ACIT, Bangalore V. M/s Elite Enterprises, Belthangady

ITA 721/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51324 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-10-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-10-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 26-05-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Keywords: Bonafide belief
• Section: 43B; 143(3)

Judgement Text

PAGE 1 OF 6 ITA NO.721/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.721/BANG/2010 (ASSESSMENT YEAR 2007-08) THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-1(1), MANGALORE. - APPELLANT PA NO.AAACB 6793 J VS M/S ELITE ENTERPRISES, 7/96, SUDHA NILAYA, NEAR P U COLLEGE, BELTHANGADY. - RESPONDENT PA NO.AABFE 3929P DATE OF HEARING : 20/10/2011 DATE OF PRONOUNCEMENT : 20/10/2011 APPELLANT BY : SMT. SUSAN THOMAS JOSE, JCIT RESPONDENT BY : SHRI S PARTHASARATHI, ADVOC ATE ORD ER PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE DEPARTM ENT IS DIRECTED AGAINST THE ORDER OF CIT(A), MANGALORE DATED 29.03.2010. T HE RELEVANT ASST. YEAR IS 2007-08. 2. THE SOLITARY ISSUE THAT IS RAISED IS WHETHER TH E CIT(A) IS JUSTIFIED IN DELETING THE DISALLOWANCE OF KIST PAY MENT AMOUNTING TO RS.95,84,505/-. 3. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A FIRM. IT IS ENGAGED IN THE BUS INESS OF VENDING ARRACK. FOR THE CONCERNED ASST. YEAR, RETU RN OF INCOME WAS PAGE 2 OF 6 ITA NO.721/BANG/2010 2 FILED DECLARING A TOTAL INCOME OF RS.11,72,870. SC RUTINY ASSESSMENT U/S 143(3) WAS COMPLETED VIDE ORDER DATED 22.12.200 9. IN THE SAID ASSESSMENT, THE AO DISALLOWED THE KIST PAYMENT OF R S.95,84,505/- AND DETERMINED THE FIRMS TOTAL INCOME AT RS.1,07,5 7,374/-. 3.1 THE FACTUAL BACKGROUND WITH REGARD TO THE DISALLOWANCE OF KIST PAYMENT ARE AS FOLLOWS:- DURING THE PREVIOUS YEAR RELEVANT TO THE ASST. Y EAR, THE ASSESSEE HAD TAKEN ON SUBLEASE ALL RIGHTS OF RETAIL VENDING OF ARRACK IN THE SHOPS OF TWO TALUKS, NAMELY KARKALA FOR ENTI RE 12 MONTHS AND KUNDAPURA FOR FIRST THREE MONTHS OF THE ASST. YEAR. AS PER THE LEASE AGREEMENT, THE ASSESSEE IS RESPONSIBLE TO PAY THE K IST TO THE GOVERNMENT AS PER THE CONTRACT LICENCE AWARDED TO T HE LICENCEE. AS PER THE AGREEMENT BETWEEN THE LICENCEE AND THE A SSESSEE, THE TOTAL KIST PAYMENT PAYABLE FOR THE ENTIRE ASST. YEA R WAS RS.480 LAKHS AND RS.1,168.53 LAKHS RESPECTIVELY FOR KUNDAPUR AND KARKALA TALUKS. HOWEVER, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAD CLAIMED RS.535 LAKHS IN RESPECT OF KUNDAPUR TALUK A ND RS.1209.37 LAKHS IN RESPECT OF KARKALA TALUK. THE TOTAL DIFFE RENCE IN THE CLAIM OF KIST AS PER THE AGREEMENT WAS RS.95.84 LAKHS. T HE ASSESSEE WAS ASKED TO SUBSTANTIATE AS TO WHY THE KIST NOT RELATA BLE TO THE RELEVANT ASST. YEAR IS CLAIMED AND WHY NOT THE SAME BE DISAL LOWED. THE ASSESSEE FILED A DETAILED REPLY VIDE ITS LETTER DAT ED 17.12.2009, WHICH IS EXTRACTED AT PAGES 4 TO 6 OF THE ASSESSMEN T ORDER. THE AO, REJECTING THE ABOVE CONTENTIONS/OBJECTION S RAISED BY THE ASSESSEE, HELD THAT THE