2012 (1) TMI 276 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are u/s 263 of the Income-tax Act, 1961, enhancement of income, disallowance of premium on Keyman Insurance policy, application of mercantile system of accounting, and the correctness of the order passed by the ld. CIT.

Enhancement of Income u/s 263:
The appeal was filed against the order passed by the ld. CIT u/s 263, enhancing the income of the assessee. The grounds of appeal included the contention that the assessment was completed under scrutiny u/s 143(3) after due application of mind. The appellant argued that the order was erroneous and prejudicial to the revenue due to lack of proper enquiry and application of mind by the AO.

Disallowance of Premium on Keyman Insurance Policy:
The ld. CIT disallowed a portion of the premium paid on Keyman Insurance policy, stating that the expenses beyond a certain date were not allowable in the relevant assessment year. The CIT held that expenses must be related to the period under assessment for accrual basis accounting. The disallowed amount was added to the total income of the assessee.

Mercantile System of Accounting:
The ld. CIT based the disallowance on the mercantile system of accounting, emphasizing that expenses should be debited to the profit and loss account only if they are related to the period under assessment. The CIT noted that the assessee had followed the mercantile system for other expenses but not for the premium paid on the Keyman Insurance policies.

Decision:
The Tribunal observed that the liability to pay the insurance premium arose and was paid in the year under appeal, in accordance with the mercantile system of accounting followed by the assessee. As the expenses were recognized in the books of account, the order of the ld. CIT disallowing the insurance premium was vacated, and the appeal filed by the assessee was allowed to that extent.

This judgment highlights the importance of proper application of accounting principles and the necessity for expenses to be related to the relevant assessment year for accrual basis accounting.