Issue remitted to AO to consider issue whether the expenditures incurred under the head advertisement and marketing expenses and printing and stationery bills can be disallowed on the ground that expenditure was not ledgerised even though it pertained to the assessment year in question and therefore, deduction could not be considered in regular assessment and the expenditure had to be dealt with during block assessment — as held by DelHC in Dinesh Kumar Goel v CIT — In favour of : Others ; ITA No. 790 of 2006 with ITA No. 553 of 2007
Dinesh Kumar Goel v CIT
High Court of Delhi
ITA No. 790 of 2006 with ITA No. 553 of 2007
A.K. Sikri and M.L. Mehta, JJ
Decided on: 11 May 2011
Counsel appeared:
Mr. C.S. Aggarwal, Sr. Adv. with Mr. Prakash Kumar, Adv. for the appellant
Ms. Prem Lata Bansal, Sr. Adv. with Mr. Deepak Anand, Adv. for the respondent
Judgment
A.K. Sikri, J.
1. ITA No.790 of 2006 relates to the Assessment Year 1997-98, which was admitted
on the following substantial questions of law:
“1. Whether the Income Tax Appellate Tribunal was correct in law in sustaining the
disallowance of Rs.18,99,255/- under the head ‘ advertisement expenses’?
2.Whether the Income Tax Appellate Tribunal was correct in law in sustaining the
disallowance of the claim of expenses of R s . 11,68,905/- under the head
‘printing and stationery’ on the ground that same was to be considered in the
block assessment proceedings and not under Chapter XIV of the Income Tax Act,
1961?”
Other appeal is in respect of Assessment Year 1998-99 which also involves the
aforesaid two questions with difference in amounts only. It is for this reason, both
the appeals were heard together.
2. For the sake of convenience, we may take note of the facts of ITA No.790 of 2006
giving rise to the questions formulated above. Concededly, outcome of these questions
3. The assessee furnished return of total income on 29.10.1997 declaring an income of
Rs.3,42,621/- inter alia claiming a deduction of expenditure incurred on advertisement at
Rs.1,00,36,975.75/-. The return was prepared on the basis of accounts. A search
operation under section 132(1) of Income Tax Act (hereinafter referred to as ‘the Act’)
was conducted on 18.08.1998 on the assessee. On 31.03.1999, the assessee revised the
return of income, within the statutory period under section 139(5) of the Act, wherein he
returned a loss of Rs.58,39,070/-. In the revised return of income, he inter alia
enhanced the claims of expenditure incurred by:
(a) Rs. 3,69,500/- on printing and stationery (based on two bills), as he found
that, the expenditure incurred under the aforesaid head was debited
in his books for the financial year 1997-98 instead of the Financial
Year 1996-97 i.e. for the Assessment Year 1997-98, in which the said
expenditure had been incurred. In fact, apart from these two bills
further amounts incurred under the aforesaid head of R s . 7,99,405/-
(supported by seven “credit bills”) were found, related to the
Assessment Year 1997-98 which too, had also been claimed as a
deduction. Thus, an aggregate deduction of expenditure incurred
under the head ‘ printing & stationery’ of Rs.11,68,905/- was made.
(b) Apart from the aforesaid sums, a claim of expenditure of Rs. 40,78,858/-
incurred was also made. The expenses incurred were supported by
credit bills but remained to be ledgerized. Out of the sum of Rs.
40,78,858/- a sum of Rs. 21,79,603/- related to Assessment Year 1998-
99 and remaining sum of Rs. 18,99,255/- related to the Assessment
Year 1997-98.
4. On 29.03.2000, the assessment was framed under section 143(3) of the Act at an
income of Rs.85,17,334/-. The Assessing Officer (AO) though proceeded to compute
income on the basis of revised return, but disallowed the claim of the aforesaid
expenditure incurred by holding that the claim of deduction of Rs. 3,69,500/- incurred
on ‘ printing & stationery’ was incorrect and “against the provisions of the Act”. Rs.
7,99,405/- in respect of printing and stationery bills pertaining to financial year were not
recorded and were found during search proceedings. On this premise, he held the
view that it had to be dealt with in the block assessment. In respect of advertisement
expenditure of R s . 40,78,858/-, the AO held that out of the advertisement bills,
R s . 18,99,255/- were not ledgerized in respect of which entry was made as per
seized ledger in financial year 1997-98, which narrated “provision for bill”. According
to him, this had to be dealt with block assessment. In respect of remaining sum of Rs.
21,79,603/-, he held that these bills were raised in financial year 1997-98 and had been
entered in the books of accounts for 1997-98 and thus would be considered in financial
year 1997-98. He, thus, disallowed the claim of expenditure.
5. Being aggrieved by the order of the AO, the assessee preferred appeal before the
CIT(A). It was contended that since genuineness of expenditure incurred had not
been disputed, the AO had erred in law in holding that the said expenditure incurred in
the Financial Year 1996-97 of Rs 3,96,500/- and Rs 7,99,405/- aggregating to R s
11,95,905/- and of R s 18,99,255/- under the two heads had to be allowed, as the
assessee was following mercantile method of accounting and could not be
disallowed. It was submitted that there was no justification to say that it had to be dealt
with in block assessment and that in any case, it has not been allowed thereto. The
CIT(A) obtained a remand report of the AO on 16.01.2001, who confirmed that the
amounts credited in the account of advertisers are genuine and were incurred for the
services rendered. In other words, there was no dispute about the incurring of
expenditure. The assessee furnished his comments on 31.01.2001 with submissions that
the deductions claimed as aforesaid be directed to be allowed. The CIT(A), however,
held that the expenditure incurred was since not ledgerized and thus could be a part of
block assessment proceedings.
