2020 (1) TMI 987 - AT - Income Tax

Disallowance of prior period expenses while calculating income under the normal provision of the Act - HELD THAT - When the assessee followed the mercantile system of accounting, expenditure incurred during the previous year though pertaining to an earlier period is deductable. We have carefully considered the judgment passed in the matter of Kedarnath Jute Mfg. Co. Ltd.-vs-CIT 1971 (8) TMI 10 - SUPREME COURT where it was held that where the assessee has followed mercantile system of accounting and distributing the liability to pay to sales tax and not making provision in its books of accounts particularly when the demand raised on the basis of the sales made during the accounting year the assessee entitled to deduct the amount of sales tax on the basis of the liability incurred and even in the absence of entries in the books of accounts, the same is admissible. The expenditure is not to be disallowed merely because it related to earlier previous year. In short under mercantile system of accounting the liability is allowable in the year it crystallized and thus the claim of the assessee seems to be justified and hence allowable See SAURASHTRA CEMENT AND CHEMICAL INDUSTRIES 1994 (10) TMI 30 - GUJARAT HIGH COURT . The addition made in this respect is, therefore, deleted. Addition towards amount received on account of advance against depreciation - CIT-A direct the AO to verify the claim of the appellant in the event the appellant is able to prove that any income has been taxed in the subsequent assessment year is in fact adjusted against advance such income would not be liable to be taxed in the year in which the appellant company has shown any income - HELD THAT - It is the case of the assessee that such advances to be adjusted with the power so supplied in the future. We, thus, having regard to the facts and circumstances of the case find no infirmity in the order passed by the Learned CIT(A) in making such direction upon the Ld. AO with the guidelines framed therein in order to grant relief to the assessee if permissible under the law, so as to warrant interference. Hence, we confirm the order passed by the Ld. CIT(A).

Summary

Issues:
1. Disallowance under section 14A of the Act ?1,88,087 as per Rule 8D.
2. Disallowance of prior period expenses ?26,40,010 under normal provisions.
3. Addition of ?14,92,00,000 towards advance against depreciation.
4. Levy of interest under sections 234D and recovery under section 244A.
5. Initiation of penalty proceedings under section 271(1)(c).

Issue 1 - Disallowance under section 14A:
The appeal challenges the disallowance of ?1,88,087 under section 14A of the Income Tax Act. The appellant did not press this ground during the hearing, leading to its dismissal.

Issue 2 - Disallowance of prior period expenses:
The appellant contested the disallowance of prior period expenses amounting to ?26,40,010 while calculating income under normal provisions. The appellant argued that these expenses, though related to earlier years, were crystallized and incurred during the current year. The appellant relied on the judgment in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT and the principle of mercantile accounting. The tribunal found in favor of the appellant, citing that under the mercantile system, liabilities are deductible in the year they crystallize, allowing the appellant's claim and deleting the addition.

Issue 3 - Addition of advance against depreciation:
The appeal contested the addition of ?14,92,00,000 received as an advance against depreciation, which was upheld by the CIT(A). The appellant explained that the advance was received as per a Power Purchase Agreement and was to be adjusted against future bills. The tribunal noted that the appellant failed to prove the adjustment of the advance against future bills. The CIT(A) directed the AO to verify the claim and allowed for the reduction of the addition from future income if proven. The tribunal upheld the CIT(A)'s decision, confirming the direction given to the AO.

Issue 4 - Levy of interest and recovery:
The issue of interest under sections 234D and recovery under section 244A was raised. However, no specific details or challenges were presented in the summary provided.

Issue 5 - Penalty proceedings under section 271(1)(c):
The initiation of penalty proceedings under section 271(1)(c) was mentioned, but no detailed analysis or outcome was provided in the summary.

In conclusion, the tribunal partially allowed the assessee's appeal concerning the disallowance of prior period expenses and the addition of advance against depreciation. The disallowance under section 14A was dismissed as not pressed, and no detailed information was provided regarding the issues of interest levy or penalty proceedings. The judgment highlighted the importance of adhering to accounting principles, such as the mercantile system, in determining the deductibility of expenses and liabilities.