2020 (12) TMI 1389 - AT - Income Tax

Accrual of income - income accrued but not received has not been accounted for by the Assessee - assessee claimed royalty payment on accrual basis on the basis of the quantification as per the existing guidelines of the Office of the Directory General of Hydrocarbon (DGH) - system of accounting is being followed consistently - change of accounting policy which is also changed according to the CAG report which is mandatory for the Assessee Board to follow - HELD THAST - It is pertinent to note that the assessee has followed the same method of accounting which is receipt basis for taking remittance on DGH as an income. The change in account in policy in reference to CAG s observation/report was basically to strengthen the fund management of the Assessee Board. The assessee accounted for Rs. 4657 lacs as an income from the sale of data from DGH. From the perusal of the records it can be seen that from accounting purposes it is taken as outstanding on 31st March, 2008 and a sum was realized in the next assessment year and has been accounted for as income. This fact was no where denied by the Revenue. Thus, the CIT(A) has totally ignored this aspect and simply on the basis of change of accounting policy which is also changed according to the CAG report which is mandatory for the Assessee Board to follow, confirmed the addition. The same is not justified as the accounting policy principles were thoroughly followed by the Assessee Board and the income was reported for A.Y. 2009-10 which is next assessment year. There is no revenue loss as well. Therefore, the Assessing Officer as well as the CIT(A) was not correct in making addition. Addition of Royalty payable to State Government being prior period expense - CIT(A) has given a categorical finding that the royalty payable to Arunachal upto December 2008, the assessee has debited such expenses on the mercantile basis and since these liabilities of payment of royalties have been provided in the relevant year in pursuance of the DGH letters dated 23.03.2009 and 27.03.2009 having detailed working. Once the royalty expenses have been crystallized in the relevant Assessment Year, these are not the contingent liability when the genuineness of the same is not questioned by the Revenue authorities. Hence, there is no need to interfere the findings of the CIT(A). Assessee is allowed and appeal of the revenue is dismissed.

Summary

Issues:
1. Disallowance of royalty payment as prior period expenses.
2. Addition of income not accounted for by the assessee.

Analysis:

Issue 1: Disallowance of Royalty Payment as Prior Period Expenses
The appellant, a statutory body providing financial assistance to the Oil Industry, claimed royalty payment on accrual basis from A.Y. 2008-09 based on C & AG directions. The Assessing Officer disallowed Rs. 30,62,00,000 as prior period expenses. The CIT(A) partly allowed the appeal, stating that the royalty expenses were crystallized during the relevant year. The appellant argued that the prior period expenses were allowable, citing various cases and the consistency in accounting methods. The Revenue contended that the liability was not crystallized during the relevant year. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were not contingent liabilities and were duly provided for in the relevant year, leading to the dismissal of the Revenue's appeal.

Issue 2: Addition of Unaccounted Income
The appellant's appeal challenged the addition of Rs. 13,28,38,502 on account of income not accounted for by the assessee in the current year. The appellant followed a consistent system of accounting, and the income was accounted for in the subsequent year. The appellant argued against double taxation and presented evidence supporting their accounting practices. The Revenue contended that the change in accounting system without proper cause justified the addition. However, the Tribunal found that the change in accounting policy was in line with CAG's report and was necessary for fund management. The Tribunal noted that the income was reported in the next assessment year without any denial from the Revenue, leading to the allowance of the appellant's appeal and the dismissal of the Revenue's appeal.

In conclusion, the Tribunal allowed the appellant's appeal regarding the unaccounted income and dismissed the Revenue's appeal concerning the disallowance of royalty payment as prior period expenses.