2020 (12) TMI 1029 - AT - Income Tax

Disallowance of licence fee - system of accounting - accrual of expenditure - HELD THAT - When the assessee was granted the liquor licence for financial year 2006-07 i.e. Assessment Year 2007-08 he has claimed it as expenditure in the Profit Loss Account of Assessment Year 2007-08. We are of the considered view that since the expenditure of licence fees has crystallized during Financial Year 2006-07 (Assessment Year 2007-08), the assessee has rightly claimed it as an expenditure against revenue of assessment year 2007-08. Issue of cash system/mercantile system of accounting is not having any impact on the issue under consideration because the amount of advance licence fees paid during Financial Year 2005-06 was just an advance and it converted into expenditure during Financial Year 2006-07 (Assessment Year 2007-08). Thus Ld. CIT(A) was not justified in confirming the addition made by Ld. A.O. We thus set aside the finding of Ld. CIT(A) and allow the claim of the assessee for the expenditure of licence fees

Summary

Issues:
Appeal against disallowance of license fees paid in earlier year but crystallized during the year; Claim of advance payment for license fees following consistency principle; Consideration of cash system of accounting; Disallowance of expenditure of advance license fee.

Analysis:
1. The appeal pertains to the disallowance of license fees paid in an earlier year but crystallized during the year under consideration. The assessee contended that the advance payment for license fees was in accordance with government regulations, where fees are paid before the commencement of the year for which the license is applied. The advance payment was treated as an expenditure when the license was granted for the relevant year. The Tribunal found that the expenditure of license fees had indeed crystallized during the year under consideration, and thus, the assessee rightly claimed it as an expenditure against revenue for that year.

2. The second issue raised was regarding the consistency principle in assessing advance payments for license fees. The assessee argued that since the payment was treated as an advance in the balance sheet until the license was granted, it should be considered as an expenditure for the year in which it pertained. The Tribunal agreed with this argument and held that the advance payment for license fees was correctly claimed as an expenditure for the year in which it crystallized.

3. The third issue involved the consideration of the cash system of accounting. The assessee maintained that the advance payment for license fees was in line with the cash system of accounting, as the expenditure was recognized when the license was granted. The Tribunal observed that the cash system versus mercantile system of accounting did not impact the treatment of the advance payment, as it converted into expenditure when the license was granted for the relevant year.

4. Lastly, the Tribunal addressed the disallowance of the expenditure of advance license fee by the lower authorities. After examining the audited financial statements, relevant documents, and the nature of the payment, the Tribunal concluded that the assessee had rightly claimed the advance payment as an expenditure for the year in which the license was granted. Therefore, the Tribunal set aside the decision of the lower authorities and allowed the claim of the assessee for the expenditure of license fees.

In conclusion, the Tribunal allowed the appeal of the assessee, overturning the disallowance of the license fees and recognizing the advance payment as a valid expenditure for the relevant year.