2019 (12) TMI 1233 - AT - Income Tax

Tribunal reverses disallowance & upholds deletion of additions in tax appeal.

The Tribunal allowed the assessee's appeal, quashing the reassessment proceedings and reversing the disallowance of outstanding municipal tax liability. ... Reopening of assessment beyond four years requires failure to make full and true disclosure - Section 43B not attracted where assessee is a mere collecting agent and liability is that of State authority - Prior period expenses allowable where liabilities crystallize during the year and were disclosed in audited accounts - Nomenclature does not determine substance - expenditure on loss due to flood/cyclone/fire can be revenue in nature if it is repair/replacement - Mercantile system of accounting does not preclude allowance of expenditure which crystallizes and is disclosedReopening of assessment beyond four years requires failure to make full and true disclosure - Validity of reassessment proceedings initiated under section 147/148 where original assessment was completed and more than four years had elapsed - HELD THAT: - The Tribunal admitted the additional ground challenging reopening and examined the reasons recorded. It held that where more than four years have elapsed from the end of the assessment year, reopening under section 147 is permissible only if there was failure by the assessee to make full and true disclosure of material facts. In the present case the items relied upon for reopening were reflected in the assessee's audited balance sheet, profit and loss account and auditor's report which were part of the return. The Assessing Officer referred to those same disclosed entries in recording reasons for reopening. Consequently there was no failure to disclose material facts and the reassessment proceedings under section 147/148 could not be sustained. [Paras 14, 15]Reassessment proceedings initiated under section 147/148 are not valid and are set aside.Section 43B not attracted where assessee is a mere collecting agent and liability is that of State authority - Allowability of municipal tax amounts collected but not deposited before the due date - applicability of section 43B - HELD THAT: - The facts show the assessee collected municipal tax on consumption of electricity as a conduit/collecting agent for the State and accounted for uncollected amounts as receivables with corresponding payables to the State. Applying the principle in CESC Ltd. (as relied upon by the assessee), where the licencee merely acts as collecting agent and the duty is not a primary liability of the assessee, section 43B (which disallows amounts not paid by due date) does not apply. The Tribunal found the CIT(A)'s and AO's reliance on section 43B misplaced, noting consistent accounting treatment from earlier years and that liability would arise only on collection by the State. On this basis the disallowance under section 43B was reversed and deduction allowed. [Paras 16, 17, 18]Disallowance under section 43B in respect of municipal taxes collected is deleted; amount is allowable.Prior period expenses allowable where liabilities crystallize during the year and were disclosed in audited accounts - Mercantile system of accounting does not preclude allowance of expenditure which crystallizes and is disclosed - Allowability of prior period expenses (including aggregate prior period expenditure of Rs. 7.66 crores) debited to profit and loss account - HELD THAT: - The Tribunal examined the components of the prior period expenditure. It held that part of the claimed amount duplicated an already considered provision for non-existing fixed assets (Rs. 5.88 crores) which was allowed; double addition could not be sustained. For the remaining items, the assessee had shown corresponding prior period income and the net impact on P&L was nominal. Certain prior period liabilities (including power purchase reconciliation differences and amounts that crystallized in the year) were shown and supported by books and reconciliations; the CIT(A)'s findings that these items crystallized during the year were not rebutted by Revenue. Therefore, although the assessee follows mercantile accounting, expenditures that were contingent and crystallized during the year and disclosed in audited accounts are allowable when properly evidenced. Accordingly the deletion of the addition was upheld. [Paras 23]Deletion of addition in respect of prior period expenses is upheld and Revenue's ground is dismissed.Nomenclature does not determine substance - expenditure on loss due to flood/cyclone/fire can be revenue in nature if it is repair/replacement - Allowability of expenditure claimed as loss due to flood, cyclone and fire debited to profit and loss account - HELD THAT: - The Tribunal considered the nature of the expenditure rather than its label. The assessee contended the losses arose from repairs, replacements and events like flood, cyclone and fire and were revenue in nature. The Assessing Officer's objection that such loss should not be debited to P&L was rejected because the actual nature of the expenditure was in the field of revenue expenditure. The Tribunal accepted the assessee's explanation and the CIT(A)'s conclusion that the expenditure was properly allowable as revenue expense. [Paras 24]Deletion of addition relating to loss on sale/ loss due to calamities is sustained and the expenditure is allowable.Prior period expenses allowable where liabilities crystallize