2016 (1) TMI 1456 - AT - Income Tax

Disallowance of prior period expenses - entire claim of prior period expenses is in respect of liability crystallized during the year and claim is in conformity with past history of the case - HELD THAT - The assessee is a government undertaking. The assessee has been following mercantile system of accounting, as per which all items of income and expenditure are treated as accrued, only after the approval is granted by the competent authority. This system has been followed consistently in respect of both income and expenditure items. The system followed has been accepted by the department in the immediate preceding year. Therefore, in our view, it will not be appropriate to disturb the regular system being followed by the assessee. Moreover, the revenue has already accepted the same basis adopted regarding the accrual of income and, therefore, different standards cannot be followed in respect of expenditure incurred in relation to the same income as it would give a distorted picture of the profit of the year. The ld.CIT(A) has also allowed the claim in part in his order. As AR has submitted that the issue may be sent back to the ld.AO for verification to an extent of ₹ 67,99,614/-. DR does not object to this preposition, d by the ld.AR. Accordingly we set aside this ground to the ld.AO for verification and to allow the same following the principle of consistency. This ground raised by the assessee therefore stands statistically allowed. Addition being in the nature of contingent claim without proper appreciation of facts or legal principles - HELD THAT - As the amount has not been crystallized the same cannot be treated as income in the hands of the assessee. The assessee being a Government undertaking has been following a system of accounting as per which all items of income and expenditure are treated as accrued only after the approval is granted by competent authority. This system has been followed consistently in respect of both income and expenditure items which has not been disputed by the Revenue in any of the preceding years. Therefore, we are of the considered opinion that the addition confirmed by the CIT(A) is without any basis and needs to be deleted. Income had accrued or received during the year under reference - addition as accrued interest income on dues from Iraq - HELD THAT - As perused assessee has only realeased a total amount of ₹ 166.62 crores at an interest of ₹ 6% p.a. We are, therefore, inclined to delete the addition confirmed by the ld. CIT(A) to an extent of ₹ 71.26 crores as interest on the basis of the above discussions.

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Addition of contingent claim as income.
3. Addition of accrued interest income on Iraq dues.
4. Deletion of prior period expenses by CIT(A).

Issue-wise Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The CIT(A) confirmed the disallowance of Rs. 67,99,614/- in respect of the claim of prior period expenses. The assessee argued that these expenses were liabilities crystallized during the year and consistent with past practices. The CIT(A) noted that proper evidence was not filed to support these claims. The Tribunal observed that the assessee, a government undertaking, consistently followed a system where income and expenses were recognized only after approval by the competent authority. This system had been accepted by the department in previous years. The Tribunal directed the Assessing Officer (AO) to verify the claim of Rs. 67,99,614/- and allow it following the principle of consistency.

2. Addition of Contingent Claim as Income:
The CIT(A) confirmed the addition of Rs. 201.66 lacs as income, which the AO treated as interest on mobilization advance. The assessee contended that this was a contingent claim under arbitration proceedings and not an accrued income. The Tribunal noted that the arbitration proceedings were ongoing and, therefore, the amount could not be treated as income. The Tribunal emphasized that the assessee's accounting system, which recognized income and expenses only after approval, had been consistently followed and accepted by the department. Consequently, the Tribunal deleted the addition of Rs. 201.66 lacs.

3. Addition of Accrued Interest Income on Iraq Dues:
The CIT(A) confirmed the addition of Rs. 71.26 crores as accrued interest income on Iraq dues. The assessee argued that the interest of Rs. 48.87 crores was approved and taxed in AY 2009-10, and the addition was duplicative. The Tribunal reviewed the documents and found that the Government of India had sanctioned Rs. 166.62 crores at an interest rate of 6% per annum, which included the interest of Rs. 48.87 crores. The Tribunal concluded that the addition of Rs. 71.26 crores was incorrect and deleted it.

4. Deletion of Prior Period Expenses by CIT(A):
The Revenue appealed against the deletion of Rs. 1,67,08,386/- of prior period expenses by the CIT(A). The CIT(A) relied on the Tribunal's decisions for AY 1998-99, 2006-07, and 2007-08, which upheld the assessee's accounting system. The Tribunal reiterated that the assessee's system of recognizing income and expenses only after approval had been consistently followed and accepted by the department. Therefore, the Tribunal found no infirmity in the CIT(A)'s decision and dismissed the Revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance of prior period expenses and the addition of contingent claims and accrued interest income. The Tribunal dismissed the Revenue's appeal concerning the deletion of prior period expenses. The order was pronounced in open court on 20.01.2016.