SYSTEM OF ACC OUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE AND WHEN THE ASSESSEE RECOGNIZES INCOME ON ACCRUAL BASIS, THE EXPENSES ALSO SHOULD BE CLAIMED ON MERCANTILE SYSTEM. SINCE EXPENSES OF KIST PAYMENT A MOUNTING TO PAGE 3 OF 6 ITA NO.721/BANG/2010 3 RS.95,84,505/- HAS NOT BEEN CLAIMED IN THE PREVIOUS ASST. YEARS ON ACCRUAL BASIS, THE SAME CANNOT BE ALLOWED AS A DEDU CTION. THE AO ALSO RELIED ON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF J K INDUSTRIES LTD. V UNION OF INDIA 165 TA XMAN 323 AND THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF TAPARIA TOOLS LTD. V JCIT 260 ITR 102, WHEREIN THE MATCHING CONCEPT WAS DISCUSSED THREADBARE. IT WAS HELD BY THE AO THAT THE PROVISION OF SECTION 43B IS NOT APPLICABLE TO THE FACTS OF THIS CASE. IT WAS FURTHER STATED BY THE AO THAT, HAD THE ASSESSEE WAS UNDER A BONAFIDE BELIEF THAT THE KIST IS COVERED BY SECTION 43B OF THE ACT, IT SHOULD HAVE ACCOUNTED FOR THE EXPENDITURE AS A PROVISION IN THE CORRECT ASST. YEAR FIRST AND THEN CLAIMED THE SAME ON PAYMENT BAS IS. FINALLY, THE ASSESSMENT ORDER WAS CONCLUDED BY OBSERVING THUS:- IN VIEW OF THE ABOVE DISCUSSION, THE CLAIM OF THE EXPENDITURE TOWARDS KIST PAYMENT BY THE ASSESSEE IS TO BE ALLOWED ONLY TO THE EXTENT IT IS LIABLE TO PAY DURING THE RELEVANT ACCOUNTING PERIOD. FURTHER, IT IS NOT A CASE OF CRYSTALLIZATIO N OF A PRIOR PERIOD EXPENSE IN A SUBSEQUENT YEAR BUT, THE ASSESSEE WAS FULLY AWARE OF HIS LIABILITY IN ADVANCE. HENCE, IF THE ASSESSEE HAS FORGONE ITS CLAIM IN THE EARLIER ASSESSMENT YEARS, IT CANNOT CLAIM THE SAME AGAINST THE CURRENT YEARS PROFIT. THEREFORE, THE EXCESS CLAIM OF KIST AMOUNTING TO RS.95,84,505/- IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 4. AGGRIEVED BY THE ASSESSMENT COMPLETED, THE ASSE SSEE CARRIED THE MATTER IN APPEAL BEFORE THE FIRST APPEL LATE AUTHORITY. 5. THE SUBMISSIONS OF THE ASSESSEE ARE ELABORATED IN PARAS 19, 20 AND 21 OF THE IMPUGNED ORDER OF THE CI T(A). THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IT WAS CONCLUDED BY THE CIT (A) THAT THE SYSTEM OF ACCOUNTING MAINTAINED BY THE ASSESSEE, TH OUGH PAGE 4 OF 6 ITA NO.721/BANG/2010 4 DESCRIBED AS MERCANTILE SYSTEM, IT CAN BE SEEN FROM THE NATURE OF BUSINESS AND THE WAY THE ACCOUNTS ARE MAINTAINED, T HE METHOD FOLLOWED, IN EFFECT, IS A CASH SYSTEM OF ACCOUNTING . BY REFERRING TO THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE C ASE OF CIT V BILAHARI INVESTMENT (P) LTD. 299 ITR 1, THE CIT(A) HELD THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING A SYSTEM O F ACCOUNTING AND THE PROFITS ACTUALLY EARNED HAS BEEN RECOGNIZED AND THEREFORE, THE COURSE OF ACTION ADOPTED BY THE AO IS ACTUALLY REVENUE NEUTRAL. 6. THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFORE US. 7. THE LEARNED DR SUBMITTED THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING FOR THE R ECEIPTS AND CONSEQUENTLY IT SHOULD HAVE RECOGNIZED THE RELEVANT EXPENSES ALSO ON MERCANTILE SYSTEM OF ACCOUNTING. SHE ARGUED TH AT WHEN THE ASSESSEE ITSELF HAS NOT RECOGNIZED THE RELEVANT EXPE NSES ACCRUED DURING THE EARLIER ASST. YEAR, IT CANNOT CLAIM THE SAME ON PAYMENT BASIS RELYING ON SECTION 43B OF THE ACT WHEN THE SA ID EXPENSES ARE NOT COVERED BY SECTION 43B OF THE ACT. THE LEARNED DR FURTHER SUBMITTED THAT THE CIT(A) HAS ERRED IN RELYING UPON THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF CIT V BILAHARI INV ESTMENT (P) LTD. (2008) 299 ITR 1 EVEN THOUGH IT WAS BROUGHT ON ASSE SSMENT ORDER THAT THE SAID JUDGEMENT IS NOT APPLICABLE TO THE FA CTS OF THE PRESENT CASE. IT WAS FURTHER SUBMITTED THAT THE CLAIM OF TH E ASSESSEE IS NOT ALLOWABLE IN VIEW OF THE JUDGEMENTS OF HONBLE SUPR EME COURT IN THE CASE OF J K INDUSTRIES LTD. V UNION OF INDIA (2007) 165 TAXMAN 323 AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF TA PARIA TOOLS LTD. V JCIT (2003) 260 ITR 102. PAGE 5 OF 6 ITA NO.721/BANG/2010 5 8. THE LEARNED AR, ON THE OTHER HAND, REITERATED T HE SUBMISSIONS MADE BEFORE THE INCOME TAX AUTHORITIES A ND RELIED ON THE CONCLUSIONS DRAWN BY THE FIRST APPELLATE AUTHOR ITY. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE OF CIT V SRI BALAJI & CO. 246 ITR 750 HAD CONC LUSIVELY RULED THAT KIST PAYMENT IS NOT COVERED U/S 43B OF THE ACT . AS RIGHTLY POINTED OUT BY THE AO, HAD THE ASSESSEE BELIEVED TH AT THE PROVISIONS OF SECTION 43B IS APPLICABLE TO THE FACT S OF THE CASE, THE EXPENDITURE SHOULD HAVE BEEN ACCOUNTED IN THE CORREC T ASST. YEAR ON ACCRUAL BASIS AND THEN CLAIMED THE SAME ON PAYME NT BASIS. WITHOUT MAKING A PROVISION FOR THE CORRESPONDING EXP ENDITURE IN THE CORRECT ACCOUNTING PERIOD, THE ASSESSEE CANNOT CLAI M SUCH EXPENDITURE U/S 43B OF THE ACT ON PAYMENT BASIS. IF THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE S YSTEM, NO DOUBT, THE COURSE ADOPTED BY THE AO WOULD BE JUSTIF IED IN THE EYES OF LAW. HOWEVER, THE CIT(A) IN PARA 23 OF HIS IM PUGNED ORDER HAS GIVEN A FINDING THAT ESSENTIALLY, THE SYSTEM OF ACC OUNTING FOLLOWED BY THE ASSESSEE IS CASH SYSTEM OF ACCOUNTING. SO THERE IS PRIMA FACIE A CONTRARY FINDING BY THE INCOME TAX AUTHORITI ES. THE AO HELD THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTE M OF ACCOUNTING, WHEREAS THE CIT(A) HELD THAT THE ASSESSEE IS ESSENT IALLY FOLLOWING CASH SYSTEM OF ACCOUNTING. IN VIEW OF THE DIVERGE NT FINDING, WE ARE OF THE VIEW THAT THE MATTER NEEDS A FRESH CONSIDERA TION BY THE AO. THE AO SHALL EXAMINE THE SYSTEM OF ACCOUNTING THAT IS FOLLOWED BY THE ASSESSEE AND SHALL ARRIVE AT A CONCLUSION WHETH ER KIST PAYMENT AMOUNTING TO RS.95,84,505/- IS A DEDUCTIBLE EXPENDITURE FOR THE CONCERNED AY NAMELY 2007-08. THEREFORE, TH E ISSUE IS RESTORED TO THE FILE OF THE AO. HE SHALL AFFORD A REASONABLE PAGE 6 OF 6 ITA NO.721/BANG/2010 6 OPPORTUNITY OF HEARING TO THE ASSESSEE AND CONCLUDE THE ASSESSMENT AS EXPEDITIOUSLY AS POSSIBLE. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENU E IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED ON THE 20 TH DAY OF OCTOBER, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. SZ