Prior Period Expenditure allowed if National Buildings Construction Ltd Vs. ACIT Delhi

If Settlement amount is excess than the amount claimed earlier or short settlement of claims of income from clients is reflected as negative prior period items. And those expenditure were done in the relevant previous year, the amount so incurred will be allowed.- ITAT, Delhi in case of National Buildings Construction Ltd Vs. ACIT Delhi

 

 

IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: ‘E’: NEW DELHI

BEFORE SHRI J.S. REDDY, ACCOUNTANT MEMBER, AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER.
ITA Nos. 1238 & 1239/Del/2014
[Assessment Year: 2008-09 & 2009-10]

M/s National Buildings Construction Ltd                    Vs.                                   The A.C.I.T
NBCC Bhawan, Lodhi Road,                                                                                   Circle 13(1)
New Delhi                                                                                                                  New Delhi
PAN: AAACN3053B
[Appellant]                                                                                                                 [Respondent]

Date of Hearing : 12.07.2016
Date of Pronouncement: 02.09.2016
Assessee by : Shri Rakesh Gupta, Adv
Shri Somil Aggarwal, Adv
Revenue by : Shri P. DAM Kanunjna, Sr. DR

ORDER

PER CHANDRA MOHAN GARG, JUDICIAL MEMBER

             The above two appeals have been fi led by the assessee directed against the order of the CIT(A)-XVI, Delhi dated 28/01/2014 passed in first appeal Nos. 153/2010-11 and 313/11- 12 for A.Ys 2008-09 and 2009-10 respectively. Since the issues involved in both these appeals are similar and the appeals were heard together, so these are being disposed off by this consol idated order for the sake of convenience and brevity.

2. In this appeal, the assessee has raised as many as five grounds of appeal. Ground No. 5 is general and Ground No. 4 is consequential. Ground Nos. 2 and 3 are argumentative and supportive to the main Ground No. 1 which reads as under:

“1. That having regard to the facts and circumstances of the case, the ld. CIT(A) has erred on facts and in law in not fully deleting the disal lowance of Rs. 18,48,519/- made by the AO u/s 14A by applying the provisions of Rule 8D and has further erred in sustaining the same to the extent of Rs. 12 lakhs that too without considering the submission and evidences of the assessee.”

3. We have heard the arguments of both the sides and careful ly perused the relevant material placed on record before us inter al ia the assessment order, appel late order and the assessee’s paper book spread over 211 pages. The ld. Counsel for the assessee drew our attention towards relevant paras 4.1 to 4.8 of the assessment order and contended that the AO recorded satisfaction on wrong premise and appl ied Rule 88D of the I.T. Rules, 1962 mechanically without any substantial al legation. The ld. AR further submitted that the CIT(A) in para 3.1.1 noted the facts of the case and thereafter in para 4.1 drew an incorrect conclusion despite the fact that the first appel late authority noted that investment as appearing in the schedule 5 of the balance sheet are joint ventures, the income from which are duly taxable under the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’. Therefore the said investments cannot be considered for the purpose of disal lowance u/s 14A of the Act. The ld. AR further pointed out that in view of the above, the AO has erred in making the disallowance u/s 14A of the Act by taking into consideration the investments as per Schedule 5 of the balance sheet. The ld. AR vehemently pointed out that despite the fact that the CIT(A) observed the entire relevant facts pertaining to this addition, but after recording the facts uphold the addition on incorrect and unjustified premise. Therefore, the same may be directed to be deleted.

4. In appeal, the CIT(A) noted from the balance sheet that there was no secured loan as on the beginning and in the end of the financial years. Unsecured loans have come down from Rs.
6713.57 lakhs as on 31.3.2007 to Rs. NIL as on 31.3.2008. Therefore, there was no new interest bearing secured and unsecured loans during the previous year relevant to A.Y 2008-09 against the tax free investments made during the relevant period. Therefore, no direct or indirect expenses can be disallowed u/s 14A r.w.r. 8D(2)(ii) of the Rules on account of ht tax free investment. The ld. AR pointed out that the disal lowance of indirect interest expenditure of Rs. 5.03 lakhs made by the AO cannot be sustained. The ld. AR further pointed out that when the AO has not pointed out any defect about the correctness of the financial statement submitted by the assessee and satisfaction has been recorded on wrong premises and incorrect facts mechanically made by the AO and upheld by the CIT(A), cannot be held as sustainable. Thus the same may be kindly deleted. To support this contention, the ld. AR placed reliance on the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Taishika Engineering reported as 370 ITR 338 [Del].

