Spacevision Impex (P) Ltd, New Delhi vs Department Of Income Tax

M/s. Spacevision Impex (P) Ltd., vs. ACIT, Circle 9 (1), D - 14, Kailash Colony, New Delhi. New Delhi - 110 048.

(PAN : AAICS0922Q)

ITA No.1423/Del./2010 (ASSESSMENT YEAR : 2006-07)

ACIT, Circle 9 (1), vs. M/s. Spacevision Impex (P) Ltd., New Delhi. D - 14, Kailash Colony, New Delhi - 110 048.

(PAN : AAICS0922Q)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri Raj Kumar Gupta, Advocate, Shri Amit Gopal, CA REVENUE BY : Shri B.R.R. Kumar, Senior DR

Date of Hearing : 05.05.2015 Date of Pronouncement : 15.05.2015

ORDER

PER S.V. MEHROTRA, AM :

2 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

ITA No.1457/Del/2011 filed by the assessee and ITA

No.1423/Del/2010 filed by the revenue are cross appeals directed against

the order passed by the CIT (A)-XII, New Delhi dated 23.12.2009 for the

assessment year 2006-07. ITA No.1875/Del/2012 filed by the assessee is

directed against the order of the CIT (A)-XII, New Delhi dated 06.04.2010

for the assessment year 2007-08.

2. The facts of the case are that during the year under consideration,

the assessee company was engaged in the business of trading of petroleum

products. It had filed its return of income declaring income at

Rs.19,53,953/-. The assessment was completed at a total income of

Rs.62,90,861/- as under :-

Income as per return of income 19,53,953/- Add: i) On account of ROC fees (as 1,98,000/- discussed vide para 3 and 3.1) (1,50,500 + 47,500) ii) On account of accrued on NCs (as 63,605/- discussed vide para 4) iii) On account of custom duty (as 84,729/- discussed vide para 5) iv) On account of custom duty (as 7,04,233/- discussed vide para 5.1) v) On account of professional fees 7,500/- (as discussed vide para 6) vi) On account of legal fee (prior 9,450/- period) (as discussed vide para 6.1) vii) On account of professional fees 22,066/- paid for conversions of Agriculture land (as discussed vide para 6.2) 3 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

viii) On account of medi-claim of the 13,142/- director (as discussed vide para 7) ix) On account of interest of work-in- 1,24,148/- progress (as discussed vide para 8) x) On account of plant expenses (as 93,973/- discussed vide para 4) xi) On account of notional interest on 2,84,405/- advances (as discussed vide para 9) xii) On account of telephone & 50,000/- vehicle (as discussed vide para 10) xiii) On account of service charges (as 11,40,652/- 43,36,908/- discussed vide para 11.3 7,32,148/- + 8,08,857/-) Total Income : 62,90,861/-

Ld. CIT (A) partly allowed the assessee's appeal. Being aggrieved with

the order of the CIT (A), both the assessee and revenue are in appeal for

assessment year 2006-07.

3. First, we take up assessee's appeal being ITA No.1457/Del/2011.

The assessee has taken the following effective grounds of appeal :-

"1. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in Confirming the addition of Rs.1,98,000/- by Assessing officer by disallowing the entire expenditure of Rs.150,500/- and Rs.47,500/- for raising authorized capital of the Company vide Para 3 and 3.1 of assessment order dated 2411 2/2008 instead of allowing the expenditure in five years as per section 35 D of Income Tax Act 1961 or as per other relevant section of Income Tax Act 1961.

2. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in Confirming addition of Rs.84,729/- and Rs.7,04,233/- by Assessing officer by disallowing the interest on late payment of custom duty vide Para 5 and 5.1 of assessment order dated 24/12/2008 inspire' of our reply that there is no default on our part for late payment of custom duty being custom duty had been paid late for non release of material by custom authorities due to Government Procedures. Learned assessing officer not raised query for what purpose 4 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012 Rs.7,04,233/- paid to custom authorities and made the addition to income on its own assumptions.

3. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in Confirming addition of Rs.9.450/- by Assessing officer by disallowing the legal fee for the month of March 2005 under the head of consultancy and professional charges being prior period expenses vide para 6.1 of assessment order dated 24/12/2008. Being no amount had been provided for in the accounts for the F.Y. 2004-2005, expenditure had been accounted for on submission of bill by the consultant.

4. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in Confirming addition of Rs.13,142/- by Assessing officer by disallowing the Mediclaim policy paid for Director of the company under the head insurance expenses vide para 7 of assessment order dated 24/12/2008 stating that no reply / explanation furnished, however the reply had been submitted vide para 9 of letter date 18/12/2008.

5. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming addition of Rs.1,24,148/- being interest not charged on capital expenditure of Rs.46,73,942/- booked as work in progress on behalf of plant owner M/s Futuristic Offshore Services & Chemicals Ltd. vide para 8 of assessment order dated 24/12/2008.

6. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming addition of Rs.93,973/- by Assessing officer by disallowing the plant expenses of Rs. 93,973/- vide para 8.1 of assessment order dated 24/12/2008.

7. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming addition of Rs.2,84,405/- being interest not charged on business advances of Rs.18,96,035/- given in earlier years vide para 9 of the assessment order dated 24/12/2008.

8. Ld. Commissioner of Income Tax (Appeals) has erred both on facts and in law in confirming addition of Rs.50,000/- by Assessing officer by disallowing the expenditure of Rs.50,000/- on estimate bases for personal use under the head of Telephone, Vehicle Running & Maintenance vide para 10 of the assessment order dated 24/12/2008 inspite of Fringe Benefit Tax paid on Telephone & Vehicle Running Maintenance expenses."

5 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

4. At the time of hearing, ld. Counsel for the assessee did not press

ground no.1. Accordingly, the same is dismissed as not pressed.

5. Brief facts, apropos ground no.2, are that the assessee had claimed

an amount of 34,78,005/- under the head Custom Duty. On examination of

details, the Assessing Officer noticed that assessee had, inter alia, claimed

a payment of Rs.84,729/- to the Custom Department in the month of

February, 2006 which was on account of delayed payment of Custom Duty

on the goods imported during the financial year 2003-04. The Assessing

Officer required the assessee to explain as to why it should not be treated

as penal in nature/prior period expenses and, accordingly, disallowed. The

assessee submitted as under :-

"Interest of Rs.84,728/- paid on custom duty was not paid due to any default by the company. Actually there had been delay in release of material due to Government procedures, however, customer authorities charge the interest from the assessee company."

The Assessing Officer disallowed the assessee's claim on two counts - (a)

assessee had made the payment in the financial year 2005-06 whereas

Custom Department had raised demand note on the goods imported during

the financial year 2003-04; and (b) as the delay was attributable to the

assessee, it had paid penalty in terms of interest. Further, the Assessing

Officer noticed that under the head Custom Duty paid, the assessee had

claimed an amount of Rs.7,04,233/- as Custom Duty paid in the month of

November, 2005. He noted that this was also on account of interest paid to 6 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

Custom Department on account of delayed payment of Custom Duty. He

required the assessee to explain as to why this amount should not be

treated as penal in nature and prior period expenses being relatable to

financial year 2003-04. Not being satisfied with assessee's explanation, he

disallowed both these amounts claimed by the assessee which was

confirmed by the ld. CIT (A) inter alia observing that Custom Department

levied penalty for retaining material beyond the specified period.

6. Ld. Counsel for the assessee submitted that since the demand for

both the amounts was raised during the year, therefore, liability accrued

during the year itself and this was not a prior period expenditure. He

submitted that the very nature of payment being interest clearly suggests

that it is compensatory in nature and not penal in nature. Ld. DR

submitted that there is nothing on record to suggest that the demand was

raised during the year. He, therefore, submitted that the matter be restored

to Assessing Officer to verify when the demand was raised.

7. We have considered the submissions of both the parties. The facts

are not disputed. Ld. Counsel refers to page 20A wherein Cochin Customs

receipt for miscellaneous charges is contained which is dated 30.01.2006

acknowledging the payment of Rs.84,728/-. In this receipt, the bill of

entry number is mentioned as 170028 dated 30.11.2005 from 16.11.2005

to 31.01.2006. This suggests that the demand note was received during the 7 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

year under consideration and, therefore, this cannot be treated as prior

period expenditure. Similarly, the details of interest for Rs.7,04,233/- at

page 20B of the paper book are reproduced as under :-

"SPACE VISION IMPEX (P) LTD.

