Punjab & Haryana H.C : The Tribunal was right in law and on facts in deleting disallowance of Rs. 3,41,747 made by the AO on account of expenditure not pertaining to the accounting period relevant to the asst. yr. 1975-76?

High Court Of Punjab & Haryana

CIT vs. Guru Nanak Construction Co.

Section 37(1)

Asst. Year 1974-75

M.M. Kumar & Rajesh Bindal, JJ.

IT Rer. No. 171 of 1989

1st March, 2007 

Counsel appeared :

S.K. Garg Narwana, for the Revenue

JUDGMENT

RAJESH BINDAL, J. :

Following question of law has been referred for opinion of this Court by the Tribunal, Chandigarh Bench, Chandigarh (for short ‘the Tribunal’) arising out of order dt. 8th Sept., 1988 passed in ITA No. 606/Chandi/1987, in respect of the asst. yr. 1975-76.

“1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law and on facts in deleting disallowance of Rs. 3,41,747 made by the AO on account of expenditure not pertaining to the accounting period relevant to the asst. yr. 1975-76?”

The facts, as noticed by the Tribunal in the statement of the case, are that the assessee filed his return of income for the assessment year in question on 29th Aug., 1975 declaring his income at Rs. 2,29,873. The assessment was framed at Rs. 3,17,970 vide order dt. 29th Feb., 1978, which was rectified on 21st Sept., 1979 and the income was reduced to Rs. 2,28,296. Search and seizure operation under s. 132 of the IT Act, 1961( for short ‘the Act’) was carried out at the premises of assessee wherein certain books of accounts and other documents were seized.

On the basis thereof proceedings under s. 147(a) of the Act were initiated. During the course of re-assessment proceedings, the AO noticed that as per seized books of accounts total expenditure was to the tune of Rs. 22,27,061/57 under various heads. Account also had an opening balance of Rs. 3,94,884/94, which was incurred prior to 1st April, 1974, the date on which the assessee firm was constituted. It was also noticed that there was a credit balance of Rs. 53,847 in the account leaving a debit balance of Rs. 3,41,747. These expenditure were disallowed by the AO with the observations that the same do not relate to the assessment year in question. Disallowance was contested by the assessee before the CIT(A) (for short ‘the CIT(A)’) by raising contention that even though the firm was constituted on 1st April, 1974 but the partners thereof were orally informed by the contracting Department that work had been awarded to them, therefore, the job was undertaken even before 1st April, 1974. It was further contended that expenditure related to the same work and thus allowable though incurred prior to 1st April,1974 as the receipts against the work done were received by the assessee after 1st April, 1974. However, CIT(A) rejected the contention of the assessee. In further appeal before the Tribunal, the contention of the assessee was accepted and the expenditure in question was allowed as a deduction in the year in question with the following observations: “We have given our careful consideration to the rival submissions. In our opinion, the assessee is entitled to these deductions even though the expenditure was incurred prior to 1st April, 1974.

The firm was not in existence before 1st April, 1974. There was, therefore, no question of filing the return by the firm for the earlier period. Another view that the Department could take was that the return should have been filed in the status of AOP. In our opinion, even this is not correct inasmuch as there could be no commencement of business unless there were sales. In the present case, the sales have to be equated with receipts from the contracting Department. It is an admitted fact that receipts against the above work done prior to 1st April, 1974 were received after 1st April, 1974. Till receipt, these expenses could not be claimed and, therefore, the same had to be carried forward and allowed in the accounting period relevant to the assessment year under appeal. The ITO and the CIT(A) were, therefore not justified in not allowing these claims. Their orders on this account are,therefore, reversed.” We have heard learned counsel for the Revenue and perused the record. Primary contention raised by learned counsel for the Revenue is that the expenses having not been incurred during the year in question could not be allowed even if those were for the business of the assessee. However, from a perusal of the facts on record, which have been analysed by the Tribunal, the assessee spent amount in question during the previous year in which there were no receipt from business, accordingly, there was no question of its setting off against any income and the same had to be carried forward to the next year. A perusal of various heads under which the expenses were made by the assessee shows that the same relate to the business being conducted by him. This being the factual position on record, we do not find any illegality has been committed by the Tribunal in allowing these expenses as deduction during the year in question. Accordingly, the question referred is answered against the revenue and in favour of the assessee. The reference is disposed of accordingly.

[Citation : 294 ITR 294]

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