DCIT, CHENNAI V. Dr. Agarwal's eye Hospital Limited, CHENNAI

ITA 865/CHNY/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6208 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 07-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SREENIVASAN

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI ... , , # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NO. 865/MDS/2017 / ASSESSMENT YEARS : 2010-11 DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1(1), CHENNAI 600 034. VS. M/S. DR. AGARWALS EYE HOSPITAL LIMITED, NO. 19, CATHEDRAL ROAD, GOPALAPURAM, CHENNAI 600 086 [PAN: AAACD 2373G] ( / APPELLANT) ( / RESPONDENT) %& / APPELLANT BY : SHRI. SREENIVASAN, JCIT )*%& / RESPONDENT BY : NONE & /DATE OF HEARING : 07.06.2017 & /DATE OF PRONOUNCEMENT : 05.09.2017 /O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE REVENUE FILED THIS APPEAL AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNAI IN ITA NO. 391/CIT(A)- 1/2015-16 DATED 31.01.2017. :-2-: I.T.A. N0. 865/MDS/2017 2. M/S. DR. AGARWALS EYE HOSPITAL LTD., THE ASSESS EE, IS IN THE BUSINESS OF RUNNING NURSING HOMES, CLINICS, MEDICAL RESEARCH AN D OTHER RELATED ACTIVITIES PRIMARILY TOWARDS EYE CARE. IN THE RE-ASSESSMENT M ADE FOR ASSESSMENT YEAR 2010-11, THE ASSESSING OFFICER ADDED NET PRIOR PERI OD EXPENDITURE DEBITED TO P&L ACCOUNT AT RS. 49,77,664/-. AGGRIEVED, THE ASS ESSEE FILED AN APPEAL BEFORE THE CIT(A). THE CIT(A) RELYING ON THE DECIS ION OF CIT VS. JAGATJIT INDUSTRIES LIMITED OF THE DELHI HIGH COURT IN ITA N O. 848/2010 DATED 06.09.2010 ALLOWED THE APPEAL. AGGRIEVED AGAINST T HAT ORDER, THE REVENUE FILED THIS APPEAL, INTER ALIA, WITH THE FOLLOWING G ROUNDS OF APPEAL: 2.1 THE LEARNED CIT(A) ERRED IN DELETING THE ADDIT ION MADE UNDER THE HEAD PRIOR PERIOD EXPENSES WITHOUT APPR ECIATING THE FACT THAT THE EXPENSES SO CLAIMED DOES NOT BELONG TO THE RELEVANT ACCOUNTING YEAR OF THE ASSESSMENT YEAR 2010-11, BUT RELATES TO THE PREVIOUS FINANCIAL YEARS. 2.2 THE LEARNED CIT(A) ERRED IN HOLDING THAT THE PR IOR PERIOD EXPENSES ARE DEDUCTIBLE EXPENSES FOR THE RELEVANT A CCOUNTING YEAR OF THE ASSESSMENT YEAR (2010-11) WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTI NG AND THE PRIOR PERIOD EXPENSES IF ANY OUGHT TO HAVE BEEN CLAIMED I N THE RELEVANT FINANCIAL YEARS BY WAY OF MAKING PROVISIONS. 2.3 THE LEARNED CIT(A) ERRED IN LAW BY HOLDING IT C ONTRARY, IN AS MUCH AS THE SETTLED PRINCIPLE THAT DEDUCTION CAN BE ALLOWED IN RESPECT OF ONLY THOSE EXPENDITURE WHICH ARE INCURRED IN THE RELEVANT ACCOUNTING YEAR FOR THE PURPOSE OF COMPUTING THE PROFITS AND G AINS OF A PARTICULAR FINANCIAL YEAR. :-3-: I.T.A. N0. 