Income Tax Appellate Tribunal - Chandigarh
Laj Exports,, Ludhiana vs Assessee on 10 January, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL: "A" BENCH: CHANDIGARH BEFORE SHRI H L KARWA, VP AND SHRI D K SRIVASTAVA, AM ITA No. 668/Chd/2010 Assessment Year 2005-06 M/s Laj Exports v A.C.I.T. Circle 1, Ludhiana E-597-598, Phase VII Focal Point, Ludhiana AAAFL 3811 A Appellant By : Shri Sudhir Sehgal Respondent By: Smt. Jyoti Kumari, CIT Date of hearing: 10.01.2012 Date of pronouncement: 11.01.2012 ORDER
D K Srivastava: The appeal filed by the assessee is directed against the order passed by the ld. CIT on 3.3.2010, on the following grounds:-
"1 That the worthy CIT-I, Ludhiana has erred in passing order u/s 263 of the Income-tax Act, 1961 and enhancing the income of assessee to Rs. 45,67,835/- as against Rs. 19,,29,479/- originally assessed by the AO.
2 That the worthy CIT-I, Ludhiana has not considered the fact that assessment was completed under scrutiny u/s 143(3) of the Act after the due application of mind, making detailed enquiries and after examination of various replies/information and discussion with the AO during the course of assessment proceedings. As such, the version of the worthy CIT-I. Ludhiana that the order is not only erroneous but also prejudicial to the interest of the revenue as same has been passed due to lack of Enquiry and application of mind on the part of the AO, is not correct.
3. That without prejudice to the above grounds of appeal even otherwise on merits, that the Worthy CIT-I, Ludhiana has erred in holding that the Premium paid on Keyman Insurance policy is to be allowed on accrual basis and thus the maximum amount that could be allowed is Rs. 3,61,644/-.
4. That without prejudice to the ground No. 3 above, even otherwise, no prejudice has been caused to the revenue since the premium which is held to be not related to the year under consideration will be allowed in the subsequent year as per the version of the Worthy CIT-I, Ludhiana and there is no tax effect and thus, even from this angle the order u/s 263 is bad in law.
5. That the addition has been made against the facts and circumstances and submissions made by us have not been properly considered.
6. That the Appellant craves leave to add or a mend the grounds of appeal before the appeal is finally heard or disposed off."
2. Briefly stated, the facts of the case are that the assessee filed its return of income for the year under appeal on 26.10.2005 returning total income at Rs. 18,27,968/- as against which assessment u/s 143(3) was completed on 26.11.2007 assessing the total income at Rs. 19,29,479/-. The Ld. CIT, Ludhiana called for the records and examined them. He noticed that the assessee had claimed deduction on account of expenditure of Rs. 30.00 lakhs being the amount of premium paid on the insurance of lives of its three partners namely S/Shri Krishan Kumar Gupta, Chaman Parkash and Gian Chand Singla. He also noticed that the insurance policies in respect of aforesaid Keyman were purchased in February, 2005. He further noticed that a sum of Rs. 3,61,644/- out of insurance premium paid related to the year under appeal while the remaining sum, i.e., Rs. 26,38,356/- related to subsequent years. After hearing the assessee, the CIT disallowed a sum of Rs. 26,38356/- with the following observations:-
"4.4 As regards the next argument raised by the assessee that a premium paid cannot be bifurcated on accrual basis the same is also found to be not valid. In this case policies have been issued on 15.2.2005 or 18.2.2005 for a validity of one year subject to payment of further premium. Since expense has been incurred for the period beyond 31.3.2005 the same cannot be held to be allowable in AY 2005-06 relevant to previous year 2004-05. In mercantile system of accounting only those expenses are debited to profit and loss account, which are relatable to the period under assessment irrespective of the actual payment of the same. In this case since premium has been paid for 15.2.2005 to 14.2.2006 in case of two policies and 18.2.2005 to 17.2.2005 in case of another policy, the premium paid beyond 31.3.2005 cannot be held to be relatable to the previous year under assessment. In mercantile system of accounting such expenses are treated to be prepaid expenses and are taken to Balance Sheet. A reference to Balance Sheet of the assessee itself shows the following:
Prepaid Expenses Insurance Expenses Rs. 1,22,722/-
Machinery Repairs Rs. 3,092/- Telephone Expenses Rs. 26,000/-
The assessee itself has followed the concept of mercantile system in respect of above noted expenses but the same has not been followed in case of premium paid against keyman insurance policies which is in contradiction to assessee's own system of accounting as well as provisions of law. Therefore, expenses of Rs. 26,38,356/- relatable to period beyond 31.3.2005 cannot held to be allowable.
4.5 The argument that the insurance premium paid for insurance on the lives of partners is deductible as 100% business expenditure u/s 37(1) of the Income-tax Act, 1961 is not disputed at all. Though it is an allowable expense however, it is reiterated that it is only allowable to the extent it is relatable to the period falling in the relevant previous year under assessment as discussed in para 4.4 above.
5 From the above discussion it has been found that order of the AO is erroneous as far as it is made on incorrect assumption of facts as well as incorrect application of law. Further, since the same has resulted into allowance of expenses which were not allowable otherwise, the same is prejudicial to the interest of revenue also. Hence, proceedings u/s 263 are held to be maintainable and as discussed in para 4 above expenses of Rs. 26,38,356/- are hereby held to be not allowable and thus added to the total income of the assessee. AO is directed to re-compute the income and tax thereon accordingly and issue revised demand notice."
3. Aggrieved by the order passed by the ld. CIT, the assessee is now in appeal before this Tribunal. He submitted that Keyman Insurance policies were taken on the lives of three partners in February, 2005 and the premium which fell due in February 2005 itself was accordingly paid to the Insurance Company and therefore the entire premium was rightly allowed by the AO in the year under appeal.
4. In reply, the ld. DR supported the order passed by the ld. CIT.
5. We have heard both the parties and carefully considered their submissions. As rightly observed by the ld. CIT, the assessee follows mercantile system of accounting. However the fact remains that the insurance premium fell due in the year under appeal and was therefore paid by the assessee. In the mercantile system of accounting, the expenses are liable to be allowed on accrual basis. The expenditure is said to arise as soon as it is incurred, i.e., liability to pay arises and is recognized in the books of account. In the present case, the liability to pay insurance premium arose in the year under appeal. It was also paid in the year under appeal. The expenses were also recognized in the books of account. In this view of the matter, the order of the ld. CIT in disallowing the insurance premium is vacated. Appeal filed by he assessee to the aforesaid extent is allowed.
Order pronounced on 11.01.2012 Sd/- Sd/- (H L KARWA) (D K SRIVASTAVA) VICE PRESIDENT ACCOUNANT MEMBER Chandigarh, 11.01.2012 SURESH Copy to: 1. The Appellant, M/s Laj Exports 2. The Respondent, A.C.I.T. 3. The CIT, Ludhiana 4. The CIT(A), Ludhiana 5. The D.R, Income-tax Department, Chandigarh Assistant Registrar, ITAT, Chandigarh 4 ITA No. 668/Chd/2010 M/s Laj Exports v. ACIT