVIDES THAT (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB - SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: [PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN.] 8. ACCORDING TO US, THE LD AO HAS DETERMINED THE ALP OF SALE PRICE OF 3225 TRACTORS TO A E BY COMPARING THE MARGIN OF THE TRACTORS SOLD TO AE WITH TRACTORS SOLD TO NON AE ADOPTING CUP USING INTERNAL COMPARABLES. THE LD AO HAS COMPARED THE MARGIN OF THE SALE OF ALL TRACTORS TO AE WITH MARGIN OF SALE OF TRACTORS TO NON AE WHICH ARE VARIOUS TRANSACTIONS OF THE SALE OF TRACTORS TO AE AND WHICH IS NOT ONE PRICE BUT MULTIPLE PRICES OF SALE OF TRACTORS, THEREFORE, , ASSESSEE DESERVES TO BE ALLOWED THE BENEFIT OF 5 % RANGE AND THEREFORE WE REVERSE THE FINDING OF THE LOWER AUTHORITIES AND DIRECT LD AO TO GRANT BENEFIT OF MARGIN OF 5 % ON THE ALP DETERMINED BY THE LD TPO/A O AND RECOMPUTE THE ADJUSTMENT ACCORDINGLY. IN THE RESULT, GROUND NO 1 OF THE APPEAL IS ALLOWED ACCORDINGLY. 9. GROUND NO 2 OF THE APPEAL IS AGAINST THE ORDER OF THE LD. CIT (A) IN ARRIVING RELIEF OF RS. 1312018/ ONLY OUT OF THE DISALLOWANCE OF RS. 102583794/ ON ACCOUNT OF PRIOR PERIOD EXPENSES. THE FACTS SHOWS THAT IN THE TAX AUD IT REPORT THE ASSESSEE COMPANY SUBMITTED THAT THE PRIOR P ERIOD EXPENSES AMOUNTING TO RS. 1 0258 3794/ HAS BEEN DEBITED. ON VERIFICATION OF THE DETAILS IT WAS NOTED BY THE LD. AO THAT THESE INCLUDE PERSO NAL EXPENSES AMOUNTING TO RS. 2 10261/ , SALES AND ADM INISTRATION EXPENSES OF RS. 101067785/ AND PURCHASE AND RAW MATERIAL CONSUMPTION OF RS. 112 2465/ AND OPERATING EXPENSES OF RS. 183283/ . THE LD. ASSESSING OFFICER NOTED THAT ASSESSEE COMPANY HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING HENCE EXP ENSES WERE DISALLOWED FO R THE YEAR UNDER CONSIDERATION A S THE Y ARE PERTAINING TO THE PRIOR PERIOD. THE ASSESSEE AGITATED THE ISSUE BEFORE THE LD. CIT (A) AND SUBMITTED THAT SUCH EXPENDITURE FRUCTIFIED IN THE SUBSEQUENT ASSESSMENT YEAR BECAUSE OF NEGOTIATIO N, DISPUTES, RATES SETTLEMENT ETC A S ALSO THE FINAL SANCTION FOR PAYMENT THEREOF HAS BEEN RECEIVED IN THOSE YEARS AND THEREFORE THIS EXPENDITURE HAS ACCRUED DURING THE YEAR AS IT CRYSTALLIZED DURING THE YEAR. WITH RESPECT TO THE SEVERAL EXPENDITURE , IT WAS SUBMITTED BEFORE THE LD. CIT (A) THAT THERE ARE FEW CASES WHERE VOUCHERS ARE NOT TRACEABLE AND THEREFORE AN ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 5 APPLICATION UNDER RULE 46A WAS MADE FOR ADMISSION OF ADDITIONAL EVIDENCES. THE LD. ASSESSING OFFICER OBJECTED TO THE ADMISSION OF ADDITIONAL EVIDEN CES IN THE REMAND REPORT. HOWEVER, THE LD. CIT (A) ADMITTED THOSE ADDITIONAL EVIDENCES AND AFTER ANALYSIS DECIDED THE ISSUE. THE LD. CIT (A) HAS CONFIRMED THE DISALLOWANCE OF THIS 117739/ BECAUSE OF PUBLICITY AND CREATIVE DESIGN EXPENDITURE HOLDING THAT T HIS EXPENDITURE PERTAIN