2022 (3) TMI 477 - AT - Income Tax

Disallowance on account of payment of octroi expenses - HELD THAT - There is no dispute that the impugned liability pertains to F.Ys. 2011-12 and 2012-13. A perusal of the documents shows that though the assessee made several attempts of paying the same, but the Brihan Mumbai Mahanagar Palika returned the demand draft, as further investigation was going on in respect of the liability. Finally, liability was settled and the assessee made a payment. There is no dispute that the entire liability was discharged before filing return of income for the year under consideration. On perusal of the facts, we are of the considered opinion that since the liability of F.Ys. 2011-12 and 2012-13 crystallized during the Assessment Year under consideration, the same has to be allowed. We, accordingly, direct the Assessing Officer to allow the claim - Addition is, accordingly, deleted. Ground Nos. 1, 2 and 3 are allowed. Assessee received incentives/benefits from lessors - HELD THAT - There is no dispute that the assessee has received incentives from the lessors - It is also not in dispute that the assessee has amortized in the profit and loss account only ₹ 34,05,526/- and balance has been spread over the entire lease period. Assessee is following the mercantile system of accounting and, therefore, was required to recognize all revenue receipts as income in the year of accrual. Lease agreement clearly indicates that the assessee is entitled to receive lease incentives at the time of the delivery of space/opening of stores which means that the right to receive the lease incentives accrued to the assessee at the beginning of the lease. Even in the lease agreement, there is nothing to show that the incentives accrued yearly. In fact, the assessee is not under any obligation to refund any part of the incentive to the lessor in case the lease is terminated before the completion of lease period. This also shows that the amount of incentive does not accrue yearly during the lease period. The findings of the Assessing Officer/ld. CIT(A) cannot be faulted with. Therefore, no interference is called for. Ground Nos. 4 and 5 are, accordingly, dismissed.

Summary

Issues:
1. Disallowance of octroi expenses
2. Disallowance of lease incentive
3. Addition of provision for sales returns

Issue 1: Disallowance of Octroi Expenses
The Assessing Officer disallowed a deduction of ?3,97,28,446 claimed by the assessee as octroi expenses for Assessment Years 2012-13 and 2013-14. The dispute arose as the liability to pay these expenses was incurred in previous financial years, but payment was made before filing the return for the year under consideration. The ITAT held that since the liability crystallized during the assessment year in question, the deduction was allowable. The ITAT directed the Assessing Officer to allow the claim, stating that the entire liability was discharged before filing the return.

Issue 2: Disallowance of Lease Incentive
The Assessing Officer disallowed ?6,60,79,574 recognized by the assessee as lease incentives received from lessors. The AO considered these incentives as revenue receipts, not on capital account, and made an addition. The ITAT upheld this disallowance, stating that the assessee should have recognized the full amount of incentives received as income in the year of accrual. The ITAT noted that the lease agreement indicated the right to receive incentives accrued at the beginning of the lease, and as the assessee followed the mercantile system of accounting, all revenue receipts should have been recognized in the year of accrual.

Issue 3: Addition of Provision for Sales Returns
The Assessing Officer added ?1,16,76,820 to the profit and loss account of the assessee for provisions made for sales returns. The AO argued that there was a change in accounting policy resulting in double deduction. The ITAT, however, supported the assessee's method of provision for sales returns based on Accounting Standard 29, which requires recognition of provisions for liabilities resulting from past events. The ITAT found the accounting method sound and dismissed the addition made by the Assessing Officer.

In conclusion, the ITAT partly allowed the appeals of both the assessee and the Revenue, with different outcomes for each issue raised. The judgment provided detailed reasoning for each issue, emphasizing the importance of recognizing liabilities and revenue receipts in accordance with accounting principles and the Income Tax Act.