2023 (1) TMI 867 - AT - Income Tax

Disallowance expenditure u/s 37(1) - as perusing the details of other expense AO noted that assessee has claimed expenditure on account of claims/bills submitted but not acknowledged - CIT-A deleted addition - HELD THAT - CIT(A) while deciding the issue in favour of the assessee has given a finding that the additional claims lodged by the assessee with various parties were not admitted by those parties and therefore no income can be said to have accrued to the assessee as no right have been vested in the assessee to recover the amount and accordingly under the law no debt can be said to have created in favour of the assessee. He therefore held that the entries made by the assessee was only a hypothetical income and not a real income. Before us Revenue has not pointed to any fallacy in the finding of the Ld. CIT(A) nor has placed on record any contrary binding decision in its support. Appeal of revenue dismissed.

Summary

Issues:
1. Disallowance of expenditure under section 37 of the Income Tax Act, 1961.
2. Treatment of credit entries of Rs. 29.80 Crores in the Profit & Loss account.

Issue 1: Disallowance of Expenditure under Section 37:
The case involved an appeal by the Revenue against the order of the Ld. CIT(A) relating to the assessment year 2015-16. The Revenue challenged the deletion of an addition made by the Assessing Officer under section 37 of the Income Tax Act, 1961. The AO disallowed an expenditure of Rs. 29.80 crores claimed by the assessee on account of "claims/bills submitted but not acknowledged." The assessee contended that these expenses were reflective of claims lodged but not acknowledged by various authorities. The Ld. CIT(A) observed that the claims were disputed and pertained to various government departments, with ongoing arbitration proceedings. The CIT(A) noted that no income had accrued to the assessee as the claims were uncertain and not accepted by the clients. The CIT(A) referred to accounting standards and held that the entries made by the assessee were hypothetical income and not real income. The Revenue's grounds were dismissed as no fallacy was pointed out in the CIT(A)'s findings.

Issue 2: Treatment of Credit Entries of Rs. 29.80 Crores:
The second issue revolved around the treatment of credit entries of Rs. 29.80 Crores in the Profit & Loss account by the assessee. The AO considered these entries as income accrued under the mercantile system of accounting and disallowed the debit of Rs. 29.80 crores. However, the CIT(A) found that no income had accrued to the assessee as the claims were disputed and not accepted by the parties involved. The CIT(A) emphasized that no debt had been created in favor of the assessee, making the entries hypothetical income. The CIT(A) concluded that the entries were made to nullify the effect of credit entries and should be discarded while computing taxable income. The Revenue's appeal was dismissed as no contrary binding decision was presented to challenge the CIT(A)'s findings.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 29.80 crores, emphasizing that no real income had accrued to the assessee due to the disputed nature of the claims. The judgment highlighted the importance of recognizing income based on certainty and legal principles, ultimately leading to the dismissal of the Revenue's appeal.