TO EARLIER YEARS AND THE BILLS ALSO HAVE BEEN RAISED IN THE EARLIER YEARS. WITH RESPECT TO THE PUBLICITY CREATIVE DESIGNING EXPENDITURE OF RS. 174304 / - HE ALSO CONFIRMED THE DISALLOWANCE ON THE SAME REASON. HE ALSO CONFIRMED THE DIS ALLOWANCE BECAUSE OF REPAIR AND MAINTENANCE EXPENDITURE 199 7474/ WHICH IS ALLEGEDLY INCURRED BY THE ASSESSEE BECAUSE OF UPDATION OF THE SOFTWARE FRO M ORACLE INDIA PRIVATE LIMITED V IDE INVOICE DATED 11583 - DATED 7/5/2004. THE LD. CIT (A) HAS DISALLOWED THIS EXPENDITURE HOLDING THAT THOUGH IT IS WRON GLY CLASSIFIED BY THE ASSESSEE A S PRIOR P ERIOD EXPENDITURE BUT ACCORDING TO HIM THIS PERTAINS TO THE PURCHASE OF SOFTWARE PACKAGES AND THEREFORE IT IS A CAPITAL EXPEND ITURE. R EPAIRS AND MAINTENANCE EXPENDITURE THE LD. CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE WITH RESPECT TO RS. 75 000/ . SIMILARLY THE LD. CIT (A) HAS ANALYZED THE 22 ITEMS OF SUCH EXPENDITURE AND CONFIRMED THE DISALLOWANCE OUT OF PRIOR PERIOD EXPENDITUR E OF RS. 10127 1776/ AGAINST THE ADDITION OF RS. 1 0258 3794/ MADE BY THE LD. ASSESSING OFFICER. ASSESSEE IS MAINLY AGITATED BY THE CONFIRMATION OF DISALLOWANCE OF SALES INCENTIVE AND SALES COMMISSION EXPENSES. 10. ON APPEAL BEFORE US THE LD. AUTHORIZED R EPRESENTATIVE VEHEMENTLY CONTESTED THAT APPELLANT HAS FILED COMPLETE DETAILS OF PRIOR P ERIOD EXPENSES ALONG WITH JUSTIFICATION BEFORE THE LD. CIT (A) , WHO REFERRED THE MATTER TO THE AO FOR REMAND REPORT AND AFTER THAT HE ADMITTED THE ADDITIONAL EVIDENCES B UT ONLY GIV E RELIEF TO THE EXTENT OF RS. 1 312018/ OUT OF THE TOTAL DISALLOWANCE OF RS. 1 0258 3794/ . THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THE MAJOR DISALLOWANCE CONFIRMED BY THE LD. CIT (A) IS WITH RESPECT TO SALES INCENTIVE TO THE DEALERS OF RS. 7.75 CRORES OUT OF THE TOTAL DISALLOWANCE OF RS. 10.25 CRORES. ACCORDING TO HIM, THE APPELLANT HAD FIXE D TARGET FOR ITS DEALERS FOR THE 15 MONTHS ACCOUNTING PERIOD ENDING ON 30/06/2004 AND BASED ON THE ACHIEVEMENT OF EACH DEALER THE SALES INCENTIVE HA D TO BE DETERMINED AFTER THE END OF THE FINANCIAL YEAR AS AT 30/6/2004. THE APPELLANT HAS COMPUTED THE AMOUNT OF SALES INCENTIVE PAYABLE TO EACH DEALER BY THE MONTH OF SEPTEMBER 2004 AND ACCORDINGLY ISSUED CREDIT NOTES ON 30/9/2004 TO THE QUALIFYING DEALER S. THE APPELLANT WAS NOT IN A POSITION TO MAKE A PROVISION IN ITS ACCOUNT FOR THE YEAR ENDED ON 31/03/20 04 BECAUSE THE SALES INCENTIVE COULD NOT HAVE BEEN DETERMINED ON THE SAID DATE BECAUSE THE INCENTIVE DETERMINATION PERIOD HAS NOT EXPIRED. HE THEREFORE SUBMITTED THAT THE LD. CIT (A) SHOULD HAVE ALLOWED THE ABOVE DEDUCTION AND DELETED THE DISALLOWANCE. WITH R ESPECT TO THE OTHER ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 6 SUM OF 1.3 3 CRORES BECAUSE OF COMMISSION PAID FOR THE PREVIOUS PERIOD , HE SUBMITTED THAT THIS EXPENDITURE