A.Y. 2006- 2007

DETAILS OF INTEREST FOR Rs.7,04,233/-

1. Bill of Entry No. 170027 Date 30.11.2005 Warehousing Qty. 1240 KLR Warehousing Date 15.11.2003 Free Period 90 Days Duty 1266775 Interest @15% p.a. (A) 333,180.00 (upto 15.11.2005 - Total 640 days) (1266775 X 15/ 100 X 640/365)

2. Bill of Entry No. 170028 Date 30.11.2005 Warehousing Qty. 1240 KLR Warehousing Date 15.11.2003 Free Period 90 Days Duty 1410774 Interest @15% p.a. (B) 371,053.00 (upto 15.11.2005 - Total 640 days) (1410774X 15/ 100 X 640/365) _________________________________ Total Interest (A) + (b) 704,233.00

This also clearly suggests that the liability is crystallized during the year

under consideration and, therefore, this also cannot be treated as prior

period expenditure. Further, both the impugned amounts are primarily

compensatory in nature being on account of delayed payment of Custom

Duty. Therefore, both the amounts are to be allowed being incurred wholly

and exclusively for business purposes. However, in view of the

submissions of the ld. DR, we restore this issue to the file of the Assessing 8 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

Officer to verify when the demand was raised and if it was raised during

the previous year under consideration then it is to be allowed. We order

accordingly. This ground is allowed for statistical purposes.

8. Brief facts, apropos ground no.3, are that the assessee had claimed

an expenditure of Rs.9,450/- towards legal fee payment for the month of

March 2005 which was denied on the ground of being relatable to prior

period expenses. Ld. CIT (A) had confirmed the Assessing Officer's

action, inter alia, observing that assessee was following mercantile system

of accounting and it should have been debited in the assessment year 2005-

06.

9. Having heard both the parties, keeping in view the smallness of

amount and there being no dispute about genuineness of the expenditure

and further the fee being relatable for the month of March, 2005, we are of

the opinion that the claim should not be denied particularly when the bill

has been received in the current assessment year and the payment has also

been made in the current assessment year. We order accordingly allowing

this ground.

10. Brief facts, apropos ground no.4, are that assessee company had paid

a sum of Rs.13,142/- on medi-claim policy of the Director of the company.

The Assessing Officer disallowed the same on the ground that the same are

personal in nature. Ld. CIT (A) confirmed the Assessing Officer's action. 9 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012

11. Ld. Counsel submitted that there cannot be any disallowance on the

ground of personal expenditure of director in the hands of the assessee

company because the amount has been incurred for the purpose of

business. He relied on the decision of Hon'ble Gujarat High Court in the

case of Sayaji Iron and Engg. Co. vs. CIT reported in 253 ITR 749.

12. Having heard both the parties, we do not find any reason to interfere

with the order of lower revenue authorities because admittedly the medi-

claim policy was for the benefit of director only and no benefit was

derived by the assessee company from the said insurance policy in the

name of director. This claim in no way was for the benefit of business

interest of assessee company. It is true that disallowance cannot be made

on the ground of personal expenses in the hands of assessee company

provided the company was under obligation to incur such expenditure but

here is a case where the personal expenses made on the director have been

incurred by the assessee company on his behalf. This is primarily in the

nature of advance to the director from the company. The assessee has not

brought on record any evidence to infer that it was in any way under

obligation to meet the expenditure on medi-claim policy in terms of

service conditions. The facts in the case of Sayaji Iron and Engg. were

entirely different inasmuch as the directors of the assessee were entitled to

use the vehicles for their personal use in accordance with the terms and 10 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

conditions on which they were appointed and the perquisites given to the

directors formed part of their remuneration under section 309 of the Act.

Therefore, we confirm this action of the lower revenue authorities on this

ground. This ground is rejected.

