2016 (3) TMI 148 - HC - Income Tax

Addition on account of claim of interest and sales tax recoverable from IFCI - Held that - The position which obtains is that the liability in respect of interest has been incurred in the respective years though paid but not charged to profit and loss account of those years. The liability in respect of those years was charged to profit and loss account of this year although no amount was paid by way of interest to the IFCI in this year in so far as the amount of ₹ 22,04,344/- is concerned. In other words, there is no foundation to hold that the liability was inchoate in those years which crystalized in this year, the reason being that the assessee was required to pay interest at the agreed rate and no rebate was admissible in view of non fulfilment of export obligation which was also clear in those years. Therefore, we do not find ourselves in agreement with the learned counsel that the liability was otherwise allowable under this Act in this year. The liability was also not paid in this year. Therefore, correctly held that the assessee is not entitled to deduct this amount in computation of its income - Decided against assessee Claim of sales tax liability - Accrual of liability - Held that - assessee had failed to justify how the amounts claimed were transferred to the recoverable account when these were not the liability of the assessment year in question and they were not paid or were payable in this year. - The assessee has followed mercantile system and there is no dispute in this matter. If the liabilities of earlier three years in respect of interest or earlier year in respect of sales tax is allowed merely on the basis of Board resolution, it will lead to distortion of the picture of profits of this year. Therefore, we are of the view that the amounts were not deductible as neither the liability accrued in this year nor it was paid in this year. - Decided against assessee Addition under the head entertainment expenditure - Held that - We find that the expenditure was incurred on staff members for providing tea etc. Further expenditure was also incurred on lunch and dinner for staff as well as for others. The assessee has not culled out the expenditure incurred on outsiders which will be in the nature of entertainment expenditure while the expenditure on the staff members during office hours or for late sitting in the office will not be in the nature of entertainment expenditure. However, in the absence of proper working furnished by the assessee, the estimate of entertainment expenditure at 25% of the total expenditure is reasonable.- Decided against assessee

Summary

Issues Involved:
1. Disallowance of Rs. 22,04,344/- on account of liability of interest to IFCI.
2. Disallowance of Rs. 13,88,741/- as sales tax liability.
3. Disallowance of Rs. 52,257/- under the head 'entertainment expenditure'.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 22,04,344/- on account of liability of interest to IFCI:
The Tribunal maintained the disallowance of Rs. 22,04,344/- on the grounds that the liability had not crystallized in the assessment year in question. The Tribunal found that the interest liability pertained to the financial years 1989-90, 1990-91, and 1991-92. The assessee had transferred 20% of the amounts paid in those years to an interest recoverable account, which was later written off in the year under appeal. The Tribunal noted that the assessee did not fulfill the conditions for a rebate of 20% on interest as required by IFCI, and therefore, the liability accrued in the respective years and not in the year under appeal. The Tribunal concluded that the liability was not deductible in the computation of income for the assessment year in question as it neither accrued nor was paid in that year.

2. Disallowance of Rs. 13,88,741/- as sales tax liability:
The Tribunal upheld the disallowance of Rs. 13,88,741/- on account of sales tax liability, agreeing with the CIT(A) that the assessee failed to justify how the amounts claimed were transferred to the recoverable account when they were not the liability of the assessment year in question. The Tribunal observed that no evidence was provided to show that any demand or claim of refund was raised or denied by the sales tax authorities in the year under appeal. The Tribunal emphasized that the assessee, following the mercantile system of accounting, could not claim liabilities of earlier years based merely on a Board resolution. Consequently, the Tribunal held that the amounts were not deductible as the liability neither accrued nor was paid in the year under appeal.

3. Disallowance of Rs. 52,257/- under the head 'entertainment expenditure':
The Tribunal maintained the disallowance of Rs. 52,257/- on account of staff welfare expenses and annual general meeting expenses, agreeing with the Assessing Officer's treatment of 25% of the expenditure as entertainment expenditure. The Tribunal noted that the expenditure on tea, lunch, and dinner had an element of entertainment, and in the absence of a proper breakdown provided by the assessee, the estimate of 25% of the total expenditure as entertainment expenditure was deemed reasonable. The Tribunal found no merit in the assessee's claim that the entire expenditure should be allowed as business expenditure.

Conclusion:
The Tribunal's findings were upheld, and the appeal by the assessee was dismissed. The Tribunal's conclusions were based on the lack of evidence to support the assessee's claims and the application of relevant accounting principles and legal provisions. The substantial questions of law were answered against the assessee, affirming the disallowances made by the Assessing Officer and the CIT(A).