ALSO DOES NOT BELONG TO THE EARLIER YEAR BUT CRYSTALLIZED AS EXPENDITURE DURING THE YEAR. HE HEAVILY RELIED UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF CIT VERSUS SHRIRAM PISTON RINGS LIMITED 174 TAXMAN 147 (2008) (DELHI) AS WELL AS THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN CASE OF SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES LTD VERSUS CIT 80 TAXMAN 61 (GUJARAT) AND CIT VERSUS EXXON MOBIL LUBRICANTS PRIVATE LIMITED O F HONBLE DELHI HIGH COURT. HE FURTHER REFERRED TO THE DECISION OF THE CIT (A) FOR ASSESSMENT YEAR 2003 0 4 FOR ALLOWING FULL RELIEF BASED ON THE ITATS ORDER IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2001 02. THEREFORE, IT IS SUBMITTED THAT THE DISALL OWANCE BY THE LD. CIT (A) DESERVES TO BE DELETED. 11. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTED THE LD. CIT (A) AND SUBMITTED THAT ASSESSEE HAS FAILED TO FURNISH DETAILS BEFORE THE LD. ASSESSING OFFICER AND SUBMITTED THAT IT IS FOR THE LD. CIT ( A) WHO AFTER ADMITTING THE ADDITIONAL EVIDENCES AND ANALYZING THEM IN COMPLETE AND IS HAS CONFIRMED THE DISALLOWANCE. HE REFERRED TO THE SERIAL NO. 18 AND 19 THE LD. CIT (A) HAS GIVEN THE DETAILED REASONS FOR CONFIRMING THE DISALLOWANCE. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. THE LD. CIT (A) HAS HELD THAT TH E COMMISSION PAID OF RS. 1339 6000/ IS DISALLOWED, AS ASSESSEE HAS NOT FURNISHED ANY DETAILS IN THE TAX AUDIT REPORT ABOUT THE RELEVANT EXPENDITURE ITEMS THAT WOULD BE SAID TO BE PERTAINING TO THE PREVIOUS YEAR. THE LD. CIT (A) HELD THAT AUDITOR HAD ACCESS TO THE PRIMARY DOCUMENTS OF THE APPELLANT COMPANY WHILE PREPARING THE TAX AUDIT REPORT AND THE AUDITOR HAS BEEN APPOINTED BY THE APPELLANT COMPANY THEREFORE HE WAS OF THE VIEW THAT THE OBSE RVATION OF THE AUDITOR IS AUTHENTIC AND RELIABLE. THE APPELLANT HAS FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCE TO PROVE THAT THE OBSERVATION OF THE AUDITOR IS INCORRECT. THEREFORE, HE CONFIRMED THE DISALLOWANCE RELYING UPON THE OBSERVATION IN THE TAX AUDIT REPORT. BEFORE US, ASSESSEE HAS DISPUTED THAT THE COMMISSION PAID OF RS. 13396000/ HAS NOT BEEN MENTIONED BY THE TAX AUDIT OR IN ITS REPORT AS PRIOR PERIOD EXPENSES . HOWEVER, THE LD. CIT (A) HAS MENTIONED IN THIS FINDING THAT THE APPELLANT HAS FAILED TO PRODUCE ANY DOCUMENTARY EVIDENCE TO PROVE THAT THE OBSERVATION OF THE AUDITOR IS INCORRECT. THIS IS THE MAIN REASON GIVEN BY LD CIT (A ) FOR CONFIRMING THE DISALLOWANCES. BEFORE US, THE ASSESSEE HAS NOT PRODUCED THE C O PY OF THE TAX AUDIT REPORT AS WELL AS THE DETAILS OF COMMIS SION EXPENSES OF RS 1.33 CRORES. IT WAS NOT DEMONSTRATED BEFORE US THAT HOW THIS EXPENSES ARE CRYSTALLIZED DURING THE YEAR. MERELY BECAUSE EXPENDITURE HAS BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT DURING THE YEAR NEITHER IT BECOME S THE