2017 (1) TMI 245 - AT - Income Tax

Disallowance of expenditure - AO disallowed the same on the ground that the expenditure of the preceding assessment years cannot be claimed as deduction during the year - Held that - The salary and interest to partners for A.Y. 2005-06 and 2006-07 has already been debited to the cost of flats in those years and credited to capital account of partners. Once the same has been debited to the cost of the flat in the preceding assessment years, the assessee cannot claim the same again under the head other expenses in the current year. Even though there was no profit in the preceding assessment years, nothing precluded the assessee from claiming the minimum salary paid to the partners in those years. The method followed by the assessee in the instant case amounts to claiming of the expenditure twice, i.e. in the year when the assessee has debited such expenses to the cost of the flats as there was no profit and again during the impugned assessment year when there is profit. This definitely amounts to double deduction. Therefore, do not find any infirmity in the order of the CIT(A) upholding the action of the Assessing Officer in disallowing the expenditure . - Decided against assessee.

Summary

Issues: Disallowance of expenses of earlier years under the head "other expenses" for Assessment Year 2007-08.

Analysis:
1. The appellant, a partnership firm engaged in construction, declared total income of ?34,039/- for AY 2007-08. The Assessing Officer noted an amount of ?9,00,195/- debited under "other expenses," including ?4,70,990/- paid to partners as interest and salary for earlier years.
2. The AO disallowed the expenses of earlier years citing sections 36 & 37 of the IT Act, relying on legal precedents. The appellant explained the expenses were accounted for in earlier years when no profit was made, and requested allowance of the expenditure.
3. Before the CIT(A), the appellant argued that in the construction business, profit realization takes time, and expenses incurred in earlier years were accounted for appropriately. The CIT(A) upheld the AO's decision, stating that the expenses were already accounted for and claiming them again amounted to double deduction.
4. The appellant appealed to the Tribunal, challenging the disallowance. The Tribunal considered arguments from both sides and upheld the CIT(A)'s decision, stating that the method followed by the appellant resulted in double deduction, as the expenses were already accounted for in earlier years.
5. The Tribunal concluded that debiting the expenses to the cost of flats in preceding years and claiming them again as "other expenses" in the current year constituted double deduction. The appeal was dismissed, affirming the disallowance of ?4,70,990/-.

This detailed analysis covers the issues involved in the legal judgment regarding the disallowance of expenses of earlier years under the head "other expenses" for Assessment Year 2007-08.