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2022 (7) TMI 250 - AT - Income TaxDisallowance on account of prior period expenses - assessee contended that the said commission actually became payable only when the proceeds in respect of the corresponding sales were actually realized in the year under consideration - HELD THAT - As rightly contended by the learned Sr. DR, when the assessee was following the mercantile system of accounting, the commission payable on the corresponding sales made in the earlier year at an agreed rate could have been and should have been provided by the assessee-company in that year itself as the liability for the same was ascertainable with greater certainty. Moreover, when the corresponding sales were duly accounted for in the earlier year and recognized as income, the commission payable in respect of the said sales at an agreed rate should have been claimed as deduction by the assessee in that year itself going by matching principle. There is also nothing brought on record to establish that the liability for the said commission pertaining to the earlier year had arisen and crystallized in the year under consideration - sale promotion and sale commission expenses pertaining to the earlier were not allowable in the year under consideration being prior period expenses and the deduction claimed by the assessee for the same is not allowable either in law or even in the facts of the case. We accordingly restrict the disallowance made by the AO and confirmed by the CIT(A) on account of prior period expenses. Unutilized CENVAT and Service Tax credit written off - HELD THAT - Amounts in question representing the unutilized CENVAT and Service Tax credit cannot be considered as trade debts of the assessee and deduction for the same on being written off cannot be allowed under Section 36(1)(vii) r.w. Section 36(2) - Even the learned Counsel for the assessee has not been able to dispute this position. She, however, has contended that these two amounts having become irrecoverable, the same should be allowed as deduction under Section 37 of the Act being the business loss. She, however, has not been able to bring anything on record to establish that the unutilized CENVAT and Service Tax credit amount in question had become irrecoverable during the year under consideration so that the same can be allowed as business loss in that year. We, therefore, find no infirmity in the impugned order of the learned CIT(A) confirming the disallowance made by the Assessing Officer on this issue and upholding the same. We dismiss Ground No.2 of the assessee s appeal.
Issues Involved:
1. Disallowance of prior period expenses. 2. Addition on account of unutilized CENVAT and Service Tax credit written off. Detailed Analysis: 1. Disallowance of Prior Period Expenses: The primary issue pertains to the disallowance of Rs.32,25,523/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income-tax (Appeals) [CIT(A)] on account of prior period expenses. The assessee, a company engaged in manufacturing printed circuit boards, filed its return for the Assessment Year (AY) 2015-16, declaring a total income of Rs. Nil. During the scrutiny assessment, the AO identified that certain expenses claimed by the assessee pertained to earlier years. These included: - AMC Payments: Rs.91,875/- for 2013-14, Rs.1,90,000/- (01/01/2014 to 30/06/2014), and Rs.2,00,000/- (01/01/2015 to 30/06/2015), with portions not relevant to the current year. - Professional Fees: Rs.1,24,550/- with Rs.72,000/- related to 2012-13 and 2013-14. - Visit Expenses: Rs.39,402/- for a visit on 03/01/2014. - Sales Promotion Expenses: Rs.37,68,046/- with Rs.24,86,600/- and Rs.3,50,646/- pertaining to commissions on sales from earlier years. The assessee argued that these expenses were booked when bills were received, following a consistent practice. However, the AO disallowed these expenses, citing the mercantile system of accounting, which requires expenses to be accounted for in the period they pertain to. Upon appeal, the CIT(A) upheld the AO's decision, emphasizing that the expenses should not be claimed in AY 2015-16 as they pertained to earlier years. The Tribunal, however, found merit in the assessee's contention that the liability for AMC, professional fees, and quality check expenses crystallized in the year under consideration when the bills were raised. Therefore, these expenses were allowable in AY 2015-16. Conversely, for sales promotion and commission expenses, the Tribunal noted that these should have been accounted for in the earlier year when the corresponding sales were made and income recognized. Thus, the Tribunal restricted the disallowance to Rs.28,37,246/-. 2. Addition on Account of Unutilized CENVAT and Service Tax Credit Written Off: The second issue involved the addition of Rs.3,90,431/- made by the AO and confirmed by the CIT(A) on account of unutilized CENVAT and Service Tax credit written off, which the assessee claimed as bad debts. The AO disallowed this claim, stating these amounts did not represent trade debts and thus were not deductible under Section 36(1)(vii) read with Section 36(2) of the Income-tax Act. The assessee's alternate claim for deduction under Section 37 as business loss was also rejected as it did not pertain to the year under consideration. The Tribunal upheld the authorities' decision, agreeing that the unutilized CENVAT and Service Tax credit could not be considered trade debts and that there was no evidence to establish these amounts had become irrecoverable in the year under consideration to qualify as a business loss under Section 37. Conclusion: The appeal was partly allowed, with the Tribunal restricting the disallowance of prior period expenses to Rs.28,37,246/- and upholding the addition of Rs.3,90,431/- on account of unutilized CENVAT and Service Tax credit written off.
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