EXPENDITURE PERTAINING TO THIS YEAR MORE IT BECOMES AN EXPENDITURE PERTAINING TO THE PRIOR YEARS. IT IS THE DUTY OF THE ASSESSEE TO SHOW THAT THIS EXPENDITURE HAS CRYSTALLIZED ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 7 DURING THE YEAR AND THEREFORE THEY ARE INCURRED DURING THE YEAR. AS THE AD EQUATE DETAILS HAVE NOT BEEN PRODUCED BEFORE THE LD. ASSESSING OFFICER AS WELL AS BEFORE THE LD. CIT (A) WE SET ASIDE THE ISSUE OF THE DISALLOWANCE OF RS. 1339600 / - OF COMMISSION PAID BY THE ASSESSEE DISALLOWED BY THE LOWER AUTHORITIES HOLDING THAT THESE ARE PRIOR P ERIOD EXPENDITURE. 13. WITH RESPECT TO THE SALES INCENTIVE OF RS. 77500000/ IT WAS SUBMITTED BEFORE HIM THAT THE SALES INCENTIVE OF RS. 7.75 CRORES PERTAINS TO THE SALES TARGETS MET BY THE DEALERS FOR THE 15 MONTHS ACCOUNTING PERIOD ENDING 30/6/ 2004 HOWEVER, HE CONFIRMED THE DISALLOWANCE STATING THE SIMILAR REASONS. WITH RESPECT TO THE SALES INCENTIVE OF RS. 7.75 CRORES, THIS IS CLAIMED BY THE ASSESSEE THAT THE SALES INCENTIVE IS PERTAINING TO THE 15 MONTHS ACCOUNTING PERIOD, ENDING ON 30/06/2004 . THE ASSESSEE HAS SUBMITTED THAT THIS EXPENDITURE IS IN THE NATURE OF SALES INCENTIVE EXPENDITURE. APPARENTLY THE ASSESSEE COMPANY HAD AND ACCOUNTING PERIOD OF 15 MONTHS STARTING FROM 1 ST APRIL 2003 TO 30 TH OF JUNE 2004 WHEREAS FOR THE TAX PURPOSE THE A SSESSEE HAS PREPARED ITS ACCOUNT FOR 12 MONTHS PERIOD FROM 1 ST APRIL 2004 TO 31 ST OF MARCH 2005. THE SALES INCENTIVE OF BE 7.75 CRORE PERTAIN TO THE SALES TARGETS PAID BY THE DEALERS FOR THE 15 MONTHS ACCOUNTING PERIOD ENDING ON 30/06/2004. IT WAS FURTHER STATED THAT THE INCENTIVE AMOUNT ACCRUED BASED ON THE SALES PERFORMANCE OF THE DEALERS FOR THE ACCOUNTING PERIOD ENDED ON 30 JUNE AND THEREFORE CREDIT NOTES WAS ISSUED TO THE ELIGIBLE DEALERS ON 30 TH 200 4 OF RS. 7.75 CRORES. THE ASSESSEE HAS SUBMITTED THE COMPLETE DETAILS OF THE PARTIES AND AMOUNT OF INCENTIVE GIVEN TO THE EACH OF THE DEALERS ALONG WITH THEIR SALES INCENTIVE TARGETS AS WELL AS THE SALES INCENTIVE PAYABLE TO THEM. NATURALLY THE SALES INCENT IVE WOULD BE PAYABLE TO THE DEALERS ONLY WHEN THE SALES PERFORMANCE OF THE PARTY WAS KNOWN TO THE ASSESSEE. THE EXPENDITURE HAS ACCRUED IN THE FINANCIAL YEAR 01/04/2004 TO 31/3/2005. THE HONBLE DELHI HIGH COURT IN CASE OF CIT VERSUS SHRIRAM PISTONS AND RI NGS LIMITED 200 CTR 404 (DELHI) ON IDENTICAL FACTS AND CIRCUMSTANCES HAS HELD AS UNDER: - 4. IN TERMS OF THE SCHEME, AS EXTENDED, THE ASSESSEE INCURRED A LIABILITY OF RS. 1,40,541 AND ACCORDING TO THE ASSESSEE THIS AMOUNT WAS LIABLE TO BE ADJUSTED IN THE ASSESSMENT YEAR 1983 - 84. THE BASIS ON WHICH THE ASSESSEE HAD CLAIMED THIS DEDUCTION FOR THAT YEAR WAS THAT THE LIABILITY HAD ACCRUED AND CRYSTALLIZED ONLY ON 30 - 6 - 1981 WHEN THE ASSESSEE CAME TO KNOW THE ACTUAL SALES MADE BY ITS DEALERS. 