13. Brief facts, apropos ground no.5, are that the assessee had claimed

an amount of Rs.1.13 crores under the head Interest and Finance Charges

paid to the banks and other financial institutions on borrowed capital. The

Assessing Officer examined the details in regard to work-in-progress and

noted that assessee had incurred an amount of Rs.46,75,942/- on

upgradation of plants on behalf of M/s. Futuristic Offshore Services &

Chemicals Ltd. (in short, FOSCL). He noted that as per agreement dated

08.09.2004 executed between FOSCL and the assessee company, the

expenditure so incurred on upgradation of plants was required to be

reimbursed to the assessee company. The assessee company had not

charged any interest on such expenditure though assessee had incurred

such amount out of the funds borrowed from bank and financial

institutions. The assessee in its reply stated as under :-

"Assessee company has not charged interest on work in progress of Rs.46,73,942/- as decision was made by the management to charge interest on yearly basis instead of charging for short period."

The Assessing Officer observed that assessee had neither charged interest

during the year nor in the subsequent year on the amounts so incurred on 11 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

behalf of FOSCL whereas the assessee had paid interest on the borrowed

funds even for a single day which was stated to have been utilized

upgrading of plants. He computed the disallowance at Rs.1,24,148/- by

applying the interest @ 15% per annum. Ld. CIT (A) confirmed the

Assessing Officer's action.

14. Ld. Counsel referred to page 25 onwards wherein the agreement of

business arrangement between assessee and FOSCL dated 08.09.2004 is

contained and pointed out that it was clearly agreed that the assessee would

advance interest free funds to FOSCL as the profits derived from the

business will be shared between both the parties on equal basis. He

submitted that this arrangement was made on account of commercial

business expediency and, therefore, no disallowance could be made.

15. We have considered submissions of both the parties. In the

agreement, the following recitals are made :-

"WHEREAS "SIPL" is carrying on the business as importer and exporter of petroleum products and has considerable technical knowledge regarding the product and information about export marketing possibilities of the same. WHEREAS "FOSCL" is carrying on the business of manufacturing/processing of petroleum products and has considerable technical knowledge and know-how regarding the same and is holder of the Intellectual property rights concerning the Products and any future added Products and is entitled to these rights.

WHEREAS "FOSCL" intends to expand its business in association with "SIPL".

NOW, WHEREAS "SIPL" and "FOSCL" herein have agreed to carry business as per the terms as laid down in this AGREEMENT.

NOW, THEREFORE, IT IS AGREED BY AND BETWEEN "SIPL" AND "FOSCL" AS FOLLOWS:

12 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012 THIS AGREEMENT IS IN CONTINUATION TO THE MOUs DATED 23.04.2004 AND 30.08.2004 AND, THAT THIS AGREEMENT IS TO BE READ ALONGWITH THE SAID MOU, AS IT IS CONSIDERED TO BE AN ADDENDUM TO THE SAME INCLUDING THE FOLLOWING ADDITIONAL TERMS & CONDITIONS:

Further, the financial involvement of the assessee defined in the agreement

reads as under :-

"FINANCIAL INVOLVEMENT OF SIPL

The total amount of Capital Expenses considered as 'Pre-Operative Plant Expenses' (meaning within the broad term as expenses incurred toward major/minor repair of plant & machinery, overhauling of plant & machinery & purchase of items required for plant operation and Working-Capital Expenses considered as 'Post-Operative Expenses' (meaning within the broad term as expenses incurred towards purchase of raw materials/feed-stock for processing all production expenses such as, Utility, Wages, Administration, Maintenance, Stores &. Spares involved by SIPL at the plant of FOSCL will be interest free as the profits derived from the business will be shared between both the parties on equal basis.

All the investments made by the First Party for the purpose of making present plant in operation at Tarapur as well as any other investments or payment already made on account of any of the Group Company shall be reimbursed by way of adjusting against processing charges or from the income of group of Company viz. M/s Ganesh Benzoplast Ltd. or the rental income from the storage facilities of Ganesh Benzoplast Ltd. at various port viz. Goa, Cochin & JNPT or their other sources of income relating to M/s Ramakant Plant and Ramesh Pilani associates. Such investment from the First Party will be settled and paid within 180 days failing which interest @ 15% per annum will be charged extra.

However, the financial expenses incurred to SIPL with regard to settlement of outstanding dues of FOSCL towards Financial Institutions, Banks, Excise, Sales Tax, MSEB & MIDC will be paid by FOSCL at the Interest Rate of 12% per annum."

A bare perusal of the above arrangement clearly shows that the whole

arrangement has been made on account of commercial expediency because

both the parties were benefited by the technical knowledge and know-how 13 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

of each other. FOSCL was also the holder of intellectual property rights

concerning the products and any other future added products and was

entitled to these rights, therefore, it was in the interest of assessee to get

benefit out of the same. We, therefore, considering the commercial

expediency involved and terms of the agreement between the parties, did

not find any reason to confirm the disallowance made by the lower revenue

authorities on account of interest element on the amounts advanced to

FOSCL being reflected as work-in-progress in the fixed assets. This

ground is allowed.

16. Brief facts, apropos ground no.6, are that under the head Plant

expenses, the assessee company claimed expenses of Rs.93,973/- which

was incurred on behalf of FOSCL. The Assessing Officer disallowed this

expenditure for the same reasons as with regard to the interest

disallowance considered by us vide ground no.5 above.

17. Having heard both the parties, we find that the expenditure claimed

is on the same footing as claimed by the assessee in ground no.5.

Accordingly, we allow this ground of the assessee for the same reasons as

recorded vide dealing ground no.5 above.

18. Brief facts, apropos ground no.7, are that Assessing Officer noticed

from the balance sheet that assessee had advanced Rs.18,96,035/- to the

following persons :-

14 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012

(i) Shri B.B. Ashtagi Rs. 3,46,035/-

(ii) Shri B.M. Laxmi Narain Rao Rs.14,50,000/-

(iii) Shri Babu Rao Kazi Rs. 1,00,000/- Rs.18,96,035/-

The Assessing Officer noticed that these advances were interest free

despite the fact that assessee was paying the interest on the borrowed

funds. The Assessing Officer required the assessee to show cause as to

why notional interest on these advances should not be charged. The

assessee submitted as under :-

"Advance to Sh. B.M. Laxmi Narain Rao, Sh. Babu Rao Kazi and Sh. B.B. Ashtagi had been given in the F.Y. 2004-05 for execution of business transaction and no interest is to be charged as agreed being advances given in the normal course of business."

19. After considering the assessee's reply, the Assessing Officer

charged notional interest @ 15% aggregating to Rs.2,84,405/- and added

the same to the assessee's total income. Ld. CIT (A) confirmed the

Assessing Officer's action, inter alia, observing that there was no

explanation why the said advance was pending with the above three

individuals and proof of any business transactions with them had not been

submitted.

20. Ld. Counsel for the assessee submitted that assessee was having

sufficiently owned funds to advance this amount. In this regard, he

referred to page 36 of the paper book and submitted that assessee had

reserves and surplus of Rs.28,99,603/-. He further referred to page 37 of

the paper book and submitted that assessee had advances from customers 15 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

of Rs.4,52,85,499/- and other liabilities of Rs.24,58,305/-. He submitted

that in any way of the matter, no notional interest could be charged.

21. We have considered the rival submissions and perused the record of

the case. It is well settled law that no addition can be made on account of

notional interest to be earned by assessee. This is against the very concept

of real income theory. Be that as it may, the assessee had sufficiently

owned funds to advance a sum of Rs.18,96,035/-. We, therefore, do not

find any basis for confirming the additions made by lower revenue

authorities. Accordingly, this ground is allowed.

22. Brief facts, apropos ground no.8, are that from the tax audit report,

the Assessing Officer noticed that auditors had observed that assessee

might have booked some personal expenses under the head telephone

expenses and vehicle running maintenance. He accordingly made a

disallowance of Rs.50,000/- on estimate basis which was confirmed by ld.

CIT (A).

23. Ld. Counsel for the assessee submitted that fringe benefit tax has

been paid on telephone and vehicle running expenses, therefore, further

disallowance is not called for. He relied on the decision of ITAT in the

case of Assistant CIT vs. M/s. Micro Turners in ITA No.4569/Del/2011

order dated 15.02.2013 contained at pages 51 to 57 of the paper book. 16 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012

24. Having heard both the parties, we find that the ITAT in the case of

ACIT vs. M/s. Micro Turners, cited supra, has inter alia observed as

under:-

"8. The Commissioner of Income Tax(A) has disallowed above addition with an observation that the Assessing Officer has failed to note that the FBT was paid on the major part of the expenses has been paid by the assessee and for the remaining expenses, the Assessing Officer could not make any claim for disallowance. The Commissioner of Income Tax(A) further observed that in a case of a firm having a turnover of more than Rs.166 crores and returning an income of Rs.1.42 crores, the issue of making ad hoc disallowance of some expenses without bringing any adverse material on record is not tenable. We are unable to see any valid reason to interfere with the findings of the ld. Commissioner of Income Tax(A) in the impugned order. Respectfully following the decision of ITAT 'H' Bench Mumbai (supra), we hold that the present case is squarely covered by the judgment of ITAT Mumbai Bench and ground no. 2 of the revenue has no legs to stand. Accordingly, ground no. 2 of the revenue being devoid of merits is also dismissed."

It is not in dispute that assessee has paid fringe benefit tax on telephone

and vehicle running expenses, therefore, no further disallowance on

estimate basis is called for. Accordingly, this ground is allowed.

25. In the result, the appeal filed by the assessee being ITA

No.1457/Del/2011 is partly allowed.

26. Now, we take up revenue's appeal being ITA No.1423/Del/2010.

The Department has taken following effective two grounds :-

"1. Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs.7,32,148/- duly admitted by the assessee, made on account of prior period expenses and Rs.8,08,857/- made on account of under valuation of closing stock, thereby deleting total addition of Rs.15,41,005/- made under the head service charges.

17 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

2. Ld. Commissioner of Income Tax (Appeals) erred in law and on the facts and circumstances of the case, in deleting the addition of Rs.11,40,652/- made by the AO on account of prior period interest expenditure and thereby shifting the onus to the AO to find out the period to which expenditure relates."

27. At the outset, ld. Counsel for the assessee submitted that part of the

ground no.1 relatable to addition of Rs.7,32,148/- is misconceived because

assessee did not assail the findings of Assessing Officer before ld. CIT (A)

in regard to take that charges of Rs.7,32,148/- being pertaining to previous

year. Therefore, the only issue is to be considered apropos ground no.1 is

in regard to addition of Rs.8,08,857/- made on account of under valuation

of closing stock.

28. Brief facts, apropos this issue, are that the assessee company had

imported material, namely, Benzene from M/s. PEC Limited and claimed

to have paid a sum of Rs.31,16,607/- on account of service charges to M/s.

PEC Limited. In its reply, the assessee, inter alia, pointed out that out of

the LC charges of Rs.13,55,446/- debited to the service charges,

Rs.7,32,148/- pertaining to previous year, therefore, this amount was

disallowed by Assessing Officer being pertaining to prior period expenses

as assessee's admission. As regards balance amount of Rs.6,23,298/-

(Rs.13,55,446/- minus Rs.7,32,148/-), the Assessing Officer noted that 18 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

assessee had not furnished any documentary evidences and working of

valuation of closing stock and supporting evidences thereof. He,

accordingly, apportioned value of balance expenses of Rs.23,84,459/-

incurred in connection with import of goods of Benzene to the closing

stock of Benzene in regard to purchase made during the year and value of

closing stock declared in the return of income as under :-

Amt. of service charges x value of closing stock of Benzene as declared Total purchase of Benzene made during the year

i.e. 23,84,459 x 6875000 20267063

= Rs.8,08,857/-

Ld. CIT (A) deleted this addition inter alia observing that payment was

made for the purpose of business of assessee.

29. Ld. DR submitted that this is the direct cost incurred by the assessee

for import of Benzene, therefore, should have been allocated to the closing

stock also.

30. Ld. Counsel for the assessee referred to page 40 of the paper book

and pointed out that service charges of Rs.31,16,607/- had been debited to

profit and loss account. He submitted that this system has consistently

been followed. He further pointed out that in assessment year 2005-06, the

assessment was completed u/s 143(3). The order of which was also filed at

pages 50 & 50A of the paper book which demonstrate that no such 19 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

addition has been made in that year. He further submitted that in case, the

findings of Assessing Officer are upheld then a direction may be issued for

increasing the opening stock of subsequent year.

31. We have heard the rival submissions and perused the material on

record. Admittedly, the assessee had not apportioned the direct cost

incurred for import of Benzene to the closing stock. We are not convinced

with the submission of ld. Counsel for the assessee that since, in earlier

years, no such apportionment was made, therefore, the consistent method

of valuation should be followed. The assessee's approach is contrary to

fundamental principle of accounting which require the matching of

expenses with the revenue. If the revenue is to be realized by sale of stock

in subsequent year then all the direct expenses attributable to the said stock

can also be realized only when the stock is sold. Therefore, the direct

expenses are to be allocated to the closing stock irrespective of the fact

whether the same are debited to profit and loss account or trading account.

We, therefore, set aside the order of the CIT (A) and restore that of the

Assessing Officer. However, we are in agreement with the ld. Counsel for

the assessee that if the closing stock of the current year is to be increased

then simultaneously opening stock of subsequent year has also to be

increased. We direct accordingly. This ground is allowed in terms of

aforementioned observations.

20 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012

32. Brief facts, apropos ground no.2, are that the assessee company had

made a payment of Rs.11,40,652/- to M/s. PEC Limited on account of

overdue interest charges. The assessee was required to explain as to why

this amount should not be disallowed being prior period expenses and

penal in nature. The assessee submitted as under :-

"The interest of Rs.11,40,652/- paid to PEC Ltd. in respect of delay in payment to them. The payment have been delayed due to fall in market price of the product deal by the assessee company. Interest on delayed payment is not the penalty charged by PEC Ltd., therefore it is allowed as revenue expenditure."

The Assessing Officer did not dispute the assessee's claim that it was not

penal in nature, however, observed as under :

"However, regarding the period to which it relates, assessee preferred not to file any reply. Assessee has not furnished any documentary evidences and has not provided the details for which period it relates. In absence of any details, it is not clear for which financial year the said payment is relevant. Since the assessee failed to substantiate the claim made by it by filing documentary evidence, same is treated as prior period expense. In view of this, an amount of Rs.11,40,652/- claimed under the head interest paid to PEC Ltd is hereby disallowed and added back to the income of the assessee."

Ld. CIT (A) deleted the addition, inter alia, observing that Assessing

Officer had not brought on record the said period to which the expenses

pertained.

33. Ld. DR vehemently contested the finding of CIT (A) and submitted

that it was for the assessee to bring on record the necessary details in 21 ITA No.1457/Del./2011 ITA No.1423/Del./2010 ITA No.1875/Del./2012

regard to the period to which the interest pertained. He submitted that ld.

CIT (A)'s findings are wrong.

34. Ld. Counsel for the assessee referred to page 48 of the paper book

wherein the details of interest charged by M/s. PEC Limited are contained.

He pointed out that this charge was not considered by Assessing Officer.

He submitted that the assessee was paid interest up to 03.04.2005 on the

advances given by it for the period 04.04.2005 to 17.11.2005 and the

interest was charged from assessee.

35. Having heard both the parties, we restore this matter to the file of the

Assessing Officer for verification of assessee's claim with regard to the

details given by M/s. PEC Limited which is contained at page 48 of the

paper book because the Assessing Officer has observed that assessee had

not substantiated its claim whereas assessee's contention is that the details

were before the Assessing Officer. We order accordingly and this ground

is allowed for statistical purposes.

36. In the result, the appeal of the revenue being ITA No.1423/Del/2010

is allowed for statistical purposes.

37. Now, we take up assessee's appeal for assessment year 2007-08

being ITA No.1875/Del/2012.

38. Ground No.1 is identical to ground no.6 for the assessment year

2006-07. For the reasons given by us therein, we allow this ground. 22 ITA No.1457/Del./2011

ITA No.1423/Del./2010 ITA No.1875/Del./2012

39. Ground No.2 is identical to ground no.7 for the assessment year

2006-07. For the reasons given by us therein, we allow this ground.

40. In the result, the appeal of the assessee being ITA No.1875/Del/2012

is allowed.

Order pronounced in open court on this 15th day of May, 2015.

Sd/- sd/- (C.M. GARG) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUTNANT MEMBER

Dated the 15th day of May, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-XII, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.