2020 (7) TMI 174 - AT - Income Tax

Disallowance of professional and legal expense, miscellaneous expenditure and travelling expenses - provision of expenses payable - concept of accounting on accrual basis - HELD THAT - The provision of expenses payable account is naturally shown under the head sundry creditors/ expenses payable/ liabilities etc in the balance sheet at the close of the year. On the first day of next year, this account of Expenses payable is credited to the respective Expenses account of the next year. As and when those bills are received for, which provision was made in the last year, for which provision of Expenses payable reversed by crediting expenses account of next year, assessee debits the amount of invoices to that respective expenditure account. Thus, there is no impact on the profit and loss account of the next year. Reversal of the provision is merely a control account. Assessee also deducts tax at sources at the close of the year on such provisions, If it is not deducted same is disallowed u/s 40 (a) (ia) of the act. Assessee is a company and therefore it has to mandatorily maintain its books of accounts of Accrual basis of accounting. Accrual means Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received or paid) and recorded in the financial statements of the periods to which they relate. The lower authorities have failed to understand the concept of accounting on accrual basis and practice followed by the assessee. Provision made by the assessee on accrual basis was on basis of reasonable estimates. It cannot be an unascertained and contingent liability. Similar is the fact of disallowance of legal and professional expense, miscellaneous expense and travelling expenses. Disallowance confirmed by the ld CIT (A) deserves to be deleted. Accordingly, we reverse the orders of the lower authorities and direct the ld AO to delete the disallowance of professional and legal expense, miscellaneous expenditure and travelling expenses. Nature of stamp duty paid in relation to the leased business premises - Revenue or capital expenditure - lease was for a period of 10 years - HELD THAT - The issue is squarely covered in favour of the assessee by the decision of the Honourable Bombay High Court in CIT versus Reliance Industrial Infrastructure Ltd 2015 (8) TMI 1215 - BOMBAY HIGH COURT wherein the assessee in that case took a land on lease for a period of 30 years and paid stamp duty in respect of deed of lease. Honourable Supreme Court in case of Taparia Tools Ltd versus The Joint Commissioner Of Income Tax 2015 (3) TMI 853 - SUPREME COURT also held that same is also not a deferred revenue expenditure. In view of this, we direct the lower authorities reversing the decision to allow the stamp duty charges paid by the assessee as an expenditure for the current year holding it to be revenue expenditure in nature allowable u/s 37 (1) of the act.

Issues Involved:
1. Disallowance of provisions for professional, miscellaneous, and travel expenses.
2. Disallowance of stamp duty paid on leased business premises as capital expenditure.
3. Charging of interest under section 234B of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Provisions for Professional, Miscellaneous, and Travel Expenses:

The assessee challenged the disallowance of ?1,721,805 for professional expenses, ?7,787,018 for miscellaneous expenses, and ?4,87,24,855 for travel expenses. The Assessing Officer (AO) disallowed these expenses on the grounds that they were unascertained liabilities and contingent in nature, not allowable under Section 37(1) of the Income Tax Act. The AO argued that the provisions were made for probable but not certain expenses, and since the assessee did not offer these provisions for taxation, they were deemed unascertained liabilities.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee had reversed these provisions in the subsequent year, indicating that they were contingent liabilities. The CIT(A) also noted that the assessee did not provide sufficient evidence to justify these provisions as ascertained liabilities.

The Income Tax Appellate Tribunal (ITAT) reviewed the case and found that the provisions were made on a reasonable estimate basis as part of the accrual system of accounting, which the assessee was required to follow. The ITAT noted that the provisions were reversed in the subsequent year and actual expenses were debited as per the received invoices. The ITAT concluded that these were not unascertained liabilities but legitimate business expenses incurred during the financial year. Consequently, the ITAT directed the AO to delete the disallowances of ?1,721,805 for professional expenses, ?7,787,018 for miscellaneous expenses, and ?4,87,24,855 for travel expenses.

2. Disallowance of Stamp Duty Paid on Leased Business Premises as Capital Expenditure:

The assessee contested the disallowance of ?68 lakhs paid as stamp duty for leased business premises, which the AO treated as capital expenditure because the lease was for a period of 10 years, implying an enduring benefit.

The CIT(A) upheld the AO's decision, stating that the long-term lease provided an enduring benefit to the assessee, thus justifying the classification of stamp duty as capital expenditure.

The ITAT, however, referenced the decision of the Bombay High Court in the case of Commissioner of Income Tax vs. Reliance Industrial Infrastructure Ltd., where it was held that stamp duty paid for lease agreements, irrespective of the lease period, should be treated as revenue expenditure if incurred for business purposes. The ITAT applied this precedent and directed the AO to treat the ?68 lakhs stamp duty as revenue expenditure allowable under Section 37(1) of the Income Tax Act.

3. Charging of Interest Under Section 234B of the Income Tax Act:

This issue was not elaborately discussed in the judgment. However, given the context, it is implied that the interest under section 234B would be consequential to the primary issues of disallowance. Since the ITAT ruled in favor of the assessee on the primary issues, the interest charged under section 234B would need to be recalculated based on the revised taxable income.

Conclusion:

The appeal of the assessee was allowed on all grounds. The ITAT directed the deletion of the disallowed expenses and the reclassification of the stamp duty as revenue expenditure. The revised order was pronounced beyond the usual 90-day period due to COVID-19 lockdowns, but this delay was justified and excluded from the time limits as per ITAT rules.

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