DCIT, Circle 12(1) New Delhi., Vs Hotline Glass Ltd., 52-A, Okhla Industrial Estate, Phase-III, New Delhi.
December, 18th 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES `C' NEW DELHI
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER
ITA NO. 5520/DEL/2013
DCIT, Circle 12(1), vs Hotline Glass Ltd., 52-A,
New Delhi. Okhla Industrial Estate, Phase-III,
Appellant by: Shri Satpal Singh, Sr. DR
Respondent by: None
O R D E R
PER CHANDRAMOHAN GARG, J.M.
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.
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.
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:-
"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
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.
(N.K. SAINI) (CHANDRAMOHAN GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
DT. 11th DECEMBER, 2014
Copy forwarded to:-
4. C.I.T. 5. DR