Ravechi Properties , Mumbai vs Department Of Income Tax

ी संजय अरोड़ा, लेखा सद य एवं ी वजय पाल राव, या यक सद य के सम ।

BEFORE SHRI SANJAY ARORA, AM AND SHRI VIJAY PAL RAO, JM

आयकर अपील सं./I.T.A. No. 8330/Mum/2010 ( नधा रण वष / Assessment Year: 2001-02)

Dy. CIT, Central Circle-1, Ravechi Properties Pawar Industrial Estate, 26 Guide Building, LD Ruparel 2nd Floor, Edulji Road, Charai, बनाम/ Marg, Nepean Sea Road, Thane (W) Vs. Mumbai

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAIFR 8765 K (अपीलाथ" /Appellant) : (#$यथ" / Respondent)

अपीलाथ" क% ओर से / Appellant by : Shri Love Kumar

#$यथ" क% ओर से/Respondent by : Shri Satish Chandak

सनु वाई क% तार+ख / : 29.01.2015 Date of Hearing घोषणा क% तार+ख / : 27.02.2015 Date of Pronouncement

आदे श / O R D E R Per Sanjay Arora, A. M.:

This is an Appeal by the Revenue directed against the Order by the Commissioner of Income Tax (Appeals)-I, Mumbai ('CIT(A)' for short) dated 31.08.2010, allowing the Assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2007-08 vide order dated 30.12.2009.

2 ITA No. 8330/Mum/2010 (A.Y.2007-08) Dy. CIT vs. Ravechi Properties

2. The only issue in this appeal is the validity or otherwise in law of the deletion of the disallowance effected u/s.40(a)(ia) of the Act by the Assessing Officer (A.O.) in the facts and circumstances of the case, having been since deleted by the first appellate authority.

3. The facts of the case in brief are that the assessee firm, engaged as builders and developers, were observed by the A.O. during the course of the assessment proceedings to have made payments towards its' project in an aggregate of Rs.49,50,106/- during the months of January and February, 2007. Tax, though deducted at source in respect thereof, stood deposited to the credit of the Central Government only on 07.04.2007, i.e., beyond the time limit allowed u/s.200 and, resultantly, u/s.40(a)(ia). A disallowance was, accordingly, warranted. The assessee, in explanation, would submit that it had complied with the provision of tax deducted at source (TDS) in letter and spirit, so that the condition of section 40(a)(ia) should be considered as substantially satisfied. Further, in- as-much as the impugned payments, made at the fag end of the relevant year, were carried over in the form of work-in-progress (WIP), no claim in their respect had in fact been made, so that no disallowance u/s.40(a)(ia) could be made. In sum, disallowance u/s.40(a)(ia), i.e., assuming a default there-under, or its non-satisfaction, could only be for the year in which the WIP would stand to be set off against the sales; the assessee following 'project completion method'. The same did not find favour with the A.O., who found the same misplaced and, accordingly, effected the impugned disallowance. In appeal, however, the said argument found favour with the ld. CIT(A), in whose view no expenditure had been thus claimed by the assessee in respect of the impugned sum and, accordingly, the question of disallowance did not arise. Aggrieved, the Revenue is in appeal.

3. We have heard the parties, and perused the material on record.

The assessee's argument, appealing at first blush, is misconceived. It is wholly inapposite to state that no expenditure had in fact been incurred or claimed by the 3 ITA No. 8330/Mum/2010 (A.Y.2007-08) Dy. CIT vs. Ravechi Properties

assessee for the current year. The assessee, following mercantile method of accounting, an expenditure becomes entitled to be claimed by it on the liability in its respect being incurred (refer: Calcutta Co. Ltd. vs. CIT [1959] 37 ITR 1 (SC); CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC)), which in the present case is not in doubt or dispute; the assessee having in fact also paid the said sums to the relevant parties, settling or adjusting to that extent the said liability. It is rather only for the reason that the expenditure stands suffered and incurred, that, being in direct relation to the work undertaken, which has not been sold or realized or otherwise transferred by the year-end, that the said expenditure, in the form of accumulated cost, warrants being carried over as a part of the cost of the inventory. In other words, it is only on account of the expenditure being incurred that it qualifies to be a cost and, thus, entitled to be carried over as a part of the cost in computing the income for the year, i.e., on matching principle. The carrying over of the cost of the unsold goods is only an application of the concept of 'matching principle', in- as-much as only the cost of the goods sold or revenue in respect of which is realized, is liable to be set off or adjusted against the said revenue, so that the balance costs, though incurred, have to be necessarily carried over in accounts, which is thus solely for the purpose of and guided by the consideration of determining the income, which is to be as per the method of accounting being regularly followed. The matter is not virgin, and finds considerable elucidation by the hon'ble courts of law, as by the apex court per its celebrated decisions in the case of Chainrup Sampatram vs. CIT [1953] 24 ITR 481 (SC); and CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC), to name some. The value of stock itself is a result of and, accordingly, confirms and validates the fact of cost having been incurred and claimed. We may in this regard reproduce the relevant part from the decision in the case of Raj Petro Specialities (P.) Ltd. vs. Asst. CIT [2013] 58 SOT 60 (Mum)(URO):