5. ON THE OTHER HAN D, THE VIEW TAKEN BY THE REVENUE WAS THAT SINCE THE ASSESSEE WAS MAINTAINING ITS ACCOUNTS ON A MERCANTILE BASIS, THE LIABILITY HAD ACCRUED EARLIER AND ONLY THE QUANTIFICATION OF THE INCENTIVE WAS POSTPONED. 6. IN OUR OPINION, THE ASSESSEE HAS BEEN ABLE TO MAKE OUT A CASE IN ITS FAVOUR PARTICULARLY IN VIEW OF THE JUDGMENT OF GUJARAT HIGH COURT IN SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. V. CIT [1995] 213 ITR 523 . ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 8 7. BEFOR E WE ACTUALLY GO INTO THE DECISION, WE MAY NOTE THAT TWO SITUATIONS ARISE : THE FIRST SITUATION IS THAT THE LIABILITY ARISES ON ONE DATE BUT GETS CRYSTALLIZED ON A LATER DATE (30 - 6 - 1981 IN THIS CASE). IT IS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THA T CRYSTALLIZATION OF THE LIABILITY ON A FUTURE DATE WOULD NECESSARILY RELATE BACK TO THE EARLIER PERIOD BUT THE ENTITLEMENT TO A DEDUCTION WOULD HAVE REFERENCE TO THE DATE ON WHICH THE LIABILITY GETS CRYSTALLIZED. THE SECOND SITUATION, WHICH HAS BEEN CANVA SSED BY LEARNED COUNSEL FOR THE REVENUE, IS WHERE THE LIABILITY IS ACTUALLY CRYSTALLIZED ON AN EARLIER DATE BUT IT MAY BE QUANTIFIED ON A FUTURE DATE. 8. IN OUR OPINION, THE CASE OF THE ASSESSEE FALLS IN THE FIRST CATEGORY AND NOT IN THE SECOND CATEGORY. 9 . IN SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD.'S CASE ( SUPRA ), THE GUJARAT HIGH COURT NOTED AS FOLLOWS : '. . . 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 CA N BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YEAR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS. IN EACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE BASIS IT HAS TO BE FOUND IN RESPECT OF ANY C LAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIFIED DURING THE 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 DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS IT CANNOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS AND THAT IT RELATED TO A TRANSACTION OF THE PREVIOUS YEAR. . . .' (P. 531) 10. INSOFAR AS THE PRESENT CASE IS CONCERNED, THE LIABILITY TO PAY INCENTIVE TO THE DEALERS UP TO 30 - 4 - 1981 CANNOT BE DISPUTED. HOWEVER, THE PAYMENT OF ADDITIONAL INCENTIVE, ON A GRADED SCALE AND RELATING BACK TO THE P RE - 30 - 4 - 1981 PERIOD WOULD DEPEND UPON THE SALES MADE BY THE DEALERS FROM 1 - 5 - 1981 TO 30 - 6 - 1981. THIS ADDITIONAL INCENTIVE WOULD ACTUALLY CRYSTALLIZE ONLY ON 30 - 6 - 1981 WHEN THE ASSESSEE IS INFORMED OF THE ACTUAL SALES MADE BY THE DEALERS. 