1982 (9) TMI 147 - AT - Income Tax

Tribunal allows sandalwood business expenses, rejects tax officer's timing arguments

The Tribunal allowed the appeal, overturning the disallowance of expenditure claimed by the assessee in a sandalwood business. The disallowed expenses, ... - Issues:1. Disallowance of revenue expenditure not related to the year of account.2. Change in the constitution of the firm.3. Disallowance of expenses relating to previous years.4. Profit on sale of motor cycle not admitted.5. Acceptance of the method of accounting by the department.Issue 1: Disallowance of revenue expenditure not related to the year of accountThe assessee, involved in sandalwood business, claimed expenditure not related to the year of account. The Income Tax Officer (ITO) sought to disallow this expenditure, arguing that it should have been claimed in the years with sales. The assessee contended that due to the nature of their business, expenses were to be set off against profits in the year of sales. The CIT(A) and ITO upheld the disallowance, stating that expenses should have been claimed in the respective years. However, the Tribunal accepted the assessee's method of accounting, citing past approvals by the department and the nature of the business as reasons to allow the appeal.Issue 2: Change in the constitution of the firmThe ITO disallowed the expenditure incurred by the firm with three partners in a year when it had six partners, asserting that the expenses of the former setup could not be allowed for the latter. Despite the firm's registration with six partners, the ITO raised this issue. However, the Tribunal did not find this argument relevant to disallow the expenses and focused on the method of accounting accepted by the department.Issue 3: Disallowance of expenses relating to previous yearsThe ITO pointed out that assessments for certain years had been completed with nil returns filed by the assessee, indicating that expenses from those years could not be allowed in the current assessment. The Tribunal did not find this reasoning sufficient to disallow the expenses, emphasizing the accepted method of accounting and the nature of the business.Issue 4: Profit on sale of motor cycle not admittedThe ITO noted that the assessee did not admit profit on the sale of a motor cycle related to the previous assessment year. This was a minor issue raised by the ITO, which did not significantly impact the overall decision of disallowance.Issue 5: Acceptance of the method of accounting by the departmentThe Tribunal highlighted that the department had previously accepted the method of accounting employed by the assessee in earlier assessments. Despite the ITO's objections based on various grounds, the Tribunal upheld the method, considering the nature of the business and past approvals by the department as valid reasons to allow the appeal and direct the ITO not to disallow the claimed expenditure.In conclusion, the Tribunal allowed the appeal, deleting the disallowance of expenditure, based on the accepted method of accounting, the nature of the business, and past approvals by the department, overriding the objections raised by the ITO regarding the timing of claiming expenses and changes in the firm's constitution.