2016 (2) TMI 76 - AT - Income Tax

Disallowance of prior period expenses - Held that - From the details filed by the assessee it appears that some of the expenditure pertains to the salary revision of the employees. The assessee has claimed that due to revision of salary the liability on account of enhanced salary has been crystallized only during the year under consideration. Since the details of expenditure filed by the assessee do not throw much light on this fact that the expenditure pertaining to enhanced liability towards pay to the employees on account of revised salary were finalized and crystallized only during the year under consideration accordingly in the facts and circumstances of the case as well as in the interest of justice we remand this issue to the record of the AO with a direction to the assessee to furnish better particulars for examination of the AO and accordingly the claim of the assessee has to be decided as per law. Addition on ad hoc upfront premium received by the assessee under the concession agreement with three parties - Held that - When the assessee claims to have followed the accrual basis of accounting and recognizing the income on accrual basis then this very fact of recognizing the entire upfront premium as income in the books of account shows that the entire receipt accrued during the year under consideration. Though the C&AG has raised some objections in his Audit report in respect of recognizing the entire income as income of the year under consideration and recommended only proportionate amount of upfront premium to be considered as income of the year under consideration however the said remarks of the C&AG would not change the character or the incidence of accrual of the income. No error or illegality in the orders of the authorities below in treating the entire upfront premium received by the assessee as income for the year under consideration. Disallowance on account of provision for accounting and auditing - Held that - There is no dispute that audit of the accounts by the C&AG is a definite requirement as well as a certain procedure of conducting the audit by the audit team. Therefore there is no question of any contingency in respect of said expenditure except the fact that the audit has to be done only post closure of the accounts. If the assessee is following this practice consistently then it is revenue neutral because every year this expenditure is required to be allowed. Accordingly if the assessee is following this practice consistently then the said expenditure cannot be disallowed for a particular year. In the facts and circumstances of the case this issue is set aside to the record of the AO with the direction to verify whether the assessee is following this practice of recognizing the expenditure of the audit fee pertaining to each year irrespective of the actual payment then it should not be disallowed for the year under consideration.

Issues Involved:
1. Disallowance of prior period expenses.
2. Disallowance of upfront premium received under concession agreements.
3. Disallowance under Section 14A.
4. Disallowance of provision for accounting and auditing expenses.
5. Levy of interest under Sections 234B, 234C, and 234D of the IT Act.

Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The assessee claimed Rs. 4,47,44,564/- as prior period expenses, which were disallowed by the AO on the grounds that the assessee, following the mercantile system of accounting, failed to justify the claim. The AO relied on the decisions of the Hon'ble Bombay High Court in Taparia Tools Ltd. vs. JCIT (260 ITR 102) and the Hon'ble Supreme Court in J.K. Industries Ltd. vs. Union of India (165 taxman 323). The CIT(A) confirmed this disallowance. The Tribunal noted that some expenses pertained to the salary revision of employees and were crystallized during the year under consideration. The Tribunal remanded the issue back to the AO, directing the assessee to furnish better particulars for examination.

2. Disallowance of Upfront Premium Received Under Concession Agreements:
The assessee received upfront premiums from three companies under concession agreements for a period of 30 years and offered 1/30th of the upfront premium as income for the year, treating the balance as liability. The AO treated the entire amount as income for the year, which was upheld by the CIT(A). The Tribunal noted that the assessee had no further obligations after receiving the upfront premium, and thus, the entire amount should be recognized as income in the year of receipt. The Tribunal distinguished this case from the Chennai Special Bench decision in ACIT vs. Mahendra Holidays & Resorts (India) Ltd. (131 TTJ 1), where the assessee had continuing obligations.

3. Disallowance Under Section 14A:
The assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed.

4. Disallowance of Provision for Accounting and Auditing Expenses:
The AO disallowed Rs. 27,60,000/- on account of provision for accounting and auditing, as the assessee could not prove the liability. The CIT(A) confirmed this disallowance. The Tribunal noted that the audit by the C&AG is a definite requirement and the expenditure is certain, although incurred post-closure of accounts. The Tribunal remanded the issue back to the AO to verify if the assessee consistently followed the practice of recognizing this expenditure, and if so, it should not be disallowed.

5. Levy of Interest Under Sections 234B, 234C, and 234D of the IT Act:
The Tribunal noted that the levy of interest under these sections is mandatory and consequential.

Conclusion:
The appeal was partly allowed, with specific issues remanded back to the AO for further verification and adjudication. The Tribunal emphasized the importance of consistent accounting practices and the proper recognition of income and expenses in accordance with the law. The decision to treat the entire upfront premium as income in the year of receipt was particularly significant, given the absence of further obligations by the assessee.

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