11. THE DECISION OF THE SUPREME COURT RELIED UPON BY LEARNED COUNSEL FOR THE REVENUE IN BHARAT EARTH MOVERS V. CIT [2000] 245 ITR 428 RELATES TO A COMPLETELY OPPOSITE SITUATION. IN THAT CAS E THE SUPREME COURT OBSERVED AS FOLLOWS : 'THE LAW IS SETTLED : IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHO ULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LI ABILITY IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE TO BE DISCHARGED IS NOT CERTAIN.' (P. 431) ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 9 12. THE LAW LAID DOWN BY THE SUPREME COURT IN BHARAT EART H MOVERS' CASE ( SUPRA ) WOULD NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE AS IN THAT CASE THE LIABILITY HAD ACCRUED ON AN EARLIER DATE. IN THE PRESENT CASE IT IS POSSIBLE THAT A DEALER MAY NOT HAVE ANY SALE AT ALL FROM 1 - 5 - 1981 TO 30 - 6 - 1981 WITH THE RES ULT THAT HE WOULD NOT BE ENTITLED TO ANY ADDITIONAL INCENTIVE. HOWEVER, IF SALES WERE MADE, THEN THE ADDITIONAL INCENTIVE WOULD BE GIVEN ON A GRADED SCALE AND THEREFORE, THE ADDITIONAL LIABILITY ON THE ASSESSEE WOULD ONLY BE KNOWN WITH ANY DEGREE OF CERTAI NTY ONLY ON 30 - 6 - 1981 AND NOT EARLIER. 13. WE MAY ALSO NOTE THAT IN E.D. SASSOON & CO. LTD. V. CIT [1954] 26 ITR 27 THE SUPREME COURT HAS OBSERVED AS UNDER : '. . . INCOME MAY ACCRUE TO AN ASSESSEE WITHOUT THE ACTUAL RECEIPT OF THE SAME. IF THE ASSESSEE ACQUIRES A RIGHT TO RECEIVE THE INCOME, THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM THOUGH IT MAY BE RECEIVED LATER ON ITS BEING ASCERTAINED. THE BASIC CONCEP TION IS THAT HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBODY. . . .' (P. 51) 14. APPLYING THIS PRINCIPLE, INSOFAR AS THE DEALERS OF THE ASSESSEE ARE CONCERNED, THEY WOULD NOT HAVE ACQUIRED A RIGHT TO GET AD DITIONAL INCENTIVE IN THE SENSE THAT THE ASSESSEE WOULD NOT HAVE KNOWN TILL 30 - 6 - 1981 HOW MUCH INCENTIVE THE DEALERS HAD EARNED. ON THE OTHER HAND, INSOFAR AS THE DEALERS ARE CONCERNED, THEIR ENTITLEMENT WOULD BE KNOWN ONLY WHEN THE SALES WERE ACTUALLY ASC ERTAINED AND DETERMINED AND THAT WAS POSSIBLE ONLY ON 30 - 6 - 1981 AND NOT ON A DATE PRIOR TO THAT. 15. LEARNED COUNSEL FOR THE REVENUE SOUGHT TO PLACE RELIANCE ON ADDL. CIT V. RATTAN CHAND KAPOOR [1984] 149 ITR 1 PARTICULARLY ON THE FOLLOW PASSAGE : 'WE ARE OF THE VIEW THAT A LIABILITY WHICH IS SETTLED BEFORE THE ASSESSMENT IS OVER CAN BE APPROPRIATED TO THE RELEVANT YEAR IN ACCORDANCE WITH THE SUPREME COURT'S JUDGMENT, BUT IF THE LIABILITY IS RAISED, SAY, TEN YEARS LATER AS APPEARS TO BE THE CASE HERE, THEN IT CANNOT BE APPROPRIATED TO THAT YEAR AND HAS TO BE CLAIMED AT A LATER DATE OR NOT AT ALL. THE MERCANTILE SYSTEM OF ACCOUNTING VISUALIZES ENTRIES BEING MADE IN THE ACCOUNT BOOKS AND CLAIMS BEING MADE IN RESPECT THEREOF WHEN THE INCOME HAS EITHER ACCRUED OR IS RECEIVABLE AND SIMILARLY AN EXPENSE HAS TO BE ENTERED WHEN THE OBLIGATION ARISES OR THE LIABILITY TO PAY ARISES. THE ENTRIES ARE MADE IN ANTICIPATION OF ACTUAL PAYMENT S. . . .' (P. 5) 16. THE CONTENTION OF LEARNED COUNSEL FOR THE REVENUE IS THAT THE ASSESSEE COULD HAVE MADE A PROVISION IN ITS ACCOUNT BOOKS FOR THE ADDITIONAL