2019 (3) TMI 643 - AT - Income Tax

Tribunal allows appeal on Local Body Tax expenditure denial under Income Tax Act

Vinod Pahumal Ramchandani Versus The Income Tax Officer, Wad 1 (2), Solapur

The Tribunal allowed the appeal of the assessee regarding the denial of expenditure on account of Local Body Tax (LBT) under section 43B of the Income Tax ... Local Body Tax (LBT) - claimed as deductible u/s 43B - said amount was paid during the year under consideration, though it related to prior period - no provision was made in the earlier years - HELD THAT:- Where the assessee is following a particular method of accounting and any amount was incurred for carrying out the business in any of the years, then the same if covered under the provisions of section 43B of the Act is to be allowed in the year of payment. In the facts of present case, where the assessee was following mercantile system of accounting, then LBT which is 10% of purchase cost was chargeable to the Profit and Loss Account in the preceding year. No such charge was created by the assessee in the previous year since the amount was not paid by the assessee in the said year. Only on payment of said amount, the assessee debited the same to the Profit and Loss Account. It is undisputed that LBT is to be allowed as expenditure. We find no merit in the orders of authorities below in denying the same to the assessee on the ground that the amount was not shown as payable in the preceding year. The express provisions of section 43B of the Act provides that irrespective of previous year in which the liability to pay such sum was incurred by the assessee, according to the method of accounting regularly employed by him, the said sum would be allowed only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. Accordingly, we hold that the assessee is entitled to the aforesaid claim under section 43B - Decided in favour of assessee. Issues:- Denial of expenditure on account of Local Body Tax (LBT) under section 43B of the Income Tax Act, 1961.Analysis:1. The primary issue in this case revolves around the denial of expenditure incurred on Local Body Tax (LBT) amounting to Rs. 43,73,913 under section 43B of the Income Tax Act. The Assessing Officer disallowed this amount as it pertained to a prior period, even though it was paid during the year under consideration. The contention was that since the LBT was not debited in earlier years, it should not be allowed as an expenditure in the current year. The CIT(A) upheld this disallowance.2. The assessee argued that the claim was made under section 43B of the Act, which allows deductions for sums payable by the assessee by way of tax, duty, cess, or fees in the year of payment, regardless of the previous year in which the liability was incurred. The section specifically states that such deductions should be allowed in the year of payment, following the method of accounting regularly employed by the assessee.3. The Tribunal noted that the assessee, engaged in retail trading of liquor, had debited Rs. 99,67,827 as LBT, with 10% of the purchase cost being charged as LBT on liquor. While the LBT paid during the year was allowed, the amount pertaining to the earlier period was disallowed. However, as per the provisions of section 43B, the payment made during the year should be allowed as an expenditure, irrespective of whether it was shown as payable in the preceding year.4. The Tribunal emphasized that under section 43B, the deduction is to be allowed in the year of payment, even if the amount was not debited on an accrual basis in the preceding year. The express provisions of the Act mandate that such sums should be allowed when paid, following the accounting method employed by the assessee. Therefore, the assessee was entitled to claim the expenditure of Rs. 43,73,913 under section 43B of the Act.5. The Tribunal distinguished the case cited by the authorities below, where the issue was related to penal interest and penalty. In that case, the Tribunal allowed the deduction for interest paid on sales tax, which was not penal in nature. However, since the facts of the present case differed, the Tribunal allowed the grounds of appeal raised by the assessee and held that the assessee was entitled to the claimed amount under section 43B.6. Consequently, the appeal of the assessee was allowed, and the order was pronounced on March 11, 2019.