2020 (10) TMI 922 - AT - Income Tax

Disallowance of prior period expenses - reasons for claiming these expenses one by one under each head which has been reproduced by the AO in the assessment order - whether expenditures are crystallized during the year under consideration? - HELD THAT - When the liability is crystallized during the year under consideration and the assessee has been regularly and consistently following the same method of accounting and system of approval of the payments, then the claim of expenditures would not affect the tax liability of the assessee. Accordingly, in the facts and circumstances of the case and following the earlier order of this Tribunal, the disallowance made by the AO and sustained by the ld. CIT(A) is deleted. Disallowance of Business Promotion and Social Welfare Expenses - payments made to Federation of Mining Association of Rajasthan, District Police Welfare Fund, District Weight Lifting Association, West Zone Culture Centre, District Vikas Samiti for construction of Community Centre for Police Department, Rose Society, Sangeet Parishad, Mahila Samiti, Government Adarsh Higher Primary School - AO has disallowed the said amount on the ground that these expenses are in the nature of donation and not incurred for the purpose of business of the assessee - HELD THAT - Maintaining a cordial relations with the Police Department and District Administration is in the interest of business of the assessee and hence the said payment of the assessee for the welfare of the Police Department, particularly Community Centre as well as Welfare Fund of the Police Department is an allowable expenditure having regard to the nature of business activity in the mining field which requires police help for maintaining law and order situation and uninterrupted functions of the assessee. Similarly the other contributions to the various Societies, Samitis and Sangeet Parishad including the Government Adarsh Higher Primary School for sponsorship of the sports tournaments are certainly for the publicity and business promotion of the assessee. Even otherwise, such type of contributions are participations of the assessee and monetary help in conducting the social welfare activity in the area would bring a good reputation and image of the assessee's business which is nothing but a business promotion activity of the assessee. Expenditures incurred by the assessee under the head Business Promotion and Welfare Activities is allowed. Addition made by the AO is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Disallowance of business promotion and social welfare expenses.

Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The primary issue pertains to the disallowance of ?5,76,340/- on account of prior period expenses. The assessee, a Government of Rajasthan Enterprise, engaged in mining, processing, and trading of minerals, filed its return of income declaring total income of ?98,38,14,112/-, later revised to ?98,34,77,175/-. During scrutiny, the AO noted a claim of deduction for prior period expenses amounting to ?55,03,616/-. The assessee explained that ?18.87 lacs was depreciation added back in the computation, and ?36.17 lacs were expenses approved in the current year due to stringent voucher passing rules. The AO allowed ?30,38,072/- but disallowed ?5,76,340/-. The CIT(A) upheld the disallowance.

The assessee argued that the expenses were approved and crystallized in the current year, citing consistent accounting practices and previous favorable Tribunal decisions. The Tribunal noted that the AO accepted the need for approval by concerned authorities, allowing most expenses but disallowing some. The Tribunal found the disallowed expenses to be crystallized in the current year, thus allowable. It referenced previous Tribunal decisions and noted no revenue effect due to consistent tax rates, ultimately deleting the disallowance.

2. Disallowance of Business Promotion and Social Welfare Expenses:
The second issue involved the disallowance of ?10,87,000/- claimed under business promotion and social welfare expenses. The AO disallowed the amount, viewing it as donations not incurred for business purposes. The assessee contended that contributions to various associations and welfare funds were for business interests, publicity, and maintaining good relations with authorities, thus allowable under section 37(1) of the IT Act.

The Tribunal examined the nature of the expenses, finding them genuine and connected to business interests. Contributions to the Federation of Mining Association, police welfare funds, and various social organizations were deemed to benefit the assessee’s business operations and public image. The Tribunal cited previous decisions, including the assessee’s own case, supporting the allowability of such expenses under section 37(1). Consequently, the Tribunal allowed the expenses and deleted the addition made by the AO.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal deleting the disallowances made by the AO and upheld by the CIT(A), recognizing the expenses as legitimate business expenditures. The order was pronounced on 04/08/2020.