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2004 (4) TMI 277 - AT - Income TaxAddition towards interest income - Disallowance of prior period expenses - Shortage of cash - foreign travel expenses - Addition u/s 68 . HELD THAT - The return filed by the assessee for the year under appeal showing interest at 12 per cent on Rs. 2, 00, 000 is in accordance with its method of accounting and the difficulty has been created because the deposit matured on 22nd April 1998 and it was renewed with interest for a further period. Any difference between the interest of Rs. 24, 000 declared in the return and what the assessee actually received on 22nd April 1998 would properly be chargeable in the next assessment year. Accordingly we hold that no addition is called for in respect of the interest on the fixed deposit for the year under appeal. The AO would however ensure that the difference is brought to tax in the next assessment year. With these remarks we delete the addition of Rs. 6, 424 and allow the sub-ground. Disallowance of the prior period expenses - It is not disputed on behalf of the Department that the practice of debiting the price of tickets in respect of sales made during the last fortnight of March in the accounts during the first fortnight of April has been adopted by the IT authorities. There is thus no loss of revenue. Further there is no other objection to the allowability of the expenditure and in the case of a company it does not matter much whether the expenditure is allowed in a particular year or in the next year because the tax rates are the same and there is no basic exemption also. A consistent practice accepted by both the parties should not be ordinarily or needlessly departed from. It should also be remembered that if the claim for prior period expenses by way of price of tickets is not allowed the assessee may well raise a claim that the price of ticket sold during the last fortnight of March 1998 should be allowed in the assessment year under appeal. There is thus no justification for any departure from the past practice. Therefore though we reject the assessee s claim that the liability accrued only in the first fortnight of April 1997 having regard to the consistent practice adopted by both the sides over a considerably long period of time we see no need to depart from the same. Accordingly we direct the Departmental authorities to allow deduction of Rs. 6, 35, 551. Shortage of cash - As regards the shortage of cash the CIT(A) has held that no evidence has been filed. The learned counsel for the assessee has however drawn our attention to the affidavit of Devis Manjali the managing director of the assessee-company a copy of which is at p. 58 of the paper book which is to the effect that the shortage of cash was noticed in the Cochin Branch by the branch auditor during finalisation of branch account that the shortage arose due to embezzlement by an employee of the branch and therefore it is contended that it should be allowed. It is not clear as to before whom this affidavit was filed. The affidavit does not bear any date. However assuming that the affidavit contains an assertion of fact we consider it proper to restore this issue to the file of the AO who shall take a decision afresh in respect of the allowability of the shortage of cash. The AO shall afford adequate opportunity of being heard to the assessee before taking a decision. Addition u/s 68 - When the payments to the creditors have not been doubted and when the commission income in respect of the sales of those very tickets for which payments are outstanding as on 31st March 1998 has been assessed as the income of the assessee it is not justified on the part of the IT authorities to add the outstanding balances u/s 68 of the Act. We are also inclined to hold that s. 68 has no application to such a situation. The assessee has not received any moneys from the airline companies. The credit represents amount due to them for purchase of tickets. Sec. 68 comes into play only where any sum is found credited in the account of a third person and the assessee is unable to give satisfactory explanation in respect of the nature and source of the sum. The section cannot apply where goods or services are acquired by the assessee on credit and an entry is made crediting the liability in the account of the person from whom the goods and services are acquired. In this view of the matter also the addition cannot be sustained. It is accordingly deleted. Thus the entire addition is deleted as unjustified. Foreign travel expenses - It is the duty of the assessee only to show that the expenditure was incurred for the purpose of the business irrespective of whether it resulted in benefit to the business or not. However the objection of the IT authorities that the directors visited religious places and places of shopping has to be reckoned with. While therefore holding that the CIT(A) was not justified in sustaining a disallowance of 50 per cent of the foreign travel expenses we direct the AO to examine the expenditure in terms of r. 6D of the IT Rules a proposal which was agreed to before us by the learned counsel for the assessee. The AO is therefore directed to regulate the expenditure under the above rule and disallow the amount if any found not allowable as per the rule. The ground is disposed of accordingly. In the result the appeal filed by the assessee is partly allowed.
Issues Involved:
1. Validity of assessment u/s 143(3) due to improper service of notices u/s 142(1) and 143(2). 2. Addition of Rs. 6,424 towards interest income. 3. Disallowance of prior period expenses of Rs. 7,11,406. 4. Addition of Rs. 13,86,868 u/s 68. 5. Disallowance of 50% of foreign travel expenses of Rs. 3,35,375. 6. Levy of interest of Rs. 5,20,955 u/s 234B. Summary: 1. Validity of Assessment u/s 143(3): The first ground regarding the invalidity of the assessment due to improper service of notices u/s 142(1) and 143(2) was not pressed by the assessee and was accordingly dismissed. 2. Addition of Rs. 6,424 towards Interest Income: The AO added Rs. 6,424 as interest income, which was the difference between the interest deposits and the disclosed interest. The CIT(A) confirmed the addition based on the mercantile system of accounting. However, the Tribunal found that the interest of Rs. 24,000 declared by the assessee was in accordance with its method of accounting, and any difference should be chargeable in the next assessment year. Thus, the addition was deleted, and the AO was directed to ensure the difference is taxed in the next year. 3. Disallowance of Prior Period Expenses of Rs. 7,11,406: The CIT(A) sustained the disallowance of prior period expenses, including Rs. 6,35,551 paid to airlines, based on the mercantile system of accounting. The Tribunal, while rejecting the assessee's claim that the liability accrued only in April 1997, allowed the deduction of Rs. 6,35,551 due to the consistent practice accepted by both parties over a long period. The issue of doubtful debts and shortage of cash was addressed separately, with the latter being remanded to the AO for fresh consideration. 4. Addition of Rs. 13,86,868 u/s 68: The AO added Rs. 13,86,868 u/s 68 due to the lack of confirmation of sundry creditors. The CIT(A) sustained the addition due to the absence of confirmations from airline companies. The Tribunal found that the addition was unjustified as the assessee had provided sufficient details and evidence, including bank statements and ledger accounts. It held that s. 68 does not apply to trade liabilities and deleted the entire addition. 5. Disallowance of 50% of Foreign Travel Expenses of Rs. 3,35,375: The CIT(A) disallowed 50% of the foreign travel expenses as personal in nature. The Tribunal held that once it is agreed that the trip was for business purposes, the entire expenditure should be allowed. It directed the AO to examine the expenditure in terms of r. 6D of the IT Rules and disallow any amount not allowable under the rule. 6. Levy of Interest of Rs. 5,20,955 u/s 234B: The assessee contended that the levy of interest u/s 234B was without proper directions or reasons. The Tribunal upheld the levy, noting that the necessary computation of interest was contained in Form No. ITNS 150, which was served on the assessee. It found no infirmity in the levy and upheld it in principle, directing the AO to rework the interest while giving effect to the order. Conclusion: The appeal filed by the assessee was partly allowed, with specific directions and deletions made for various grounds.
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