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2021 (12) TMI 702 - AT - Income TaxAddition on payment of rent to director and wife of director u/s 40A(2)(b) - HELD THAT - The issue is covered in favour of the assessee as ITAT in assessee s own case 2017 (3) TMI 1053 - ITAT MUMBAI has decided the issue in favour of the assessee. It is not the case that order of ITAT has been reversed by Hon ble Bombay High Court. Hence, respectfully following the precedent, we uphold the order of Ld.CIT(A) - Decided against revenue. Addition of expenditure on provision for construction cost of various sites in view of mercantile system of accounting - matching concept of accountancy provision - assessee claim is that actually the expenditure is incurred in the next year, however in order to comply with matching principle/concept of accountancy, it has recognized proportionate expenditure during the year - CIT(A) deleted the additions and agreed with the assessee s contention that in order to comply with the matching concept, the booking of the expenditure as provision was justified - HELD THAT - As expenditure has to be accounted only when it has been incurred i.e either paid or it is accrued. If the expenditure is not accrued merely on the basis of matching principle any amount cannot be provided. The case laws referred by the Ld.CIT(A) also deal with the expenditures which have actually accrued. The Hon ble Courts have held that expenses can be said to have been incurred only if they have accrued. Nowhere, it is provided that without accrual expenditure should be provided merely on matching concept. We note that Ld.CIT(A) has not at all given a finding that the quantum of the expenditure worked by the assessee had actually accrued. Merely because the expenditure is incurred in the next year, on the plank matching principle assessee cannot book a good portion of the expenditure during the year to adjust the profit as per its desire. Expenditure can be provided only, if the expenditure has actually accrued. Since in this case, Ld.CIT(A) has not given any finding that the expenditure has accrued, we deem at appropriate to remit the issue to the file of the Ld.CIT(A). The Ld.CIT(A) shall examine the issue afresh and give a finding whether the expenditure allowed by him can be considered to be the expenditure which is accrued during this year - With these directions, we remit the issue to the file of the Ld.CIT(A) - Appeal by the revenue partly allowed for statistical purpose.
Issues Involved:
1. Deletion of addition on payment of rent under section 40A(2)(b) of the Income Tax Act. 2. Deletion of addition of expenditure on provision for construction cost under the mercantile system of accounting. 3. Levy of interest under section 234B and 234C of the Income Tax Act. 4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Deletion of Addition on Payment of Rent under Section 40A(2)(b): The primary issue revolves around the deletion of an addition of ?12,80,000/- made by the Assessing Officer (AO) concerning rent payments to related parties under section 40A(2)(b) of the Income Tax Act. The AO questioned the reasonableness of the rent payments made to Mrs. Shobha Jain and Mrs. Sudha Gupta, who are related parties. The AO found the rental agreements unconvincing and doubted the business necessity of these payments. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) found that the payments were justified based on the rental agreements and the business use of the premises. The CIT(A) noted that similar issues had been decided in favor of the assessee in previous assessment years (AY 2011-12 and AY 2012-13) by the ITAT. The ITAT upheld the CIT(A)'s decision, emphasizing that the AO had not provided evidence to show that the payments were excessive or unreasonable compared to market rates. 2. Deletion of Addition of Expenditure on Provision for Construction Cost: The second issue pertains to the addition of ?14,31,40,000/- made by the AO for provision for construction expenses. The AO disallowed this provision, arguing that it was hypothetical and not relevant to the current year. The CIT(A) deleted this addition, supporting the assessee's contention that the provision was made to comply with the matching principle of accountancy. The CIT(A) relied on the Supreme Court rulings in Metal Box Co. of India Ltd. vs Their Workmen and Calcutta Co. Ltd. vs CIT, which allow for the deduction of accrued liabilities under the mercantile system of accounting. However, the ITAT found that the CIT(A) had not provided a finding that the expenditure had actually accrued during the year. The ITAT remitted the issue back to the CIT(A) to examine whether the expenditure had indeed accrued during the year, emphasizing that expenses should only be accounted for if they have accrued. 3. Levy of Interest under Section 234B and 234C: The CIT(A) upheld the levy of interest under sections 234B and 234C of the Income Tax Act, citing the Supreme Court's decision in CIT vs Anjum M.H. Ghaswala, which held that the levy of interest is mandatory. The assessee's contention against the levy of interest was dismissed as legally untenable. 4. Initiation of Penalty Proceedings under Section 271(1)(c): The CIT(A) dismissed the assessee's ground contesting the initiation of penalty proceedings under section 271(1)(c), stating that no prejudice is caused to the assessee by the mere initiation of penalty proceedings. The CIT(A) noted that penalty proceedings are separate and the assessee would be given an opportunity to be heard before any penalty is levied. Conclusion: The ITAT consolidated the appeals and delivered a common order. The appeal regarding the deletion of the addition on payment of rent was dismissed, upholding the CIT(A)'s decision. The appeal concerning the provision for construction cost was remitted back to the CIT(A) for a fresh examination. The appeals concerning the levy of interest and the initiation of penalty proceedings were dismissed. Both appeals filed by the revenue were partly allowed for statistical purposes.
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