INCENTIVE AND HAVING FAILED TO DO SO, IT CANNOT CLAIM THE BENEFIT IN THE SUBSEQUENT ASSESSMENT Y EAR. THE ARGUMENT OF LEARNED COUNSEL NATURALLY PROCEEDS ON THE BASIS THAT THE LIABILITY HAD ACCRUED ON AN EARLIER DATE WHICH, AS WE HAVE HELD, IS NOT SO. THE LIABILITY HAD ACCRUED ON 30 - 6 - 1981 AND, THEREFORE, NO PROVISION COULD HAVE BEEN MADE FOR THE LIABI LITY ON AN EARLIER DATE. THEREFORE, WE ARE UNABLE TO APPLY THE PRINCIPLE LAID DOWN IN RATTAN CHAND KAPOOR'S CASE ( SUPRA ). ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 10 17. FINALLY, WE MAY ONLY MENTION WHAT HAS BEEN ARTICULATED BY THE BOMBAY HIGH COURT IN CIT V. NAGRI MILLS CO. LTD. [1958] 33 ITR 681 AS FOLLOWS : 'WE HAVE OFTEN WONDERED WHY THE INCOME - TAX AUTHORITIES, IN A MATTER SUCH AS THIS WHERE THE DEDUCTION IS OBVIOUSLY A PERMISSIBLE DEDUCTION UNDER THE INCOME - TAX A CT, RAISE DISPUTES AS TO THE YEAR IN WHICH THE DEDUCTION SHOULD BE ALLOWED. THE QUESTION AS TO THE YEAR IN WHICH A DEDUCTION IS ALLOWABLE MAY BE MATERIAL WHEN THE RATE OF TAX CHARGEABLE ON THE ASSESSEE IN TWO DIFFERENT YEARS IS DIFFERENT; BUT IN THE CASE O F INCOME OF A COMPANY, TAX IS ATTRACTED AT A UNIFORM RATE, AND WHETHER THE DEDUCTION IN RESPECT OF BONUS WAS GRANTED IN THE ASSESSMENT YEAR 1952 - 53 OR IN THE ASSESSMENT YEAR CORRESPONDING TO THE ACCOUNTING YEAR 1952, THAT IS IN THE ASSESSMENT YEAR 1953 - 54, SHOULD BE A MATTER OF NO CONSEQUENCE TO THE DEPARTMENT; AND ONE SHOULD HAVE THOUGHT THAT THE DEPARTMENT WOULD NOT FRITTER AWAY ITS ENERGIES IN FIGHTING MATTERS OF THIS KIND. BUT, OBVIOUSLY, JUDGING FROM THE REFERENCES THAT COME UP TO US EVERY NOW AND THEN , THE DEPARTMENT APPEARS TO DELIGHT IN RAISING POINTS OF THIS CHARACTER WHICH DO NOT AFFECT THE TAXABILITY OF THE ASSESSEE OR THE TAX THAT THE DEPARTMENT IS LIKELY TO COLLECT FROM HIM WHETHER IN ONE YEAR OR THE OTHER.' (P. 684) 18. IN THE REFERENCE THAT IS BEFORE US THERE IS NO DOUBT THAT THE ASSESSEE HAD INCURRED AN EXPENDITURE. THE ONLY DISPUTE IS REGARDING THE DATE ON WHICH THE LIABILITY HAD CRYSTALLIZED. IT APPEARS THAT THERE WAS NO CHANGE IN THE RATE OF TAX FOR THE ASSESSMENT YEAR 1983 - 84 WITH WHICH WE ARE CONCERNED. THE QUESTION, THEREFORE, IS ONLY WITH REGARD TO THE YEAR OF DEDUCTION AND IT IS A PITY THAT ALL OF US HAVE TO EXPEND SO MUCH TIME AND ENERGY ONLY TO DETERMINE THE YEAR OF TAXABILITY OF THE AMOUNT. 19. BE THAT AS IT MAY, WE ANSWER THE QUESTI ON IN THE NEGATIVE, IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 14. LD. DEPARTMENTAL REPRESENTATIVE COULD NOT CONTROVERT THAT HOW THE ISSUE WITH RESPECT TO THE DISALLOWANCE OF RS. 7.75 CRORES OF SALES INCENTIVE IS NOT NOW SQUARELY COVERED IN FAVOUR OF THE ASSESSEE. NO OTHER JUDICIAL PRECEDENT WAS SUBMITTED BEFORE US. IN VIEW OF THIS WE REVERSE THE FINDING OF THE LOWER AUTHORITIES WITH RESPECT TO THE DISALLOWANCE OF SALES INCENTIVE OF RS. 7.75 CRORES INDIRECT THE LD. ASSESSING OFFICER TO DELETE THE ABOVE DISALLOWANCE AS THE EXPENDITURE IS NOT A PRIOR PERIOD EXPENDITURE BUT THE EXPENDITURE PERTAINING TO CURRENT YEAR THE ASSESSEE HAS INCURRED EXPENDITURE DURING THE YEAR BASED ON CRYSTALLIZATION . 