'It is only where the cost is incurred that the same would stand to form part of the operating statement, and qualify for being recognised as a part of cost of goods unsold as at the year-end, i.e., the closing stock by definition. It is this adding of the tax/duty cost to the value of the closing stock without making a corresponding allowance for the same in the trading account that 4 ITA No. 8330/Mum/2010 (A.Y.2007-08) Dy. CIT vs. Ravechi Properties

would lead to a distorted picture and a profit figure inconsistent with the actual profit earned/accrued.'

The matter admits of no debate after the co-option of the non obstante clause of s. 145A on the statute-book, statutorily prescribing the principles to be followed for valuing, among others, stock-in-trade as at the beginning and end of the relevant year, providing thus a legal basis for the adoption of the principles of commercial accounting as well as the standard accounting practices, in-as-much as only a set off of the relevant cost would result in determination of the correct income. The same, besides being in agreement with the accounting percepts, results in providing a uniform accounting treatment for all the assessees.

The two concepts, i.e., of incurring the expenditure and the set off thereof in view of the matching principle, are separate and distinct, and the difference needs to be recognized and appreciated. The year in which the expenditure may impact the revenue or depress the profit is an altogether different matter, with which we can hardly be concerned with. This is as the disallowance u/s. 40(a)(ia), a non-obstante clause, is only toward computing the taxable income under the Act, which though based thereon, is yet legally at variance with the concept of commercial profit. A similar argument, i.e., qua purchase of stock-in-trade, raised in the context of section 40A(3), mandating disallowance of expenditure where paid in cash above a threshold limit, was rejected by the apex court in Attar Singh Gurmukh Singh vs. ITO [1991] 191 ITR 667 (SC). It was explained that the term expenditure, though not defined under the Act, is a term of wide import, taking into its ambit all outgoings of the business. Purchases, including that of stock-in-trade, would thus qualify to be 'expenditure', which would be so even following the principles of commercial accounting (refer pg. 673). The apex court, in doing so, endorsed the view of several high courts, disapproving the lone decision to the contrary by the Gauhati high court in CIT vs. Hardware Exchange [1991] 190 ITR 61 (Gau), stating that it was unable to agree with its view that purchase of stock-in-trade was not expenditure incurred as the money did not go out irretrievably in such a case. As sought 5 ITA No. 8330/Mum/2010 (A.Y.2007-08) Dy. CIT vs. Ravechi Properties

to be explained by us, the expenditure stands incurred on the corresponding liability being incurred. As such, whether the said money stands to be recouped through sales - whether at a profit or loss - or not, as where the stock-in-trade is unsold as at the year- end, would not be relevant, or make it any less an expenditure.

Be that as it may, in our view, the assessee's case merits acceptance. This is as the amendment to se. 40(a)(ia), i.e., vide Finance Act, 2010 w.e.f. 01/4/2010, whereby the deposit of tax deducted at source, deposited with the central government by the due date of the filing the return for the relevant year, i.e., where the tax was deductible at any time during the relevant previous year, has been interpreted by the hon'ble courts of law as retrospective in nature, so that it would apply for the current year as well. The decisions by the higher courts of law, as in the case of CIT v. Rajinder Kumar [2014] 362 ITR 241 (Del) and CIT v. Naresh Kumar [2014] 362 ITR 256 (Del), have read down the said amendment, holding it as retrospective on the ground of it being only clarificatory and toward mitigating the hardship being caused and, further, of the payment by due date qua the deductions effected for the first eleven months of the relevant previous year as sufficient compliance of the provision. Accordingly, the disallowance stands to be deleted. We decide accordingly.

4. In the result, the Revenue's appeal is dismissed.

प0रणामतः राज व क% अपील खा0रज क% जाती है ।

Order pronounced in the open court on February 27, 2015

Sd/- Sd/-

(Vijay Pal Rao) (Sanjay Arora) या यक सद य / Judicial Member लेखा सद य / Accountant Member मंब ु ई Mumbai; 5दनांक Dated : 27.02.2015 व. न.स./Roshani, Sr. PS

आदे श क" # त%ल&प अ'े&षत/Copy of the Order forwarded to :

1. अपीलाथ" / The Appellant

2. #$यथ" / The Respondent

3. आयकर आयु6त(अपील) / The CIT(A) 6 ITA No. 8330/Mum/2010 (A.Y.2007-08) Dy. CIT vs. Ravechi Properties

4. आयकर आयु6त / CIT - concerned

5. वभागीय # त न;ध, आयकर अपील+य अ;धकरण, मुंबई / DR, ITAT, Mumbai

6. गाड= फाईल / Guard File आदे शानस ु ार/ BY ORDER,

उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai