Delhi H.C : The CIT(A) had erred in deleting the addition of Rs. 3,16,64,463 made by the AO by making a disallowance of expenses on the ground

High Court Of Delhi

CIT vs. SMCC Construction India

Section 37(1), 40(a)(i)

Asst. Year 2003-04

Badar Durrez Ahmed & Siddharth Mridul, JJ.

IT Appeal No. 12 of 2010

15th January, 2010

Counsel Appeared : Subhash Bansal, for the Appellant : Salil Kapoor with Ms. Swati Gupta, for the Respondent

JUDGMENT

BADAR DURREZ AHMED, J. :

Civil Misc. No. 197 of 2010

The delay in refiling the appeal is condoned. This application stands disposed of. IT Appeal No. 12 of 2010 This appeal by the Revenue is directed against the Tribunal’s order dt. 23rd Dec., 2008 passed in ITA No. 806/Del/2007 in respect of the asst. yr. 2003-04. The grievance before the Tribunal was that the CIT(A) had erred in deleting the addition of Rs. 3,16,64,463 made by the AO by making a disallowance of expenses on the ground that the said expenses related to the year prior to the previous year relevant for the assessment year in question. In other words, the addition was made in respect of prior period expenses. The said expenses were in the nature of fees paid to a foreign entity for rendering technical services to the assessee. The said technical fee was payable from time to time. However, the same had not been shown as payable in the books of accounts of the assessee in the year prior to the asst. yr. 2003-04 because the parties had mutually agreed to defer the payments towards the liability. The assessee’s stand was that the said fee for all the years had become payable and had been charged to the P&L a/c and paid during the asst. yr. 2003-04. The assessee had classified the said amount as pertaining to prior period expenses. It is also to be noted that the tax in respect of the said payment was paid in the current assessment year.

The AO did not agree with the contentions of the assessee. The AO took the view that the amounts could have been debited in the previous years when they had allegedly become payable. Since they were not shown in the accounts in this manner, the AO disallowed the claim of the assessee. Being aggrieved by the said assessment order, the assessee preferred an appeal before the CIT (A) and relied upon the provisions of s. 40(a)(i) of the IT Act, 1961 (hereinafter referred to as the ‘said Act’). The CIT(A) allowed the appeal and deleted the disallowance. The CIT(A) had noted in his order that the AO’s main ground for disallowance of deduction was that it was a prior period expenditure which was not debited in the year in which the said expenditure had been incurred. The CIT(A) noted that the AO was of the view that when there was no claim in the year in which the expenditure was incurred, the same could not be allowed under the provisions of the said Act. The CIT(A), after considering the contentions of the assessee and the view taken by the AO, came to the conclusion that merely not making an entry in the accounts would not disentitle the assessee from its claim of deduction provided the same was allowable under the Act. According to the CIT (A), the deduction could be claimed in view of the provisions of s. 40(a)(i) only in the year in which the tax was actually paid. Thus, the CIT(A) took the view that even if the hypothetical situation was to be considered that the assessee had debited the amount in the earlier years, the same could not have been allowed in terms of the provisions of s. 40(a)(i) of the said Act as the tax had not been deducted at source and paid to the Government account. The total income would have remained the same. Consequently, the CIT(A) held that the provisions of s. 40(a)(i) are clear and that fee for technical services even though relating to earlier years was allowable as deduction if tax had been deducted at source and the same had been deposited in the Government account within the due date in the year in which such deduction had been made.

4. Being aggrieved by the said decision, the Revenue preferred an appeal before the Tribunal. The Tribunal confirmed the view taken by the CIT(A). An important aspect noted by the Tribunal was that as far as the genuineness of expenditure is concerned, the admissibility of deduction was not in dispute. The only objection that had been raised by the Revenue was that expenditure ought to have been claimed in the year they relate to. After considering the provisions of s. 40(a)(i) of the said Act, the Tribunal observed as under : 5. From the bare reading of this provision, it would reveal that sum chargeable under this Act if payable either outside India or in India to a non-resident is not allowable as a deduction unless tax has been deducted on the source or after deduction of such tax, it has not been paid before the expiry of the time prescribed under sub-s. (1) of s. 200 and in accordance with that provisions of Chapter XVI-B of the Act. In the case of ABN Amro Bank, the Tribunal has observed that when a deduction is not allowable because of the statutory provisions, it would make no difference whether the same was claimed or not by the assessee. Because of s. 40(a)(i) of the Act, the deduction has to be allowed in computing the income of previous year in which such TDS has been paid. This s. 40(a)(i) starts with a non obstante clause which implies that s. 40, overrides the provisions of ss. 30 to 38 of the Act. The amounts which may otherwise be allowable as a business expenditure as per the provisions of ss. 30 to 38 and which is chargeable to tax in the hands of the recipient would not be allowed as a deduction unless requisite amount of tax has been deducted on the said amount. Thus, mere passing a debit entry in the books of accounts, of these expenses would not be sufficient for claiming the deduction in the present account in the concerned year then also deduction would not be admissible unless tax has been paid on such amount. The proviso to s. 40 (a)(i) makes it clear that if tax has been deducted in subsequent year and paid then deduction would be allowed in that year. Therefore, we are of the opinion that the learned first appellate authority has rightly deleted the disallowance. We do not find any merit in this appeal of the Revenue. It is dismissed.”

5. We are of the view that the Tribunal has correctly understood the provisions of s. 40(a)(i) and that the deduction was clearly allowable. The position is clear that the deduction is to be allowed in the year in which the tax is paid. No substantial question of law arises for our consideration. The appeal is dismissed.

[Citation : 320 ITR 534]

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