License fee for liquor vending would not fall within section 43B

By | October 13, 2016

IN THE ITAT BANGALORE BENCH ‘C’

Elite Enterprises

v.

Income-tax Officer, Ward 1, Puttur

VIJAY PAL RAO, JUDICIAL MEMBER
AND INTURI RAMA RAO, ACCOUNTANT MEMBER

IT APPEAL NO. 1738 (BANG.) OF 2013
[ASSESSMENT YEAR 2007-08]

AUGUST  26, 2016

Balram R. Rao, Adv. for the Appellant. Sunil Kumar Agarwal, JCIT (DR) for the Respondent.

ORDER

Vijay Pal Rao, Judicial Member – This appeal by the assessee is directed against the order dt.17.7.2013 of Commissioner of Income Tax (Appeals), Mysore for the Assessment Year 2007-08.

2. The assessee has raised the following grounds :

“1. On the facts and circumstances of the case, the ld. Commissioner (Appeals) erred in dismissing the appeal of the appellant.
2. The ld. Appellate authority ought to have appreciated that the directions given by the Hon’ble ITAT while sitting aside the earlier assessment had not been followed by the ld. ITO.
3. The learned CIT (Appeals), erred in sustaining the Assessing Officer’s finding that the assessee was following a system of accounting which was essentially mercantile, although the facts cited by him do not support such a conclusion.
4. Without prejudice, the addition made by the A.O. is arbitrary, unreasonable and requires to be cancelled.
5. For these and such other grounds that may be urged at the time of hearing, the appellant prays that the appeal may be allowed.”

3. This is second round of litigation as the issue regarding the disallowance of kist payment was set aside by this Tribunal for re- examination of the same by the Assessing Officer after considering the system of accounting followed by the assessee. During the previous year relevant to the assessment year under consideration, the assessee has taken on sub-lease all rights of retail vending of arrack in the shops of two taluks namely Karkala for entire 12 months and Kundapura for first three months of the assessment year. As per the lease agreement the assessee is responsible to pay the kist to the Govt. as per the contract license awarded to the licensee. As per the agreement between the Govt. and the licensee the total kist payment payable for the entire assessment year was Rs.4.80 Crores and Rs.11.68 Crores respectively for the Kundapura and Karkala taluks. However, in the original assessment proceedings, the Assessing Officer noted that the assessee had claimed Rs.5.35 Crores in respect of Kundapura taluk and Rs.12.09 Crores in respect of Karkala taluk. The total difference in the claim of kist as per the agreement was Rs.95.85 lakhs. The assessee was asked to substantiate as to why the kist not relatable to the relevant assessment year is claimed and why not the same be disallowed. The assessee filed detailed reply. The Assessing Officer rejected the contention and explanation of the assessee and held that the system of accounting followed by the assessee was mercantile and when the assessee recognizes the income on accrual basis, the expenses should also be claimed on mercantile system basis. The Assessing Officer was of the view that even if the expenses of kist payment amounting to Rs.95,84,505 was not claimed in the previous assessment year on accrual basis, the same cannot be allowed as deduction. The Assessing Officer further held that the provisions of section 43B is not applicable to the facts of this case. On appeal, the CIT (Appeals) allowed the claim of the assessee in the first round of appeal vide order dt.20.10.2011 by holding that the assessee essentially followed the cash system of accounting. On further appeal by the revenue, the Tribunal vide order dt.20.10.2011 set aside the matter to the record of the Assessing Officer to examine the system of accounting followed by the assessee and then decide the issue. The Assessing Officer in the order giving effect held that except kist payment the assessee is following mercantile system of accounting and accordingly repeated the disallowance/addition as made in the original assessment. The assessee again carried the matter to the CIT (Appeals) but could not succeed.