865/MDS/2017 3. THE DR RELYING ON THE DECISION OF SUPREME COURT IN THE CASE OF CIT VS. KALINGA TUBES LTD., 218 ITR 164 (SC), THE DECISION OF KERALA HIGH COURT IN CIT VS. ST. GEORGE MOTORS, 161 ITR 444 (KERALA) AND THE PUNJAB AND HARYANA HIGH COURT DECISION IN THE CASE OF CEBON INDIA LTD. , VS. CIT, 387 ITR 502 (P&H) ASSAILED THE ORDER OF THE CIT(A). NONE APPEA RED FROM THE ASSESSEES SIDE. 4. WE HEARD THE DRS SUBMISSIONS AND GONE THROUGH T HE ORDERS OF THE LOWER AUTHORITIES. IN ALL THE CASES, WHERE THE DR WAS RELYING, THE RESPECTIVE ASSESSEES WERE FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING. THEY HAVE NOT PROVIDED THE CENTRAL SALES TAX OR THE TAX PAYABLE U NDER THE KERALA MOTOR VEHICLES TAXATION OF PASSENGERS AND GOODS ACT, 1963 OR NON-CHARGING OF CERTAIN PORTION OF INTEREST IN THE P&L ACCOUNT, AS THE CASE MAY BE, AND HENCE, THE RESPECTIVE COURTS HELD THAT THE LIABILIT Y AROSE AS PER THE PROVISIONS OF THE RESPECTIVE ACT. IN THE CASE OF CIT VS. KALI NGA TUBES LTD., (SUPRA) THE SC HELD THAT THE SALES TAX LIABILITY WOULD ACCRUE T HE MOMENT SALES ARE EFFECTED AND ANY DISPUTE AS REGARDS QUANTUM OF TAX LIABILITY WOULD NOT AFFECT ACCRUAL OF SUCH LIABILITY. IN THE CASE OF CIT VS. ST. GEORGE MOTORS THE KERALA HIGH COURT HELD THAT THE LIABILITY FOR PAYMENT OF TAX UNDER TH E TAXATION OF PASSENGERS AND GOODS ACT HAD ACCRUED BY FORCE OF THE STATURE ITSEL F AND THE AGREEMENT REFERRED TO BY THE TRIBUNAL BY WHICH THE STATE GOVE RNMENT HAD PERMITTED THE OPERATORS OF MOTOR VEHICLES TO DISCHARGE THE LIABIL ITY IN INSTALMENTS DID NOT IN ANY WAY EFFECT THE ACCRUAL OF LIABILITY AND SUCH AC COMMODATION GRANTED BY THE :-4-: I.T.A. N0. 865/MDS/2017 GOVERNMENT WAS ONLY WITH RESPECT TO ITS DISCHARGE. THE TRIBUNAL WAS NOT, THEREFORE, JUSTIFIED IN UPHOLDING THE CONTENTION OF THE ASSESSEE THAT THE PAYMENT MADE DURING THE ACCOUNTING PERIOD IN DISCHA RGE OF LIABILITY OF THE TAX UNDER THE TAXATION OF PASSENGERS AND GOODS ACT ACCR UED DURING THE EARLIER YEARS WAS A PERMISSIBLE DEDUCTION UNDER THE ACT, FO R THE ASSESSMENT YEAR UNDER CONSIDERATION. IN THE CASE OF CEBON INDIA LT D., VS. CIT, THE PUNJAB & HARYANA HIGH COURT HELD THAT THE INTEREST PAID BY A SSESSEE TO IFCI IN EARLIER YEARS BUT NOT CHARGED TO PROFIT AND LOSS ACCOUNTS O F THOSE YEARS AS ASSESSEE WAS ENTITLED TO CERTAIN REBATE ON SUCH INTEREST ON FULFILLING ITS EXPORT OBLIGATIONS, COULD NOT BE SAID TO HAVE BEEN CRYSTAL LIZED IN RELEVANT ASSESSMENT YEAR WHEN IFCI REFUSED TO GRANT ANY REBATE FOR NON- FULFILMENT OF EXPORT OBLIGATIONS BY ASSESSEE. IN THE ASSESSEES CASE, T HE IMPUGNED LIABILITY IS NEITHER ARISING BY VIRTUE OF ANY STATUE NOT IT IS A N INTEREST LIABILITY. HENCE, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, THE RATIO S RELIED ON BY THE DR ARE NOT APPLICABLE. IN THIS CASE, THE ISSUES INVOLVED ARE (I) WHETHER THE ACCOUNTING PRACTICES HAD BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE AND (II) WHETHER THE NATURE AND GENUINENESS OF THE EXPENDITU RE IS EXAMINED. LET US EXAMINE THEM AS UNDER: 5. THE CIT(A) HAS OBSERVED AS UNDER: 6. ----------------------------------------------- --------------------- --------------. IN THE MERCANTILE SYSTEM OF ACCOUNT ING, THE LIABILITY CRYSTALLIZES AS SOON AS THE ENTIRE TRANSACTION WAS EFFECTUATED. EXAMINATION OF THE PLEA MADE BY THE APPELLANT SHOWS THAT THE AMOUNT IN :-5-: I.T.A. N0. 865/MDS/2017 QUESTION NOW BEING DEBITED TO THE P&L A/CIT(A) RELA TE TO CERTAIN BILLS AND INVOICES WHICH WERE EITHER RECEIVED OR SETTLED OR BOTH IN THE YEAR OF CLAIM. FURTHER, KEEPING IN VIEW THE VOLUME AND MUL TIPLICITY OF TRANSACTIONS INVOLVED AND TAKING INTO CONSIDERATION THE PAST BUSINESS PRACTICE, IT IS ALSO OBSERVED THAT EXPENDITURE SPIL LED OVER TO THE NEXT YEAR. IN SUCH CASES FOR SOME REASONS OR OTHER THE BILLS WERE NOT TAKEN TO HAVE BEEN SETTLED. THE SAID ACCOUNTING PRACTICE HAS BEEN CONSISTENTLY FOLLOWED BY THE APPELLANT AND DOES NOT SUFFER ON AC COUNT OF INCONSISTENCY. TO THAT EXTENT IT IS UNLIKELY TO DI STORT THE P&L FOR THE YEAR UNDER CONSIDERATION. THIS METHOD OF ACCOUNTING IS ALSO IN CONFORMITY WITH THE OBSERVATION MADE BY THE AO THAT ONLY THOSE EXPENSES WHICH ARE INCURRED IN THE RELEVANT ACCOUNTING YEAR FOR THE PU RPOSE OF COMPUTING PROFITS AND GAINS SHOULD BE ALLOWED IN KEEPING WITH THE MERCANTILE SYSTEM OF ACCOUNTING. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE HAD B EEN FOLLOWING THIS ACCOUNTING PRACTICES CONSISTENTLY. IN THE LIGHT OF THE RATIO SETTLED BY THE DELHI HIGH COURT IN THE CASE OF CIT VS. JAGATJIT INDUSTRI ES IN ITA NO. 848/2010, THE ISSUE NO. (I), SUPRA, IS IN FAVOUR OF THE ASSESSEE. NOW, LET US EXAMINE WHETHER THE NATURE AND GENUINENESS OF THE EXPENDITU RE HAS BEEN EXAMINED OR NOT. IN THIS REGARD, THE RELEVANT PORTION OF TH E ASSESSMENT ORDER IS EXTRACTED AS UNDER: 4. THE ASSESSEE FILED A REPLY DATED 12.10.2015, I N THIS REGARD WHICH IS REPRODUCED AS FOLLOWS: THE DISALLOWANCES MENTIONED IN YOUR ORDER RELATES TO PRIOR PERIOD EXPENDITURE (EXPENDITURE PERTAINING TO PREVIOUS ASSESSMENT YEAR CLAIMED DURING AY 2010-11). THE AS SESSEE :-6-: I.T.A. N0. 865/MDS/2017 RUNS CHAIN OF OPHTHALMOLOGY HOSPITALS AND HAS OVER 25 BRANCHES ACROSS INDIA. ON ACCOUNT OF THE VOLUME OF TRANSACTIONS, CERTAIN BILLS COULD BE ACCOUNTED ONLY AFTER THE YEAR END. THOUGH THE ASSESSEE IS A COMPANY AND REQ UIRE TO MAINTAIN BOOKS OF ACCOUNTS ON ACCRUAL BASIS, PROVIS ION FOR EXPENDITURE CANNOT BE MADE BASED ON ESTIMATES SINCE ESTIMATE CANNOT BE ACCURATE. IN SUCH HIGH VOLUME LOW VALUE TRANSACTION, THE LIA BILITY IN RESPECT OF CERTAIN BILLS WOULD NOT HAVE CRYSTALL IZED AS AT THE YEAR-END ON ACCOUNT OF VARIOUS FACTORS. WE HAVE ALREADY FILED AN APPEAL BEFORE COMMISSIONE R OF INCOME TAX (APPEALS)-1 FOR AY 2012-13 ON SIMILAR GROUNDS. IN CIT VS. VISHNU INDUSTRIAL GASES (IN THE HIGH CO URT OF DELHI, ITR NO. 229/1988, DECIDED ON: 6 TH MAY, 2008) WHERE THE DEPARTMENT HAD NOT DISPUTED THAT THE EXPE NDITURE WAS DEDUCTIBLE IN PRINCIPLE BUT WAS ONLY DISPUTING THE YEAR IN WHICH THE DEDUCTION COULD BE ALLOWED HELD. 5. THE SUBMISSION OF THE ASSESSEE HAS BEEN CONSIDE RED AND IS NOT ACCEPTED AS THE SAID AMOUNT IS NOT AN ALLOWABLE EXPENDITURE UNDER THE PROVISIONS OF THE ACT. THE ASSESSEE IS FOLLOWI NG MERCANTILE SYSTEM OF ACCOUNTING AND THE DEDUCTIONS CAN BE ALLOWED IN RES PECT OF ONLY THOSE EXPENSES WHICH ARE INCURRED IN THE RELEVANT ACCOUNT ING YEAR FOR THE PURPOSE OF COMPUTING THE PROFITS AND GAINS. HENCE THE SAID AMOUNT IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE. FROM THE ABOVE, IT IS CLEAR THAT THE AO HAS NOT EXA MINED THE NATURE AND GENUINENESS OF THE IMPUGNED EXPENDITURE. HE HA S SIMPLY DISALLOWED FOR THE REASON THAT THE ASSESSEE IS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING AND THE DEDUCTION CAN BE ALLOWED IN RESPECT OF ONLY THO SE EXPENSES WHICH ARE :-7-: I.T.A. N0. 865/MDS/2017 INCURRED IN THE RELEVANT ACCOUNTING YEAR OF COMPUTI NG THE PROFITS AND GAINS. THUS, HE HAD NOT EXAMINED THE NATURE AND GENUINENES S OF THE EXPENDITURE AT ALL. IN THE VIEW OF THAT WE ARE OF THE CONSIDERED OPINION THAT THE AO HAS TO EXAMINE THE NATURE AND GENUINENESS OF THE EXPENDITU RE AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW FOLLOWING THE RATIO OF THE D ELHI HIGH COURT (SUPRA). TO THAT EXTENT, THE REVENUES APPEAL IS TREATED AS ALL OWED. 6. IN THE RESULT, THE REVENUES APPEAL IS TREATED A S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON TUESDAY, THE 5 TH DAY OF SEPTEMBER, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 0 /DATED: 5 TH SEPTEMBER, 2017 JPV &)1232 /COPY TO: 1. %/ APPELLANT 2. )*% /RESPONDENT 3. 4 ( )/CIT(A) 4. 4 /CIT 5. 2) /DR 6. 7 /GF