2019 (10) TMI 661 - AT - Income Tax

Enhancement of income by the CIT(A) - Prior period expenditure - settlement of disputed expenditure - It was observed that expenses pertaining to the immediately preceding assessment year could not be allowed as deduction against the income for the year under consideration - HELD THAT - There is no dispute on the fact that the assessee did not record any expenditure on this issue in its books for the financial year relevant to the assessment year 2007-08 and accordingly no deduction was claimed in the preceding year on this score. It was only on the mutual settlement arrived at between the assessee and Kinetic Engineering Ltd. that the assessee depicted the amount of ₹ 124.53 lakh as expenditure and claimed deduction during the year. Under the mercantile system of account, a deduction is allowed when contractual liability to pay finally arises. Hon ble Delhi High Court in National Agricultural Co-operative Marketing Federation of India Ltd. (NAFED) vs. CIT 2011 (6) TMI 14 - DELHI HIGH COURT has held that a contractual liability is incurred when enforceable liability of the assessee to pay is determined. Unless there is a contrary separate provision, the amount becomes deductible at that time, even if it pertains to earlier years. When we view the facts of the instant case, it clearly emerges that the assessee did not accept the liability of ₹ 144.99 lakh on account of bills raised by Kinetic Engineering Ltd. for the A.Y. 2007-08. The dispute was finally settled in the year under consideration at a figure of ₹ 124.53 lakh. It is at this stage that the liability to pay can be said to have finally arisen. Once the liability to pay arose in the year relevant to the assessment under consideration, the same has to be allowed as deduction. We, therefore, overturn the impugned order and delete the enhancement of ₹ 124.53 lakh made by the ld. CIT(A) by treating it as prior period expenditure. Disallowance being, 50% of disallowance made by the AO on account of non-genuine labour expenses - HELD THAT - Assessee furnished the details and rates at which job charges were paid by it to the sister concerns. Section 40A(2)(a) states that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. It is evident that the onus is on the AO to prove that the expenditure incurred by the assessee is excessive or unreasonable. CIT(A) has simply treated 50% of the same as excessive without showing as to how the same was so. In the given circumstances, we are satisfied that no addition is called for.

Summary

Issues involved:
1. Assessment year 2008-09 - Common issue in two appeals by different assessees.

Detailed Analysis:
1. The first issue in the judgment pertains to an appeal related to the assessment year 2008-09 where the first appellant, a manufacturing unit, contested an enhancement made by the ld. CIT(A) amounting to ?124.53 lakh. The dispute arose from job work services provided by Kinetic Engineering Ltd., resulting in a bill reduction agreement. The ld. CIT(A) disallowed the deduction of ?124.53 lakh for the assessment year 2007-08, considering it as prior period expenditure. The tribunal analyzed the mercantile system of accounting, citing the Hon’ble Delhi High Court's ruling in National Agricultural Co-operative Marketing Federation of India Ltd. vs. CIT, emphasizing that a deduction is allowed when a contractual liability to pay arises. The tribunal overturned the CIT(A)'s decision, allowing the deduction as the liability to pay arose in the relevant assessment year.

2. The second issue in the same appeal concerned the confirmation of a disallowance of ?17,49,623/-, representing 50% of the disallowance made by the AO on non-genuine labor expenses. The AO disallowed the entire amount under section 40A(2) due to lack of evidence on job movements to related concerns. The ld. CIT(A) reduced the disallowance to 50% after verifying the genuineness of the expenditure. The tribunal observed that the genuineness was established, and the onus was on the AO to prove excessiveness or unreasonableness under section 40A(2). As the ld. CIT(A) did not provide a basis for the 50% disallowance, the tribunal ordered the deletion of the addition.

3. In a separate appeal concerning the same assessment year, the only issue raised was against an enhancement of ?21.77 lakh by the ld. CIT(A). The tribunal noted the similarity of facts with the previous appeal and followed the decision in the first case to delete the addition, as the liability to pay finally arose in the relevant assessment year.

Overall, both appeals were allowed, and the orders were pronounced on 16th September 2019.