during the year and were disclosed in audited accounts - Allowability of write off of non existing fixed assets (prior period expense of Rs. 5.88 crores) - HELD THAT: - On facts the assessee explained that during division of HVPNL certain fixed assets transferred without details could not be traced; after physical verification and adjustments a balance of Rs. 5.88 crores was written off in the year under appeal. The assessee had not claimed depreciation on these assets in earlier years; statutory auditor also reported no depreciation claimed till FY 2004 05. The CIT(A) examined fixed asset registers and accepted that the assets were written off on crystallization during the year. Revenue failed to rebut those findings. Given disclosure in audited accounts and absence of prior depreciation claims, the write off was held allowable as revenue expenditure. [Paras 19, 20, 21, 22]Deletion of addition in respect of write off of non existing fixed assets is confirmed and the expenditure is allowable.Final Conclusion: The assessee's appeal is allowed by quashing the reassessment proceedings and deleting the disallowance under section 43B in respect of municipal taxes; the Revenue's appeal is dismissed as the Tribunal upheld the deletions of additions relating to prior period write off of fixed assets, other prior period expenses and losses due to calamities, concluding the amounts were disclosed, crystallized during the year or were revenue in nature. Issues Involved:1. Validity of reassessment proceedings initiated under Sections 147/148 of the Income Tax Act.2. Disallowance of outstanding municipal tax liability under Section 43B of the Act.3. Deletion of additions made by the Assessing Officer (AO) on account of prior period expenses of fixed assets.4. Deletion of additions made by the AO on account of prior period expenses.5. Deletion of additions made by the AO on account of expenses claimed under the head 'loss due to flood, cyclone, and fire'.Issue-wise Detailed Analysis:1. Validity of Reassessment Proceedings:The first issue raised by the assessee was against the reassessment proceedings initiated under Sections 147/148 of the Act. The assessee argued that the reassessment was initiated beyond four years from the end of the assessment year without any failure on their part to make a full and true disclosure. The Tribunal noted that the original assessment was completed under Section 143(3) and all relevant facts were disclosed in the audited balance sheet, director’s report, and audit report. Since the reassessment was based on these disclosed facts, the Tribunal held that the reassessment proceedings were not justified and lacked merit.2. Disallowance of Outstanding Municipal Tax Liability:The second issue involved the disallowance of Rs. 11.63 crores on account of outstanding municipal tax liability by invoking Section 43B of the Act. The assessee contended that they acted merely as a collecting agent for the State Government and the amount was not debited to the Profit & Loss Account. The Tribunal referred to the decision of the Hon’ble Calcutta High Court in CESC Ltd. vs CIT and the Kerala High Court in Kerala State Electricity Board vs DCIT, concluding that the provisions of Section 43B were not applicable as the assessee was not the primary liable party. Consequently, the Tribunal allowed the assessee's appeal on this issue.3. Deletion of Additions on Account of Prior Period Expenses of Fixed Assets:The Revenue’s appeal challenged the deletion of Rs. 5.88 crores added by the AO as prior period expenses of fixed assets. The assessee explained that these were non-existing fixed assets written off during the year, and no depreciation was claimed on these assets. The Tribunal found that the assessee’s claim was supported by the fixed assets register and the auditor’s report, which confirmed no depreciation was claimed. Thus, the Tribunal upheld the CIT(A)’s decision to delete the addition.4. Deletion of Additions on Account of Prior Period Expenses:The Revenue also appealed against the deletion of Rs. 7.66 crores added as prior period expenses. The Tribunal noted that the prior period expenses included a provision of Rs. 5.88 crores, which was already considered separately. The remaining expenses were related to power purchase, arrears, and interest, which crystallized during the year. The Tribunal found that the CIT(A) had rightly allowed these expenses as they were duly substantiated and crystallized during the relevant year. Hence, the Tribunal dismissed the Revenue’s appeal on this ground.5. Deletion of Additions on Account of Loss Due to Flood, Cyclone, and Fire:The final issue raised by the Revenue was against the deletion of Rs. 48,70,125/- claimed as expenses due to loss from flood, cyclone, and fire. The assessee argued that these were revenue expenses related to repairs and replacements, not capital losses. The Tribunal agreed with the assessee, noting that the nature of the expenses was revenue and not capital. Therefore, the Tribunal dismissed the Revenue’s appeal on this issue.Conclusion:The Tribunal allowed the assessee’s appeal, quashing the reassessment proceedings and reversing the disallowance of municipal tax liability. The Tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s deletion of additions related to prior period expenses of fixed assets, prior period expenses, and loss due to natural calamities. The order was pronounced in the open court on 24th December 2019.