5. The ld. DR strongly supported the action of the AO as well as the impugned order and submitted that Rule 8D of the Rules is applicable from A.Y 2008-09 onwards, therefore, the AO was quite justified in invoking relevant provisions of the Act to make addition u/s 14A of the Act.

6. On vigilant reading of the decision of the Hon’ble High Court of Delhi in the case of Taishika Engineering [supra] we note that their Lordships, in appeals pertaining to A.Ys 2008-09 and 2009-10 held that if and only if the AO is not satisfied with the correctness of the disal lowance or NIL disal lowance made by the assessee, then only, the AO is entitled and authorised to compute deducted u/s 14A r.w.r. 8D of the Rules. In the present case, as noted by the AO in para 4.1, the assessee has not disal lowed any expenditure in respect of income which does not form part of total income, thus the present case is pertaining to NIL disallowance by the assessee. In para 4.2, the AO noted that the assessee made investment of Rs. 5357.59 lakhs in equity and preference shares capital of  companies, dividend income from which does not or shal l not form part of total income and in the subsequent para, the AO, referring to the judgment of the Hon’ble Bombay High Court in the case of Godrej Boyce Mfg, Co. Ltd Vs. DCIT ITA No. 626/10 and W.P. No. 758/10 observed that Rule 8D is constitutionally val id and the AO has to enforce the provisions of sub-section 1 of section 14A of the Act. For this purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of total income under the Act. These observations of the AO do not state any kind of dissatisfaction regarding correctness of the NIL disal lowance by the assessee and as we have noted above, the CIT(A), in para 4.1 of the impugned order, dealt with the issue and granted rel ief to the assessee. However, the addition of Rs. 12 lakhs u/s 14A r.w.r. 8D(2)(i i) of the Rules was upheld with the fol lowing observations:

“4.1 I have carefully considered the submissions of ht ld. AR of the appellant company , the facts of the case as well as the finding of ht A.O. Ground No. 1nd and 4 of appeal are general in  nature and not pressed for by the appellant. Therefore, no adjudication is called for. Ground No. 2 of appeal is directed against disallowance of Rs. 18,48,519/- made by the AO u/s 14A of the IT Act as the amount of expenditure incurred in relation to earning of exempt income. The appellant has earned dividend on mutual fund/shares of Rs. 2.50,51,655/- and claimed ihe same as exempt u/s 10(33)/] 0(34) of IT Act in the computation of income but no disallowance u/s 14A of IT Act to earn this exempt dividend income were offered for taxation. Section 14A read with rule 8D provides for disallowance of expenditures incurred in relation to income which does not form part of the total income under the IT Act. In this regard it is seen that the AO has disallowed Rs. 18,48,519/- treating the investments as per schedule 5 of the balance sheet as investments from which .exempt dividend income of Rs. 2.50 crores was earned. From the submission of the appellant it is evident that the investments as appearing in the schedule 5 of the balance sheet are joint ventures, the income from which are duly taxable under the IT Act. Therefore, the above investments cannot be considered for the purpose of disallowance u/s 14A In view of the above, the AO has erred in making the disallowance u/s I4A by taking into consideration the investments as per schedule 5 of the balance sheet. From the submissions of the appellant, the account statement of dividends and the balance sheet it is evident that the exempt dividend income is earned from investment of Rs. 4,800 lacs in Liquid Fund Cash Plan as per schedule 8 of the balance sheet. Therefore, the investment of R. 4,800 lacs made during the relevant previous year is required to be taken into consideration for the purpose of disallowance of expenditure incurred in relation of exempt income. From the balance sheet it is also seen that there was no secured loan as on the beginning and in the end of financial year. Unsecured loans have come down from Rs. 6713.57 lacs as on 31.03.2007 to Rs. Nil as on 31.03.2008. Therefore, it is apparent that there is no new interest bearing secured and unsecured loans during the previous year relevant to AY 2008-09 against the tax free investments made during the relevant
period. It is seen that the interest expenditures are incurred on current liabilities of interest bearing mobilization advances taken from clients. The mobilization advances are in turn released to contractors/sub-contractors on interest and such interest income forms part of the total income under the. IT Act. Interest expenditure are also incurred to meet obligation to contractors under arbitration proceeding. There was also sufficient interest free own fund in the form of share no. 2 of appeal is directed against disallowance of Rs. 18,48,519/- made by the AO u/s 14A of the IT Act as the amount of expenditure incurred in relation to earning of exempt income. The appellant has earned dividend on mutual fund/shares of Rs. 2,50,51,655/- and claimed the same as exempt u/s 10(33)/10(34) of IT Act in the computation of income but no disallowance u/s 14A of IT Act to earn this exempt dividend income were offered for taxation. Section 14A read with rule 8D provides for disallowance of expenditures incurred in relation to income which does not form part of the total income under the IT Act. In this regard it is seen that the AO has disallowed Rs. 18,48,519/- treating the investments as per schedule 5 of the balance sheet as investments from which ,exempt dividend income of Rs. 2.50 crores was earned. From the submission of the appellant it is evident that the investments as appearing in the schedule 5 of the balance sheet are joint ventures, the income from which are duly taxable under the IT Act. Therefore, the above investments cannot be considered for the purpose of disallowance u/s 14A. In view of the above, the AO has erred in making the disallowance u/s I4A by taking into consideration the investments as per schedule 5 of the balance sheet. From the submissions of the appellant, the account statement of dividends and the balance sheet it is evident that the exempt dividend income is earned from investment of Rs. 4,800 lacs in Liquid Fund Cash Plan as per schedule 8 of the balance sheet. Therefore, the investment of R. 4,800 lacs made during the relevantt previous year is required to be taken into consideration for the purpose of disallowance of expenditure incurred in relation of exempt income. From the balance sheet it is also seen that there was no secured loan as on the beginning and in the end of financial year. Unsecured loans have come down from Rs. 6713.57 lacs as on 31.03.2007 to Rs. Nil as on 31.03.2008. Therefore. it is apparent that there is no new interest bearing secured and unsecured loans during the previous year relevant to AY 2008-09 against the tax free investments made during the relevant period. It is seen that the interest expenditures are incurred on current liabilities of interest bearing mobilization advances taken from clients. The mobilization advances are in turn released to contractors/sub-contractors on interest and such interest income forms part of the total income under the IT Act. Interest expenditure are also incurred to meet obligation to contractors under arbitration proceeding. There was also  sufficient interest free own fund in the form of share capital and reserves & surplus which has gone up from Rs. 15,103 lacs as on 31.03.2007 to Rs. lacs as on 31.03.2008. in view of the above, no indirect interest expenditures can be disallowed u/s 14A read with rule 8D(2)(ii) on account of the tax free investment. Therefore, the disallowance of indirect interest expenditure of Rs. 5.03 lakhs made by the AO cannot be sustained. The AO has held the amount of expenditure directly related to exempt income as NIL. Therefore, no interference is called for on the account. Considering the administrative and managerial expenses incurred in relation to exempt income, 0.5% of average value of investment which exempt i earned calls for disallowance under rule 8D(2)(ii) of the Rules which works out to Rs. 12 lakhs [0.5% of [4800 +0]/2 = 2400 lakhs]. In view of the above, the total disallowance made by the AO u/s 14A is reduced from Rs. 18.48 lakhs to Rs. 12 lakhs. Therefore, this ground of appeal is partly allowed.”

7. In view of the above, we are of the considered opinion that the A.O has not complied with the requirement of section 14A of the Act for making disallowance in this provision. As per sub-section (2) of section 14A of the Act, if the A.O having doubts about the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to which does not form part of total income under this Act, viz., suo moto disallowance or NIL disallowance made by the assessee. At this juncture, it would be apt to consider the ratio of the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Taishika Engineering wherein it was held that where disallowance or NIL disallowance made by the assessee is found to unsatisfactory on examination of accounts, the A.O is entitled and authorized to compute deduction u/r 8D of the Rules and this precondition and stipulation is also mandated in Sub Rule (1) of rule 8D of the Rules. In the present case, from the relevant 10 operative part of the assessment order para 4.1 to 4.5, we are unable to see any observations and conclusion of the A.O which states that the A.O was not satisfied with the correctness of NIL disallowance claim of the assessee and thus, as per sub-section (2) of section 14A of the Act, the A.O cannot proceed to determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with the method as prescribed in Rule 8D of the Rules. The ld. counsel of the Revenue submitted that the ld. CIT(A) in para 4.1 of the impugned order has categorically recorded dissatisfaction recording NIL disallowance claim of the assessee and the ld. CIT(A) has coterminous powers with the A.O. Therefore, the observations and conclusion of the ld. CIT(A) complied with the requirement of sub section (2) of section 14A of the Act. In our humble understanding and language used by the Legislature in section 14A of the Act. The word ‘A.O’ has been used and we are unable to see any intention of the Legislature which mandates that compliance of sub-section (2) of section 14A of the Act can be made at the first appellate stage by the ld. CIT(A). Thus, we decline to accept the contention of the ld. counsel of the Revenue. On the basis of foregoing discussion, we are of the considered opinion that the disallowance made by the A.O and partly upheld by the ld. CIT(A) u/s 14A r.w.r. 8D(2)(ii) of the Rules is not sustainable in view of the proposition laid down by the Hon’ble High Court of Delhi in the case of Taishika [supra] and thus we demolish the same. Accordingly, the sole effective ground of the assessee for A.Y 2008-09 is allowed.