6. Still dissatisfied, the assessee went in appeal before the Income Tax Appellate Tribunal
(hereinafter referred to as ‘the Tribunal’). However, here also, the assessee remained
unsuccessful as disallowance sustained by the CIT (A) has been upheld by the Tribunal
on the same ground, viz., the expenditure was not ledgerized even though it pertained
to the assessment year in question and therefore, deduction could not be considered in
regular assessment.
7. It is clear from the above that there is no dispute that the expenditure was
incurred, and genuineness thereof is not disputed. At the same time, legal question that
arises is as to whether the expenditure incurred under these two heads could be
disallowed for the reasons stated in the orders passed by the Authorities below.
Question No.1
8. As noted above, the assessee had claimed a sum of Rs. 40,78,858/- on account of
expenditure on advertisement and marketing expenses claimed in the revised return for
the Assessment Year 1997-98. The assessee had submitted that these expenses had been
accounted for in the Assessment Year 1997-98 as per ledger. However, he was claiming
the same in this assessment year in the revised return on the ground that he was
following mercantile system of accounting. The AO has found that the assessee had not
recorded advertisement bills totaling Rs.18,99,255/- in the books of account for Financial
Year 1996-97. As per seized ledger for Financial Year 1997-98, one entry of this
amount had been recorded on 01.04.1997 with narration “provision of bill”. He, thus,
observed that this consolidated entry passed on 01.04.1997 represented advertisement
bill, was only an after-search-thought and was an attempt to convert undisclosed
income assessable under the block assessment proceeding into allowable deduction. He
even asked the assessee to clarify the reason for not recording the aforesaid
advertisement bills amounting to Rs. 18,99,255/- during Financial Year 1996-97 when
these bills had been raised on dates falling during financial year 1996-97, but
reply was not furnished by the assessee. Accordingly, the AO opined that this
expenditure had to be dealt with during block assessment, which was pending
in the case of the assessee. He disallowed the claim of deduction of Rs 18,99,255/-.
This reasoning of the AO had been accepted by the CIT (A) as well the Tribunal.
9. We fail to understand logic given by the Authorities below in disallowing the
expenditure. Such an expenditure cannot be considered in block assessment, as
provisions of section 158B of the Act would not apply. Section 158B of the Act deals
with special procedure for assessment of search cases, i.e., assessment of “undisclosed
income” as a result of search. Clause (b) of section 158B of the Act defines
“undisclosed income” as under:
b) "Undisclosed income" includes any money, bullion, jewellery or other
valuable article or thing or any income based on any entry in the books of
account or other documents or transactions, where such money, bullion,
jewellery, valuable article, thing, entry in the books of account or other
document or transaction represents wholly or partly income or property
which has not been or would not have been disclosed for the purposes of
this Act.”
10. Thus, when during the search, it is found that there is wholly or partly undisclosed
income or property, assessment can be carried out for the entire block period. It, thus,
applies to income which is undisclosed and is found during search which may be in the
form of money, bullion, jewellery or other valuable article or thing or any income
based on any entry in the books of account, etc. It does not apply to “expenditure”
claimed which was incurred in the particular financial year. Even the assessee is
claiming deduction of the said expenditure as business expenditure under section 37 of
the Act and this has to be dealt with in the regular assessment and not in the block
assessment.
11. In the present case, the assessee had revised the return within stipulated period
prescribed under the Act. He was, thus, entitled to do so. His plea was that the
expenditure was incurred during the year in question and even if the bills were not
received and they were not ledgerized, he had right to claim the same as
deduction, as he was following mercantile system of accounting. In these
circumstances, the AO was required to go into the issue. He, however, did not apply
his mind at all on this aspect and merely on the ground that the expenditure was not
ledgerized, they proceeded on wrong premise that it could be taken care of in the block
assessment year.
12. The orders of the Authorities below are, therefore, set aside.
At the same time, we may point out that the assessee has claimed that the expenditure
is actually incurred and payments are made by account payee cheques. This aspect has
not been looked into by the AO at all. Therefore, it would be necessary to verify as
to whether the expenditure was incurred and for this limited purpose, we remit the
case back to the Assessing Officer. If it is found that the expenditure was incurred,
it would be allowable as expenditure in the year in question. The question of law is
answered in the aforesaid manner.
Question No.2
13. In the revised return filed by the assessee, he claimed the deduction of printing
and stationery bills wrongly included in Financial Year 1997-98 instead of 1996-97
amounting to
Rs.3,69,500/-. When the assessee was asked to give details of these printing and
stationery bills, his reply was that two bills, both dated 27.05.1996 of
R s . 1,89,000/- and Rs.1,80,500/- were previously not entered in the books of accounts.
The AO, however, disallowed the claim when he noticed that these were neither
ledgerized in Financial Year 1996-97 nor in Financial Year 1997-98. Another claim of
Rs . 7,99,405/- was also disallowed on the ground that the same was not recorded in
the books of accounts of the assessee and same was found during search
proceeding. Only when the Department seized during the course of search, the assessee
made the claim by filing the revised return. Again, it was observed by the AO that
since the amount is not ledgerized, it can be taken care of in the block assessment
proceeding under section 158BC i.e. Chapter XIV- B of the Act.
14. Again, this is an expenditure item and for the reasons given while answering the
Question No.1, provision of Chapter XIV-B would not be applicable and it was
incumbent upon the AO to consider the allowability or otherwise this expenditure in
the regular assessment. However, it would be open to the AO to go into the
veracity/genuineness of the expenditure. Thus, for the same reason, we remit back this
issue as well to the Assessing Officer. If the expenditure is found to be genuine, the
same shall be allowed in this assessment year. This issue is answered accordingly.
15. The same conclusion in drawn in respect of the next assessment year 1998-99 in ITA
No.553 of 2007.
16. Both the appeals are disposed of in the aforesaid terms.
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