TMI Blog2013 (7) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... ee funds - There is no requirement under the law that an assessee should have separate account in respect of non interest bearing funds from that of interest bearing funds to establish that the investments have been made out of its own funds - Following decision of CIT vs. Reliance Utility and Powers Limited [2009 (1) TMI 4 - HIGH COURT BOMBAY] - Decided against revenue. Disallowance of expenditure - prior period expenditure - mercantile system of accounting - Held that:- liability in respect of work/services rendered in earlier year was crystallized only on receipt of the bill in the current assessment year - Moreover, the method adopted by the respondent assesses has been accepted by the revenue for the earlier assessment year and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.100.76 crores. During the course of the assessment proceeding the Assessing Officer noted that the respondent had earned dividend income amount of Rs.63.73 lacs by way of dividend income from mutual funds. The dividend income earned from mutual fund was exempt from tax. However, the Assessing officer also noted that during the course of the year the Respondent-assessee had invested an amount of Rs.4147.44 lacs in mutual funds on which dividend was earned. The Assessing officer noticed that the Respondent-assessee had borrowed a sum of Rs.30 crores during the year and had paid total interest of Rs.613.26 lacs on the same. On the above basis the Assessing Officer concluded that the amount of Rs.4147 lacs was invested out of borrowed fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where interest free funds were available with the assessee, the presumption has to be that investments have been made out of such interest free funds and not out of borrowed funds. In the above view, the appeal of the revenue was dismissed. (d) The grievance of the Revenue before us is that the entire amount invested in mutual funds came out of a common fund maintained by the respondent assessee. Thus, the Respondent-assessee not having maintained separate account in respect of borrowed funds and own funds the disallowance of interest to the extent of Rs.76.76 lacs by the Assessing officer was justified. As against the above, the Counsel for the assessee submits that the issue is covered by the decision of the jurisdictional High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Utility (supra) in favour of the Respondent assessee and against the Appellant-revenue. 4) Regarding Question B : (a) In its return of income for assessment year 2004-05 while declaring total income of Rs.100.76 crores the Respondent-assessee claimed an expenditure of Rs.92.81 lacs as prior period expenses. The Assessing Officer disallowed the expenditure relating to prior period on the ground that as the respondent followed mercantile system of accounting expenditure relatable to an earlier year cannot be allowed as deduction in the assessment year under consideration. Thus an amount of Rs.92.81 lacs was added to the income of the Respondent-assessee. b) In appeal, the CIT(A) held that the method of accounting consistently followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability is to be accounted when the bills are received and the payments made in the subsequent year. Thus the appeal of the Respondent-assessee was allowed. (d) The Revenue's grievance is that in mercantile system of accounting the respondent assessee has to account for the expenditure in the year in which the work/service was received by them and not when the bills were received by the respondent assesses. (e) We find that the liability in respect of work/services rendered in earlier year was crystallized only on receipt of the bill in the current assessment year. Moreover, the method adopted by the respondent assesses has been accepted by the revenue for the earlier assessment year and also while accounting for the income earned in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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