2022 (3) TMI 771 - AT - Income Tax

Disallowance of previous year expenses - crystallisation of expenditure - HELD THAT - We are of the opinion that these prior period expenses crystallised in the assessment year under consideration and payment has been made at ₹ 28,18,226. This practice of accounting has been followed consistently from year to year by the assessee and there is no change in this practice in this assessment year also. The assessee has been making the provisions for payment of expenses at the end of each year which provision has been paid in the next assessment year. Sometimes there was short provision made by assessee and in view of short provision, when actual bills are received after crystallisation of expenditure, assessee makes the payment. This method is consistently followed by the assessee. Being so, we do not find infirmity in the method of accounting followed by the assessee and it cannot be disallowed on the reason of prior period expenses incurred by the assessee. Accordingly, we allow this ground taken by the assessee. Unexplained investment in building including interest on borrowings - assessee shown total cost of building in its books of account less as against the assessee's valuer's report - HELD THAT - Valuation report submitted by the assessee is by the assessee's own valuer which cannot be the basis for addition without the AO referring the matter to the DVO for valuation. For this purpose, he relied on various case laws which are kept on record. In the present case, if we consider the difference between the books of account of the assessee and the valuation report including interest cost, difference is very huge at ₹ 1,09,71,118. The AO ought to have referred the matter to the DVO for valuation which he failed to do so. Being so, without referring the matter to the DVO, the AO cannot consider the difference between the entries made by the assessee and its registered valuer to make the addition. The valuation report relied on by the AO for making the addition is not the valuation report which is contemplated u/s. 142A of the Act. To make addition on account of difference in cost of construction, AO is duty bound to reject the books of accounts and refer the matter to the DVO as prescribed u/s. 142A of the Act, which the AO failed to do so. The registered valuer's report of the assessee cannot be the basis for making addition which has to be deleted. Being so, we are inclined to delete the addition made by the AO on this count. This ground is accordingly allowed.

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Addition towards unexplained investment in building including interest on borrowings.

Issue-wise Detailed Analysis:

1. Disallowance of Prior Period Expenses:

The primary issue revolves around the disallowance of ?28,18,226 as prior period expenses. The appellant contended that these expenses crystallized during the assessment year under consideration and were consistently accounted for in their books. The Tribunal had previously ruled in favor of the appellant, stating that these expenses, although pertaining to an earlier year, were paid in the impugned assessment year and were therefore allowable under section 37(1) of the Income Tax Act. The High Court of Karnataka, in its judgment dated 28.8.2013, remanded the matter back to the Assessing Officer (AO) for fresh consideration, focusing on the unexplained investment and expenses related to building construction and interest. However, the Tribunal noted that the High Court did not specifically address the issue of prior period expenses. The Tribunal reiterated that the appellant had consistently followed the practice of accounting for such expenses when they crystallized, and there was no change in this practice. The Tribunal allowed the appellant's ground, emphasizing that the AO should not have disallowed these expenses as they were part of the regular accounting practice.

2. Addition Towards Unexplained Investment in Building Including Interest on Borrowings:

The second issue pertains to the addition of ?18,19,322 and ?91,51,796 towards unexplained investment in building construction, including interest on borrowings. The AO had initially brought to tax the differential amount between the depreciation schedule and the valuation report provided by the appellant's valuer. The AO argued that the interest on borrowings, which was capitalized and included in the cost of construction, should not be considered as part of the actual cost. The CIT(A) upheld the AO's decision, but the ITAT had previously ruled against the revenue, stating that the AO had not rejected the books of accounts and had not provided a basis for quantifying the difference. On further appeal, the High Court remanded the issue back to the AO. In the fresh assessment, the AO maintained the same additions, asserting that the interest cost was not part of the actual construction cost and that the difference in valuation was unexplained. The appellant argued that the valuation report was an estimate and that the actual cost, including interest, was duly accounted for in the books. The Tribunal found that the AO should have referred the matter to the Departmental Valuation Officer (DVO) for an accurate valuation, as prescribed under section 142A of the Act. Without such a referral, the AO's reliance on the appellant's valuer's report was deemed insufficient for making the addition. Consequently, the Tribunal deleted the addition made by the AO.

Conclusion:

The Tribunal allowed the appeal, ruling in favor of the appellant on both issues. The disallowance of prior period expenses was overturned, and the addition towards unexplained investment in building construction was deleted due to the AO's failure to refer the matter to the DVO for a proper valuation. The judgment emphasized the importance of consistent accounting practices and the necessity of following prescribed procedures for valuation disputes.