Income Tax Appellate Tribunal - Mumbai
Parle Agro P. Ltd ( Western Express ... vs Assessee on 11 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" Bench, Mumbai
Before Shri R.V. Easwar, President
and Shri B. Ramakotaiah, Accountant Member
ITA Nos. 3344 & 3345/Mum/2010
(Assessment Years: 2005-06 & 2006-07)
M/s. Parle Agro Pvt. Ltd. DCIT, Central Circle 25
Western Express Highway Vs. 4th Floor, Aayakar Bhavan
Chakala, Andheri (E) M.K. Road, Mumbai 400020
Mumbai 400009
PAN - AABCP 8416 G
Appellant Respondent
ITA Nos. 3636 & 3637/Mum/2010
(Assessment Years: 2005-06 & 2006-07)
ACIT, Central Circle 25 M/s. Parle Agro Pvt. Ltd.
Room NO. 404, 4th Floor Vs. Western Express Highway
Aayakar Bhavan, M.K. Road Chakala, Andheri (E)
Mumbai 400020 Mumbai 400009
PAN - AABCP 8416 G
Appellant Respondent
Assessee by: Shri Firoze Andhyarujina
Revenue by: Shri Devi Singh
Date of Hearing: 11.08.2011
Date of Pronouncement: 24.08.2011
ORDER
Per B. Ramakotaiah, A.M.
These are cross appeals by assessee and Revenue against the orders of the CIT(A) XXXIX, Mumbai dated 02.02.2010 for the respective assessment years. These appeals are considered together and disposed off by this common order.
ITA Nos. 3344 & 3345/Mum/2010; A.Y. : 2005-06 & 2006-07
2. Assessee has raised the following common ground of appeal for both the assessment years.
2 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
"1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in treating artwork charges included in advertisement expenses, as capital expenditure, in spite of the fact, given the average lifespan of such artwork, no asset of enduring nature is acquired and accordingly it cannot be held as incurred in the capital field. The appellant submits that there is no justification in treating art work charges as capital expenditure and prays that the same be allowed as revenue expenditure."
In A.Y. 2005-06 assessee has raised another ground also as under:
"2. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in upholding the action of Assessing Officer for disallowance of prior period expenses of Rs.10,11,152/-. The appellant prays that the disallowance made for prior period expenses be deleted."
3. We have both the learned counsel and the learned D.R. and perused the records.
4. Regarding ground No. 1 it was submitted that this issue was considered the ITAT in assessee's own case for assessment years 1998-99 to 2002-03 and decided in favour of the assessee by holding as under: -
"8. We have heard the parties and considered their submissions. Section 37(3) is no longer on the statute book. The deductibility of the impugned expenditure has therefore to be decided in the light of the provisions of section 37(1) of the I-T Act. If the impugned expenses are capital in nature, they would not be admissible for deduction u/s. 37(1). If they are however in the nature of revenue expenses having been incurred wholly and exclusively for the purpose of the business, they would be admissible for deduction.
9. Perusal of the assessment order shows that the AO has disallowed the expenditure on the ground that it was incurred on creating apparatus which had been utilized for preparation of advertising materials and therefore was in the nature of capital expenditure. The ld. CIT(A) has simply confirmed the order of the AO without any discussion. Neither the AO nor the CIT(A) has stated about the life of the bromides or the frequency with which they are prepared or discarded. The mere fact they are used for preparing labels and cartons to be pasted on the bottles and the products does not ispo facto lead to the conclusion that the expenditure incurred on preparing them are in the nature of capital expenditure. It is like the expenditure incurred on preparing a negative with the help of which positive prints of photographs are prepared. Can it be said that the expenses incurred on preparing the negatives are in the nature of 3 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
capital expenditure? Various tests have been suggested to decide upon as to whether an item of expenditure is in the nature of capital expenditure or not. The tests of enduring benefit and "once and for all" are well-known tests. Both the Departmental authorities have held the impugned expenditure to be in the nature of capital expenditure without bringing any cogent material on record to support their conclusions. Their orders cannot therefore be sustained. It is considered appropriate to set aside their orders and restore the matter to the file of the AO with the direction to examine the de novo and decide upon the issue in accordance with law after bringing relevant materials on record to justify his decision. We order accordingly. Reasonable opportunity of hearing be given to the assessee. Ground no. 1 is treated as allowed for statistical purpose."