8. In this appeal for A.Y 2009-10, the assessee has raised as many as for grounds of appeal. Except for Ground No. 1, allother grounds are argumentative and supportive to the main Ground No. 1 which reads as under:

“1. That having regard to the facts and circumstances of the case, the ld. CIT(A) has erred on facts and in law in not deleting the disallowance made by the AO as prior period expenses on the preliminary ground these were not in fact in the nature of prior period expenses.”

9. We have heard the arguments of both the sides and careful ly perused the relevant material placed on record before us inter al ia the assessment order, appel late order and the assessee’s paper book. The ld. Counsel for the assessee contended that the impugned claim of the assessee was allowed in the earlier and subsequent years and these are actually expenditure which got crystal l ised during the year under consideration only and thus not prior period expenses and therefore, the AO may kindly be directed to delete the addition. To support this contention, the ld. AR placed rel iance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT Vs. Dinesh Kumar Goel reported at 331 ITR 10 [Del] and submitted that when the assessee is fol lowing the mercanti le system of accounting, then the fees for full course or package received in advance cannot be taxed in the year of receipt and when services there against are to be rendered in the next F.Y. then the income should be recognized in the year of receipt unless services are rendered and in this situation, income does not accrue to the assessee in the year of receipt. The ld. AR pointed out that this analogy and proposition also applies to cases of expenses especial ly when the AO has not raised any doubt about the correctness and quantum of claiming of expenses and the AO has not al leged claimed expenditure as bogus.

10. The ld. DR repl ied that in the mercanti le system of accounting, claim of assessee cannot be allowed and the AO was well within his power to disal low the claim. The ld. DR strongly supported the first appel late order and contended that the CIT(A) was quite justified and correct in upholding the correct addition made by the AO.

11. On careful consideration of the above submissions, at the very outset, we observe that in para 3.2 of the assessment order the A.O made disallowance by observing that the assessee is a limited company and it is required to maintain its books of accounts as per provisions of section 145(1) of the Act either on cash basis or accrual basis and the assessee cannot adopt mixed system of accounting. The A.O further observed that the assessee being a limited company is required to keep its books of accounts on accrual basis mandatorily and in audit report in form 3CA it has been stated that the assessee maintains its books on mercantile basis. The A.O further observed that the expenditure which have neither accord nor incurred during the previous year relevant to A.Y 2009-10 are not allowable and thereafter he proceeded to conclude prior period negative income and expenditure of Rs. 70.62 lakhs and Rs. 21.90 lakhs respectively is being disallowed and added back to the income of the assessee. First of all, we may point out that from a specific query from the Bench, the ld. counsel of the Revenue could not controvert this contention of the assessee that in similar facts and circumstances of the case, similar claim of the assessee has been allowed in the earlier and subsequent A.Ys. In para 3 of the assessment order the A.O himself noted that the assessee has claimed expenses under the head ‘prior period expenditure’ but this amount is excess of settlement amount with vendors made during hear year and short settlement of claims of income from clients is reflected as negative prior period income. It was also noted by the A.O that since these expenses/incomes are for the projects completed in the past years but were subjected to final payments to be made to the vendor or receivable from clients these difference arose and hence have been accounted for during the current period. The A.O has not controverted the above explanation and submission of the assessee and proceeded to make disallowance and addition by observing that the assessee is maintaining its books of accounts on mercantile basis. Therefore, the expenditure which is neither accrued nor incurred in the previous year relevant to A.Y 2009-10 are not allowable. Accordingly, payments made to the respective vendors in this situation cannot be held that these expenses were not incurred by the assessee during the previous year relevant to A.Y 2009-10. On the basis of foregoing discussion, we are of the considered opinion that the claim of the assessee was allowed consistently during the earlier and subsequent A.Y and expenses claimed by the assessee were shown under the heard of prior period expenses but it was incurred during the previous year relevant to A.Y 2009-10. Thus the same cannot be disallowed and added to the income of the assessee. Therefore, the A.O is directed to allow the claim of the assessee and consequently the sole effective ground of the appellant assessee for A.Y 2009-10 is allowed.

12. In the result, both the appeals of the assessee are allowed.

The order is pronounced in the open court on 02.09.2016.

 

                                                         Sd/-                                                            Sd/-
                                                      (J.S. REDDY)                                            (C.M. GARG)
                                                      ACCOUNTANT MEMBER                      JUDICIAL MEMBER

Dated: 02nd September, 2016
VL/
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR

Asst. Registrar,
ITAT, New Delhi

 

 

Copy of Order