2022 (6) TMI 735 - AT - Income Tax

Disallowance on account of LC Discounting Charges in the Revised Return filed - when the liability arose? - year of assessment - Assessing Officer observed that the assessee has claimed LC charges neither provided nor claimed in the original return. Assessee's explanation that the liability crystallized in the impugned assessment year was also rejected - AO also took adverse inference for non-furnishing of the details by the assessee - AO objected admission of additional evidence by CIT-A - HELD THAT - Till the signing of memorandum of understanding the CIT(A) accepted that the liability did not crystallise. When the liability crystallised in February 2012, the same is to be assessed for AY 2012-13. Hence, Ld. CIT(A) has contradicted himself when he says that the liability arose after there was a memorandum of understanding on 21.02.2012 still the same has to be allowed in AY 2011-12 i.e. in the year earlier than the date of MOU. The decision referred by the Ld. CIT(A) from Hon'ble Supreme Court in the case of Nonsuch Tea State Ltd. 1974 (11) TMI 5 - SUPREME COURT also supports the proposition that the liability arose only when the MOU was signed. In that case, Hon'ble Supreme Court has held that the liability to pay remuneration arose only when government conveyed its approval and not prior to that date. Same proposition is emanating from the decision of CIT vs Exxon Mobil Supra 2010 (9) TMI 36 - DELHI HIGH COURT which Ld. CIT(A) has himself referred. In this view of the matter when Ld. CIT(A) is himself accepting and giving case laws for the proposition that the liability arose only when the MOU was signed, there is no justification for the same to be accounted for in the current assessment year. The mere submission that there was the opinion from a C.A. for this claim has no legal sustainability dehors any cogent reasoning. Once it is clear that the expenditure was not to be accounted for this year, the order of the Ld. CIT(A) is not at all sustainable. As regards other aspects wherein Ld. CIT(A) is accepting the assessee's submission that five of the parties have replied directly to the Assessing Officer, which the AO has not so acknowledged. We find that nothing stopped the Ld. CIT(A) from examining the assessment records as to whether the AO's claim that there was no response from these parties is correct or not. In this view of the matter, we do not approve the Ld. CIT(A) doubting the claim of the Assessing Officer that some of these parties did not reply. Be as it may the adjudication of the claim on merit is only of academic interest, as we have already held that the amount was not liable to be accounted for in the present assessment year. We set-aside the order of the Ld. CIT(A) on the reasoning that Ld. CIT(A) has erred in holding that the L.C. discounting charges were to be allowed in the present assessment year. - Decided in favour of revenue for statistical purpose.

Summary

Issues Involved:
1. Deletion of disallowance of LC Discounting Charges.
2. Ignoring findings of inquiries during remand proceedings.
3. Identity and creditworthiness of creditors.
4. Genuineness of expenses.
5. Applicability of AS-5 on prior period items.
6. Crystallization of expenditure in the correct assessment year.

Detailed Analysis:

1. Deletion of Disallowance of LC Discounting Charges:
The Revenue contested the deletion of Rs. 3,07,60,733/- claimed as LC Discounting Charges in the revised return for AY 2011-12. The CIT(A) had accepted the assessee's explanation that the liability crystallized in February 2012 after signing a Memorandum of Understanding (MOU) with suppliers. However, the Tribunal noted that the liability crystallized in February 2012, making it relevant for AY 2012-13, not AY 2011-12. Thus, the CIT(A)'s decision was found contradictory and unsustainable.

2. Ignoring Findings of Inquiries During Remand Proceedings:
The Revenue argued that the CIT(A) ignored the findings from the AO's remand report, which indicated that notices issued to 10 parties resulted in 5 unserved notices and dubious replies from two companies. The Tribunal found that the CIT(A) should have verified the assessment records to confirm the AO's claims about the responses from these parties. This oversight by the CIT(A) was deemed inappropriate.

3. Identity and Creditworthiness of Creditors:
The CIT(A) held that the identity and creditworthiness of five creditors, to whom notices were not served, had been established. The Tribunal, however, found this claim unsupported, as the CIT(A) did not provide adequate reasoning or evidence to counter the AO's findings. The Tribunal emphasized the need for proper verification of the creditors' identities.

4. Genuineness of Expenses:
The CIT(A) accepted the assessee's claim of genuineness for the LC discounting charges based on the MOU and other submitted documents. However, the Tribunal highlighted that the CIT(A) did not provide sufficient evidence to prove that these expenses were genuine and should be accounted for in AY 2011-12. The Tribunal concluded that the expenses were not genuine for the year under consideration.

5. Applicability of AS-5 on Prior Period Items:
The CIT(A) referenced AS-5, which deals with prior period items, to justify the claim of LC discounting charges. The Tribunal found that the CIT(A) misapplied AS-5, as the liability crystallized in February 2012, making it relevant for AY 2012-13. The Tribunal emphasized that expenses should be accounted for in the correct assessment year as per the matching principle of accounting.

6. Crystallization of Expenditure in the Correct Assessment Year:
The Tribunal agreed with the CIT(A) that the liability crystallized in February 2012 but found it contradictory to allow the claim in AY 2011-12. The Tribunal cited the Supreme Court's decision in Nonsuch Tea Estate Ltd. vs. CIT and the Delhi High Court's decision in CIT vs. Exxon Mobil Lubricants Pvt. Ltd., both supporting the principle that liabilities should be accounted for in the year they crystallize. Consequently, the Tribunal held that the LC discounting charges should be accounted for in AY 2012-13.

Conclusion:
The Tribunal set aside the CIT(A)'s order, holding that the LC discounting charges were not allowable in AY 2011-12. The appeal of the Revenue was allowed for statistical purposes.