Since the facts are similar for these years also, respectfully following the above decision of the Coordinate Bench, we restore the matter back to the file of the A.O. to decide the issue in accordance with law. Ground is considered allowed.
5. The issue in ground No. 2 in ITA No. 3344/Mum/2010 is with reference to prior period expenses of Rs.10,11,152/-. Assessee claimed the prior period expenses in the P & L Account below the line and in the return filed it made a specific claim in the computation of income as the computation started from net profit. In the course of assessment proceedings, it was the submission of the assessee, that they have made detailed explanation with reference to the nature of expenses and also supporting evidence but, without any discussion the A.O. did not allow the amount. He started the computation with net profit and made adjustment to that amount. Assessee contested the same before the CIT(A) who gave a finding that these are genuine expenses met out by the assessee for business purpose. He also agreed that it is a settled principle that the expenses which arose in the accounting year relevant to the assessment year only can be allowed as deduction since assessee follows mercantile system of accounting. By holding thus, he considered that prior period expenses cannot be allowed a deduction. However, keeping in the spirit of the decision relied upon by the assessee and also keeping in view that business expenses have to be allowed as deduction while computing the total income, he directed the A.O. for allowing the prior period expenses disallowed in A.Y. 2006-07 as deduction in A.Y. 2005-06 if it is incurred in 4 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
the accounting year relevant to A.Y. 2005-06. Assessee was directed to provide necessary details. The CIT(A) however, did not give any direction for allowing the prior period expenses disallowed in this assessment year as a deduction in A.Y. 2004-05 since the appeal for that assessment year was not pending before him and the assessee was directed to approach the ITAT in this regard.
6. The learned counsel submitted that there is no doubt about the expenses being business expenses and also no doubt about the expenditure being crystallised in this year. It is the submission of the learned counsel that the expenditure should be allowed in this year and if that being so the expenditure pertaining to A.Y. 2006-07 directed to be allowed in this year should be withdrawn as there cannot be two allowances on two different principles. It was his submission that the expenses has crystallised during the year and the same should be allowed.
7. The learned D.R., however, relied on the order of the CIT(A) to submit that prior period expenses cannot be allowed in this year as assessee maintained books on mercantile system of accounting.
8. We have considered the issue. As far as prior period expenses are concerned the issue revolves on the fact whether the liability has crystallised during the year under consideration or not. Neither the A.O. nor the CIT(A) discussed the nature of prior period expenses and examined whether the expenditure has crystallised during the year or not. The CIT(A) allowed the expenditure claimed in later year as a deduction in this year and as far as the expenditure claim in this year was concerned, he declined to give any direction stating that the appeal in earlier year was not pending before him. We are of the view that the CIT(A) has erred in considering the issue on legal principles alone without examining the nature of expenditure and its crystallisation during the year as claimed by assessee. In the course of business there can be certain situations where the amounts are disputed or the bills have not been received or claims were made subsequently and in those cases the company records the expenditure as prior period expenses as per accounting principles and guide lines under Company Law. As far as 5 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
income tax matters are concerned, the expenditure is allowable as deduction in the year in which the expenditure has crystallised. Therefore the A.O. is bound to examine whether the expenditures have crystallised during the year or not. It was the submission of the assessee before the CIT(A) that they have furnished details with necessary explanation relying on various case laws but the A.O. choose to ignore the same. As seen from the assessment order there is no discussion about the claim of prior period expenses nor its disallowance. In fact the A.O. started the computation from net profit and not from the returned income. So this issue was all together omitted both in the order as well as in the computation. In the case of Toyo Engg. India Ltd. vs. JCIT 5 SOT 616 (Mum) relied upon by the learned counsel it was held that the prior period expenses are to be allowed in the year of claim. We are of the opinion that the issue has to be decided after examining the facts of the claim and nature of expenditure and for this purpose the matter has to be restored to the A.O. for examination of amount and allowability in the year under consideration.
