2016 (10) TMI 710 - AT - Income Tax

Disallowance of kist payment (lease rent) - section 43B applicability on kist payment - system of accounting followed - prior period item - Kist payment for the previous period - Held that - As more than 93% of the expenditure pertains to the kist payment interest on kist and license fees which has been accounted on payment basis. Therefore undisputedly in the business of the assessee almost entire expenditure is incurred in respect of purchase of goods by making advance payment or simultaneous payment as the payment was being made to the Government. It is apparent that since beginning the assessee has been giving the treatment of kist payment on cash basis and the Assessing Officer accepted the same because of the reason that the department has taken a stand that the provisions of section 43B are applicable on the kist payment to the Government. Only after the judgment of Hon ble jurisdictional High Court in Commissioner Of Income-Tax Versus Sri Balaji And Co. 2000 (1) TMI 17 - KARNATAKA High Court and final settlement of the issue of applicability of section 43B, the Assessing Officer first time disallowed the expenditure in question. Therefore the assessee as well as revenue were under bona fide belief that the provisions of section 43B of the Act are applicable in respect of the kist payment uptil. The practice of accounting for a particular item of expenditure on cash basis was accepted for such a long time then it becomes revenue neutral as it was not claimed on due basis in the earlier assessment year. In view of the undisputed fact that in substance the system of accounting followed by the assessee is cash basis and further consistent treatment of expenditure of kist payment has been given and accepted over several years on payment basis then disallowance for this year is not justified. It is not the case of the department that this method of accounting of kist payment on cash basis is not consistently followed by the assessee. Therefore following this system of accounting consistently should not be disturbed in a particular year and particularly for the year under consideration when this claim was not made on accrual basis in the earlier year due to consistently followed accounting treatment otherwise it would result double taxation of the same income. In view of the above facts and circumstances of the case, we allow the claim of the assessee.

Summary

Issues:
Appeal against order of Commissioner of Income Tax for Assessment Year 2007-08 - Disallowance of kist payment - System of accounting followed by the assessee - Applicability of section 43B of the Income Tax Act - Cash basis vs. mercantile basis of accounting.

Analysis:
The appeal pertains to the disallowance of kist payment by the Assessing Officer for the Assessment Year 2007-08. The issue arose due to the system of accounting followed by the assessee, specifically regarding the treatment of kist payment. The Assessing Officer contended that the assessee followed a mercantile system of accounting and should have claimed expenses accordingly. The CIT (Appeals) initially allowed the claim of the assessee, but the Tribunal remanded the matter to reexamine the system of accounting. The Assessing Officer, upon reevaluation, maintained the disallowance/addition, leading to the appeal before the ITAT.

The assessee argued that since the inception of its business in 2000, it consistently accounted for kist payment on a cash basis due to the provisions of section 43B, which supersede accrual system for certain expenses. The assessee highlighted the department's consistent view on kist payment falling under section 43B, leading to the cautious accounting treatment. The majority of the business expenditure, including kist payment and interest, was accounted on a payment basis, ensuring revenue neutrality and avoiding double taxation. The assessee emphasized the necessity to maintain consistent accounting practices to prevent adverse effects on financial results.

The Revenue, on the other hand, argued that the Assessing Officer correctly identified the assessee's accounting system as mercantile and disallowed the expenditure not claimed on an accrual basis in the previous year. However, the ITAT noted that the assessee's accounting predominantly followed a cash basis, especially for kist payment, interest, and license fees. The Tribunal highlighted the long-standing practice of treating kist payment on a cash basis, which was accepted by the department until a final judgment clarified the applicability of section 43B. Given the revenue-neutral nature of the accounting treatment and the substantial portion of expenditure accounted on a cash basis, the ITAT allowed the assessee's claim, emphasizing the importance of consistent accounting practices and avoiding double taxation.

In conclusion, the ITAT allowed the appeal of the assessee, recognizing the consistent cash basis accounting for kist payment and the revenue-neutral impact of the accounting treatment. The Tribunal emphasized the necessity to maintain accounting practices in line with long-standing practices and clarified interpretations of relevant tax provisions to prevent adverse financial implications for the assessee.