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DCIT, Circle 12(1) New Delhi., Vs Hotline Glass Ltd., 52-A, Okhla Industrial Estate, Phase-III, New Delhi.
December, 18th 2014
ITA No.5520/Del/2013
Asstt.Year: 2006-07

                   DELHI BENCHES `C' NEW DELHI


                       ITA NO. 5520/DEL/2013
                       ASSTT.YEAR: 2006-07

DCIT, Circle 12(1),       vs Hotline Glass Ltd., 52-A,
New Delhi.                    Okhla Industrial Estate, Phase-III,
                              New Delhi.
                              (PAN: AAACH0561L)
(Appellant)                    (Respondent)
            Appellant by: Shri Satpal Singh, Sr. DR
          Respondent by: None

                            O R D E R


       This appeal has been preferred by the revenue against the order of the

CIT(A)-XV, New Delhi dated 15.7.2013 in Appeal No. 168/11-12 for AY


2.     When the case was called for hearing, neither the assessee nor his

representative appeared before us nor any application for adjournment has been

filed on behalf of the assessee. On careful perusal of the relevant record of the

appeal, we are of the considered view that the appeal can be disposed of after

hearing the ld. DR and we proceed to decide the appeal on merits.

ITA No.5520/Del/2013
Asstt.Year: 2006-07

3.      The revenue has raised following grounds in this appeal:-

                "1. Whether Ld. CIT (A) was correct on facts and
         circumstances of the case and in law in deleting the addition
         amounting Rs.20,65,154/- made by the AO on account of
         disallowance of prior period expenditure?
         2. Whether Ld. CIT (A) was correct on facts and
         circumstances of the case and in law in allowing the prior
         period expenditure to the assessee by admitting additional
         evidences and without giving an opportunity to the AO to
         examine the same?"
4.      Brief facts of the case are that return of income was filed on 29.11.2006

in which brought forward depreciation of Rs.56,95,595 was set off. Later, in the

order under Section 143(3), assessment was completed at an income of

61,68,545, which was again set off against brought forward depreciation. Later,

notice under Section 263 was issued whereby the assessment was set aside to

examine the issue of Prior Period Expenses. During the assessment proceedings,

the Ld. AO noted that in the 3CD report (Col.22) and notes of accounts (Item

No.17), the appellant had debited Rs.20,65,154 on account of Prior Period

Expenses. On observing no reply from the appellant, the Ld. AO held that since

the appellant is following mercantile system of accounting, earlier year's

expenses were not allowable and accordingly, an addition of Rs.20,65,154 was


5.      The aggrieved assessee preferred an appeal against the assessment order

which was allowed and hence the revenue has preferred this appeal with the

grounds as reproduced hereinabove.

ITA No.5520/Del/2013
Asstt.Year: 2006-07

6.     Apropos both grounds, we have heard the arguments of ld. DR and

perused the relevant material placed on record. Ld. DR submitted that the AO

rightly observed that the amount of Rs.20,65,154 claimed as prior period

expenditure was not allowable as the assessee was following mercantile system

of accounting and the annual profits has to be worked out on due or accrual

basis after providing all expenses for which a legal liability has arisen and after

taking credit for all receipts that have become due regardless of their actual

receipt or payment. The DR further contended that the AO rightly noted that

only such expenses are allowable as deduction from previous years income

which are relevant to that year.     The DR supporting the assessment order

submitted that the Income Tax Act, 1961 provides that the income under the

head of profits and gains of business and profession is computed in accordance

with the method of accounting regularly followed by the assessee. The DR

vehemently contended that the CIT(A) wrongly held that the addition made by

the AO on account of disallowance of interest expenses accounted on cash basis

by holding the same as prior period expenses is not sustainable. The DR finally

submitted that the impugned order may be set aside by restoring that of the AO.

On careful perusal of the impugned order, we observe that the CIT(A) granted

relief for the assessee with following observations and findings:-

ITA No.5520/Del/2013
Asstt.Year: 2006-07

        "6.2 Also, I find that the Ld. AD did not take notice that if the
        appellant was required to strictly follow mercantile system of.
        accounting, as was held by the AD, and made to depart from
        consistently followed accounting practice, he ought to have
        allowed the claim of interest on accrual basis which was much
        higher at Rs.53.81lakhs during the year, whereas the
        disallowance of interest expenses made by the AD by holding
        the same as Prior Period Expenses was of an amount of
        Rs.20.65 lakhs only. The AO is required to correctly assess the
        income by making appropriate allowance and disallowance.
        Hence, if in AD's view, interest expenses were to be allowed on
        accrual basis, he should have computed the same accordingly.
        I have also examined the details of the interest liability incurred
        by the appellant over last 3 years. On perusal of the same, I find
        that if the appellant had to follow the mercantile system of
        accounting, as was held by the Ld. AO, he would have been
        eligible to claim interest expenses of Rs.12,94,28,307 over a
        three years period whereas the appellant had claimed only an
        amount of Rs.11,14,37,391 over this period i.e. A.Y.2003-04 to
        A.Y.2005-06 and thereby in the light of AO's own finding, the
        appellant had rather made a short claim of Rs.1,79,90,916 in
        all these years. Thus, it is evident that the claim of the interest
        expenses was not erroneous and the admission of the same by
        the AO in the original assessment order under Section 143(3)
        was not prejudicial to the revenue. On the other hand, if the
        consistently followed method of accounting of interest expenses
        was changed from cash basis to mercantile system, the claim of
        interest expenses would have been much higher, and that would
        have been prejudicial to revenue.
         6.3 Moreover, I find that the appellant had been consistently
        following the above accounting practice which is in sync with
        the provisions of Section 43B of the Act. Accordingly, the
        addition made by the Ld. AO on account of disallowance of
        interest expenses accounted on cash basis by holding the same
        as Prior Period Expenses, is not sustainable. Accordingly, the
        same is deleted."
7. The relevant part of the impugned order reveals that the CIT(A) has considered accounting of statement of earlier three years and found that the claim of interest expenses was not erroneous and if the consistently followed 4 ITA No.5520/Del/2013 Asstt.Year: 2006-07 method of accounting of interest expenses was changed from cash basis to mercantile basis, then the claim of interest expenses would have been much higher. The CIT(A) was also right in concluding that the assessee company has been consistently following the accounting practice which is in consonance with the provisions of section 43B of the Act. Hence, we are in agreement with the final conclusion of the CIT(A) that the addition made by the AO on account of disallowance of interest expenses accounted on cash basis by holding the same as prior period expenses is not sustainable. Accordingly, impugned order is hereby upheld and ground no. 1 and 2 being devoid of merits are dismissed. 8. In the result, the appeal of the revenue is dismissed. Order pronounced in the open court on 11.12.2014. Sd/- Sd/- (N.K. SAINI) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 11th DECEMBER, 2014 `GS' Copy forwarded to:- 1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order Asstt. Registrar 5
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