9. In view of the above, we set aside the directions of the CIT(A) given in para 10 entirely and restore the matter back to the file of the A.O. for fresh examination. Assessee should be given due opportunity before deciding the issue. Ground 2 in AY 2005-06 is allowed.
10. Appeals are allowed.
ITA Nos.3636 & 3637/Mum/2010 : 2005-06 & 2006-07
11. In these appeals Revenue has raised following two grounds which are common for both assessment years: -
"1. On the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the deduction made on account of mismatch in the production and consumption of performs and caps vis-à-vis consumption of bottles by merely accepting the contention of the assessee that the AO did not consider the consumption of bottles appearing in Sr.No. 1 to 11 in the said Schedule V of accounts, without considering the findings of the A.O.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in agreeing with the assessee that the AO 6 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
failed to consider the production of bottles from Sr. No. 1 to 11 of Schedule V of the accounts without considering the fact that all the bottles appearing at Sr. No. 1 to 11 of Schedule V were only opening stock of finished goods and therefore, attributing the consumption of performs and caps during the year to these bottles is not acceptable."
12. The brief facts are that the assessee furnished Schedule V forming part of Balance sheet in which captive consumption, breakages, damages, sampling free and testing of pet performs. Assessee was asked to explain and reconcile pet performs and production of bottles as well as caps consumption and also the bottle consumption. In reply assessee submitted that the company consumed specified number of performs and caps which included specified quantity purchased from outside. It was also submitted that caps and performs were exclusively used for the purpose of packing finished products and hence these were debited directly in packing material account Not satisfied with the explanation A.O. held that there was mismatch in these two items. Aggrieved assessee appealed before the CIT(A) and the CIT(A) following the order of his predecessor for A.Y. 2004-05 deleted the addition made by the A.O. He also held that there was no material available with the A.O. to prove any unaccounted production of finished goods or any inflation of expenditure on packing material such as performs and caps and the assessee has furnished the reasons for higher wastage compared to earlier with necessary evidence. Therefore the CIT(A) directed the A.O. to delete the addition. Aggrieved by the direction of the CIT(A) Revenue is in appeal.
13. We have heard both the parties and perused the relevant material on record.
14. At the outset it was submitted that similar issue was considered by the ITAT Mumbai "C" Bench in assessee's own case in ITA No. 1591/Mum/2009 for A.Y. 2004-05 wherein it was held as under: -
"3. After hearing the rival submissions and perusing the relevant material on record it is noted that the learned CIT(A) has deleted the addition by specifically noting that the Assessing Officer failed to take the production of bottles from Sr. No. 1 to 11 of Schedule V, which fact could not be controverted by the learned Departmental 7 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.
Representative. The further working given by the learned CIT(A) and determining a reasonable percentage of wastage has also remained unchallenged before us. Under these circumstances it is apparent that the Assessing Officer failed to reconcile the figures properly. We, therefore, uphold the deletion of addition."
Since the facts similar in these two assessment years also, respectfully following the above decision of the Coordinate Bench we uphold the order of the CIT(A) deleting the addition. Grounds of the Revenue are rejected. Appeals dismissed.
15. In the result, assessee's appeals in ITA Nos. 3344 & 3345/Mum/2010 are allowed and Revenue's appeals in ITA Nos. 3636 & 3637/Mum/2010 are dismissed.
Order pronounced in the open court on 24th August 2011.
Sd/- Sd/-
(R.V. Easwar) (B. Ramakotaiah)
President Accountant Member
Mumbai, Dated: 24th August 2011
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A) - XXXIX, Mumbai
4. The CIT- Central II, Mumbai City
5. The DR, "C" Bench, ITAT, Mumbai
By Order
//True Copy//
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
n.p.