1990 (1) TMI 121 - AT - Income Tax

Summary

Issues:
- Disallowance of deduction on service charges paid to M/s Rashmi Trading Co.

Analysis:
1. The appeal by the Revenue challenged the CIT(A)'s deletion of the addition of Rs. 3 lakhs made for service charges paid to M/s Rashmi Trading Co., Bombay. The Assessing Officer disallowed Rs. 1,80,000 as he was not convinced that services were rendered by M/s Rashmi Trading Co. The CIT(A) allowed the deduction after finding evidence of services rendered and subsequent payments made by the assessee. The CIT(A) also considered the formal agreement executed during the year under appeal, establishing a liability to pay service charges.

2. The Revenue argued that no deduction should be allowed for the Rs. 1,20,000 expenditure related to the preceding year since the assessee maintained books on a mercantile basis. However, the assessee's counsel highlighted correspondence indicating an understanding between the parties before the incorporation of the company, leading to the execution of a formal agreement in August 1982. The counsel relied on legal precedents to support the argument that a liability accrues when the right to receive payment arises.

3. The Tribunal confirmed the CIT(A)'s findings that services were rendered by M/s Rashmi Trading Co. and payments were made by the assessee. The Tribunal noted the accrual of liability during the year under appeal and upheld the deduction of Rs. 1,80,000. Regarding the Rs. 1,20,000 deduction for the preceding year, the Tribunal considered the correspondence indicating an understanding but no enforceable right until the formal agreement was executed in August 1982. The Tribunal agreed that under the mercantile system of accounting, a liability is allowable in the year of accrual, even if it pertains to an earlier year.

4. Ultimately, the Tribunal dismissed the Revenue's appeal, affirming the allowance of the deduction for the service charges paid to M/s Rashmi Trading Co. The decision was based on the accrual of liability during the relevant year and the absence of any grounds to interfere with the CIT(A)'s decision.