15. WITH RESPECT TO THE OTHER DISALLOWANCE CONFIRMED BY THE LD. C IT ( A), SIMILAR ARGUMENTS WERE RAISED BEFORE US. AS HELD BY HON GUJARAT HIGH COURT IN CIT V SAURASHTRA CEMENTS LIMITED (SUPRA) THAT M ERELY 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 THE YEAR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS. IN EACH CASE WHERE THE ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS, ESCORTS LIMITED V DCIT , CIRCLE 11 (1), NEW DELHI ITA NO 4235/DEL/2014 A Y 2005 - 06 PAGE | 11 IT HAS TO BE FOU ND IN RESPECT OF ANY CLAIM WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIFIED DURING THE PREVIOUS YEAR AS 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 DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILITY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS, IT CANNOT BE DISALLOWED AS DEDUCTION MERELY ON THE BASIS THAT ACCOUNTS ARE MAINTAINED ON MERCANTILE BASIS AND THAT IT RELATES TO A TRANSACTION OF THE PREVIOUS YEAR. THE TRUE PROFIT AND GAIN OF A PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED FOR THE PURPOSE OF DETERMINING TAX LIABILITY. THE BASIS OF TAXING INCOME IS ACCRUAL OF INCOME AS WELL AS ACTUAL RECEIPT. IF FOR WANT OF NECESSARY MA TERIAL, CRYSTALLIZING THE EXPENDITURE IS NOT IN EXISTENCE IN RESPECT OF WHICH SUCH INCOME OR EXPENSES RELATES, THE MERCANTILE SYSTEM DOES NOT CALL FOR AN ADJUSTMENT IN THE BOOKS OF ACCOUNT ON ESTIMATE BASIS. IT IS ACTUALLY KNOWN INCOME OR EXPENSES; RIGHT T O RECEIVE OR LIABILITY TO PAY, WHICH HAS COME TO BE CRYSTALLIZED, IS TO BE TAKEN INTO ACCOUNT UNDER MERCANTILE SYSTEM OF MAINTAINING BOOKS OF ACCOUNT. AN ESTIMATED INCOME OR LIABILITY, WHICH IS YET TO BE CRYSTALLIZED, CAN ONLY BE ADJUSTED AS CONTINGENCY IT EM BUT NOT AS AN ACCRUED INCOME OR LIABILITY OF THAT YEAR. THEREFORE, WITH RESPECT TO OTHER EXPENDITURE ALONG WITH THE SALES COMMISSION OTHER THAN SALES INCENTIVES EXPENSES, WE SET ASIDE THE ISSUE BEFORE THE LD AO WITH A DIRECTION TO ASSESSEE TO S UBMIT THE REQUISITE DETAILS THAT THE EXPENSES HAVE CRYSTALLIZED DURING THE YEAR. 16. ACCORDINGLY WE PARTLY ALLOW GROUND NO. 2 DIRECTING THE LD. ASSESSING OFFICER TO RE VERIFY THE EXPENDITURE OF RS. 13396000/ PERTAINING TO THE COMMISSION PAID AND OTHER EXP ENSES AND TO DELETE THE DISALLOWANCE OF RS. 7.75 CRORES ON ACCOUNT OF SALES INCENTIVE. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 9 / 0 3 / 2018 . - S D / - - S D / - ( H.S.SIDHU ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 9 / 0 3 / 2018 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI