Commissioner of Income Tax v. Jagatjit Industries Ltd

MANMOHAN, J. SEPTEMBER 06, 2010 sv/vk

* HIGH COURT OF DELHI AT NEW DELHI Judgment Reserved on : 6th August, 2010 % Judgment Pronounced on: 6th September, 2010 + ITA No.848/2010 C.I.T. ….. Petitioner Through: Mrs.Prem Lata Bansal, Advocate Versus JAGATJIT INDUSTRIES LIMITED ….. Respondent Through: Ms. Satyen Sethi, Advocate CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN 1. Whether reporters of the local papers be allowed to see the judgment?Yes 2. To be referred to the Reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes DIPAK MISRA, CJ The present appeal preferred under Section 260A of the Income Tax Act, 1961 (for brevity "the Act") was admitted on the following substantial question of law: "Whether ITAT was correct in law in deleting the addition applying Rule of consistency holding that such a practice was adopted by the assessee and accepted by the Department in past?" 2. The facts that have been depicted are that the respondent-assessee is engaged in the business of manufacturing and sale of Indian made foreign liquor, country liquor, malted milk food, SMP, Ghee, Glass and Plastic Containers, etc. It also manufactures malted milk food products for M/s SmithKline Beechem Consumer Health Care Ltd. and Ghee for M/s Milk Food Ltd. In the course of assessment proceedings, the assessing officer noticed that the assessee was maintaining mercantile system of accounting and had claimed expenses amounting to Rs.14,55,720/- under the head "prior period expenses" pertaining to earlier years. The auditor, in column 22(b) of the Tax Audit Report, stated that prior period expenses amounting to Rs.14,55,720/- had been debited to the Profit & Loss Account. The assessee in pursuance of notice under Section 143(2) appeared before the Assessing Officer and was required to explain the nature of the expenses covered under the said head. He was asked to further explain why the said amount should not be disallowed. The assessee by letter dated 11.12.2006 submitted the details of the expenses clubbed in prior period expenses in the Tax Audit Report. The Assessing Officer noticed that a loss on the sale of fixed assets amounting to Rs.23,813/- had already been added back by the assessee while computing his total income. He also filed a copy of the notice from the Chief Administrative Officer, New Okhla Industrial Development Authority, wherein the lease rent of industrial plot 35-C, Sector-57, Noida had been increased with retrospective effect. The total demand raised was for Rs.1,02,982/- out of which an amount of Rs.17,373.78/- pertained to the financial year 2003-04 and the rest, that is, Rs.85,608/- related to the prior period. As the assessee had received notice for the said payment pertaining to the earlier year during the current year, the same was allowed as an expenditure crystallized during that year. The Assessing Officer scrutinized the letter of explanation dated 11.12.2006 which pertains to various expenses like security expenses, LTA, rent, payments to staff members, managerial remuneration, legal and professional expenses, sales promotion expenses, miscellaneous expenses and repair and maintenance expenses under the head "prior period expenses". The nature of expenditure as was observed by the Assessing Officer could easily be classified as provisions made for the said expenditure in the year in which the expenditure was incurred. 3. Considering the submissions of the assessee, the Assessing Officer held that the nature of the expenses was such that they had occurred and crystallized during the earlier years. It was further held that as the same had been crystallized during the relevant year, the same could not be allowed in the later years. Being of this view, the Assessing Officer came to hold that the assessee had claimed Rs.13,46,299/- as expenditure of prior period allowable in the current year and, accordingly, disallowed the same. After disallowing the same, he initiated a proceeding under Section 271(1)(c) of the Act