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2017 (3) TMI 202 - AT - Income TaxDisallowance of depreciation in respect of software purchased - bogus purchase - Held that - The opinion formed by the AO that the purchases were bogus was on mere fact that the notices issued to the parties u/s 133(6) were not served and returned back unserved and the Inspected deputed to verify the facts could not find them on the given addresses cannot be considered as sufficient ground for treating the purchases being bogus one and consequently disallowing the depreciation claimed by the assessee. A similar issue has been decided in the case of H R Mehta (2016 (7) TMI 273 - BOMBAY HIGH COURT) wherein it has been held that once it was established that the payments were made through banking channels it is not fair on the part of the AO to came to the conclusion that the transactions were bogus without confronting the assessee that the material used against him and without allowing the cross-examination by the department to the assessee. In the present case also, the report of the Inspector has been used against the assessee and the assessee was not allowed to rebut the finding of the Inspector. In view of this factual aspect are of the opinion that the order of the ld.CIT(A) deserves to be set aside. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to allow depreciation as prayed by the assessee. - Decided in favour of assessee Addition on account of commission and brokerage charges under the head prior period expenses - Held that - We find merit in the argument of the ld. AR that part of the expenses incurred pertaining to next year and were not claimed in that year but separated and shown under the head prepaid expenses as on 31.3.2006 which were reversed in the financial year 2006-07 and charged to the profit and loss account under the head prior period expenses. The ld. AR vehemently pointed out that these in fact are not prior period expenses but the expenses which related to the current year but incurred in the previous year. We find from the facts before us that the assessee has incurred and paid commission and brokerage expenses which were rightly accounted for by the assessee by debiting partly in the financial year 2005-06 and showing the balance under the head prepaid expenses which were duly charged to the profit and loss account though under wrong head prior period expenses . The depiction of expenses in the profit and loss account under wrong head would not disentitle the assessee from claiming the expenses when the expenses pertain to the current year. Accordingly, we are inclined to set aside the order of the ld.CIT(A) and direct the AO to allow the claim of the assessee of commission and brokerage expenses - Decided in favour of assessee Disallowance of amount made on account of lease rent paid to the subsidiary - Held that - We find that the AO has failed to bring on record any material which proved that the transaction of advancing money, use thereof for the purchase of premises which was in turn leased out to the assessee on rental, assessee receiving interest to the tune of ₹ 59,20,361/- on the loan advanced was a sham. The ld. CIT(A) has rightly came to the conclusion that it is the commercial transaction which entered purely out of business exigency and commercial consideration and therefore correctly deleted by the ld.CIT(A). Moreover, the AO has failed to bring on records another angle of the transactions that the interest received by the assessee and rentals paid were not at the market rate and therefore, we are inclined to uphold the order of the ld.CIT(A) by dismissing the appeal of the revenue on this issue. Postponement of the recognition of the revenue thereby violating the matching principle of accountancy - Held that - We find that during the year under consideration the assessee has changed system of revenue recognition qua the course fee received from the students in cinematic training division from billing basis to only to the system which recognized the revenue basis on the training imparted/services rendered. In our opinion, the assessee has every right to change the method of accounting provided the same is consistently following the subsequent years. Moreover, the ld. CIT(A) called for the remand report from the AO which confirmed that the assessee was following the said system of accounting in the subsequent years. We are therefore in agreement with the conclusion drawn by the ld. CIT(A) that the AO was not right in rejecting the method of accounting followed by the assessee and therefore we uphold the same. Accordingly, the ground taken by the revenue is rejected - Decided in favour of assessee Prior period expenses disallowance - Foreign Travel liability was ascertained and stood incurred during the Financial Year 2007-08 - Held that - It is clear from the orders of authorities below that the expenses were incurred and charged by the assessee to the profit and loss account as the amounts were settled during the year in the case of advertisement expense, foreign travel expenses, repair and maintenance, franchisee. We find that these expenses could not be charged to the profit and loss account as the bills were not settled due to dispute and finally due to interference of higher authorities of the assessee, the bills were settled during the year which in our opinion were rightly charged to profit and loss account as the final quantification of the amount of expenses took place during the year. In view of these facts, we are of the considered view that the order of the ld.CIT(A) was not correct and is set aside and accordingly and we direct the AO to allow the expenses as pertaining to current year by deleting the disallowance.- Decided in favour of assessee
Issues Involved:
1. Disallowance of depreciation on software purchases. 2. Treatment of prepaid expenses as prior period expenses. 3. Disallowance of lease rent paid to a subsidiary. 4. Postponement of revenue recognition. 5. Disallowance of prior period expenses. Detailed Analysis: 1. Disallowance of Depreciation on Software Purchases: The assessee claimed depreciation of ?14,35,200 on software purchased from two parties, which the Assessing Officer (AO) disallowed, alleging the purchases were bogus. The AO based this on unserved notices and the Inspector's report that the suppliers were not found at the given addresses. The First Appellate Authority (FAA) upheld the AO's decision, stating the assessee failed to provide confirmations from the suppliers. However, the tribunal found that the assessee had provided sufficient documentation, including invoices, bank statements, and PAN details, and that the AO did not confront the assessee with the Inspector's report, violating the principle of natural justice. The tribunal set aside the FAA's order and directed the AO to allow the depreciation. 2. Treatment of Prepaid Expenses as Prior Period Expenses: The assessee claimed prepaid expenses of ?21,64,800 as current year expenses, which the AO treated as prior period expenses and disallowed. The FAA upheld the AO's decision, noting that the expenses related to a previous year. The tribunal found that the expenses were correctly accounted for as prepaid in the previous year and charged to the profit and loss account in the current year. The tribunal directed the AO to allow the claim of the assessee. 3. Disallowance of Lease Rent Paid to a Subsidiary: The AO disallowed ?36,03,439, the difference between the lease rent paid to a subsidiary and the interest received on a loan given to the subsidiary, considering the transaction as sham. The FAA deleted the disallowance, noting that the transactions were at arm's length and based on market rates. The tribunal upheld the FAA's decision, finding no evidence that the transactions were sham and noting that the AO failed to prove that the interest and rent were not at market rates. 4. Postponement of Revenue Recognition: The AO disallowed ?5,42,65,010, alleging that the assessee postponed revenue recognition, violating the matching principle of accountancy. The assessee had changed its method of revenue recognition to accrual, recognizing revenue only when services were rendered. The FAA upheld the assessee's method, noting that it was consistently followed in subsequent years. The tribunal agreed with the FAA, finding that the change in accounting method was permissible and consistently applied. 5. Disallowance of Prior Period Expenses: The AO disallowed ?18,92,499 of prior period expenses, which the FAA partly upheld, allowing some expenses that were crystallized during the year. The tribunal found that the expenses were either crystallized or settled during the year and directed the AO to allow these expenses as pertaining to the current year. Additional Ground: Deduction for Provision for Bad and Doubtful Debts: The assessee raised an additional ground for a deduction of ?85,98,557 for provision for bad and doubtful debts, based on a Supreme Court decision. The tribunal admitted the additional ground and remanded it to the AO for de novo consideration. Conclusion: The tribunal allowed the appeals of the assessee concerning the disallowance of depreciation, treatment of prepaid expenses, and prior period expenses. It upheld the FAA's decision to delete the disallowance of lease rent and the method of revenue recognition. The additional ground for deduction of provision for bad and doubtful debts was remanded to the AO for fresh consideration. The appeals of the revenue were dismissed.
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