4. Before us, the learned Authorised Representative of the assessee has submitted that the assessee has ever since its start of business on 1.7.2000 accounting for kist payment due to excise department on actual payment/cash basis. This accounting policy was followed by the assessee due to applicability of provisions of section 43B which supersedes the accrual system of certain expenses. The learned Authorised Representative has submitted that the assessee continue this accounting policy/system due to the apprehension that the department has been taking consistent view that kist payment coming under the purview of 43B of the Act. Even the department has challenged various decisions of the Hon’ble High Courts and the bunch of the department appeals were pending final judgment listed before the Hon’ble Supreme Court. The learned Authorised Representative has pointed out that in the case of CIT v. Varun International (P.) Ltd. as well as in bunch of other cases, the department has filed the appeals before the Hon’ble Supreme Court on this issue and claiming that the kist payment comes under the purview of section 43B of the Act. Accordingly, the assessee took cognizance of the departmental position regarding kist payment and claimed deduction of the payment of kist only on payment basis consistently. He has further submitted that this consistent treatment of accounting would also avoid re-working of tax liability and filing revised return in the event of department’s stand on section 43B of the Act is allowed in the Supreme Court. However, eventually after the gap of 7 to 8 years, the Hon’ble Supreme Court upheld the view taken by the Hon’ble jurisdictional High Court as well as other High Courts by holding that kist could not be treated as excise duty for the purpose of section 43B of the Act. It was further submitted that the mercantile system of accounting was followed by the assessee in respect of the expenses like vendor wages, partners salary, establishment charges, bank interest and charges, audit fees, accounting charges, etc. However, the expenditure on kist payment and kist interest as well as permit fees consisting of 93% of total expenditure which was accounted and claimed on payment basis. The ld. AR has pointed out that out of total expenditure of Rs.18.90 Crores an amount of Rs.17.60 Crores towards kist payment and kist interest has been accounted and claimed on payment basis and only 7% of other administrative expenses are accounted on mercantile basis. Therefore predominant portion of the assessee’s business expenditure was accounted on cash basis due to special circumstances and nature of its business. He has further contended that in the books of accounts the income and expenditure has been recorded on daily cash basis throughout the year. All the expenses like kist, kist interest, permit fees, vehicle maintenance, bank guarantee commission, electricity, telephone, etc has been accounted on cash basis. The ld. AR has contended that the kist on payment basis was consistent practice of assessee and it was also revenue neutral in as much as the expenses claimed was postponed to the year of payment. Therefore disturbing the consistent accounting policy and system followed by the assessee for this year would distort the result and adversely affect the assessee whereas there is no revenue effect when this amount was not claimed in the earlier year rather it will be double taxation on the same income.

5. On the other hand, the ld. DR has submitted that the application under Section 43B has been decided by the Tribunal in the earlier round of appeal and the only issue in the remand proceedings before the Assessing Officer was to examine the system of accounting followed by the assessee. The Assessing Officer has examined the system of accounting and found that the assessee is following mercantile system of accounting. Accordingly, the claim of the assessee of the expenditure pertaining to the earlier year cannot be allowed in the year under consideration. He has relied upon the orders of the authorities below.

6. We have considered the rival submissions as well as the relevant material on record. There is no dispute that since the year 2000, the assessee has been consistently following the accounting system wherein the kist payment, interest on kist and license fees have been accounted on payment basis. It is pertinent to note that prior to the judgment of Hon’ble jurisdictional High Court in the case of CIT v. Sri Balaji & Co. [2000] 246 ITR 750 (Kar.) the revenue has been consistently taking a stand that the kist payment comes under the purview of section 43B and accordingly was disallowing the claim on accrual basis. Therefore prior to the said decision the revenue as well as the assessee were under the belief that the provisions of section 43B are applicable on kist payment. Even the department did not accept the judgment of Hon’ble jurisdictional High Court and challenge the same before the Hon’ble Supreme Court and uptil the issue has been finally settled by the Hon’ble Supreme Court, the department was taking the stand that the provisions of section 43B are applicable on kist payment. Therefore this treatment of accounting to a particular expenditure of kist payment is revenue neutral so far as the deduction in respect of this expenditure has not been claimed by the assessee on accrual basis in the earlier assessment year and consequently the assessee paid excess tax than what was due if the expenditure would have been claimed on accrual basis. It is also not disputed that more than 93% of the expenditure has been accounted and claimed by the assessee on payment basis right from the year 2000 till the assessment year under consideration. Even otherwise prior to the judgment of Hon’ble jurisdictional High Court in the case of Sri Balaji & Co. (supra), the said expenditure of kist was considered as allowable on payment basis. The Assessing Officer has examined all the expenditure booked by the assessee in the books of accounts and found that most of them are booked on the basis of payment but the Assessing Officer has deliberately stated that the same are not instrumental in determining the system of accounting. The relevant part of the Assessing Officer reads as under :

“Therefore, it can be seen from the accounting system followed by the assessee in respect of the expenditure and revenue heads, except kist payment, have been accounted on mercantile basis and in some cases being non-determinable expenditure have been accounted as and when they have been incurred. It is also pertinent to note here that in the audit report for the Assessment Year 2007-08, the auditor Mr. Paul Verghese, who is also the authorized representative of the assessee, has certified the method of accounting employed as Mercantile (Col.11(a) of Form NO.3CD).”

Thus the Assessing Officer found that except kist payment, the assessee has been accounting other expenditure on mercantile basis. However it is not in dispute that more than 93% of the expenditure pertains to the kist payment interest on kist and license fees which has been accounted on payment basis. Therefore undisputedly in the business of the assessee almost entire expenditure is incurred in respect of purchase of goods by making advance payment or simultaneous payment as the payment was being made to the Government. The Assessing Officer found that out of total payment of Rs.21.18 Crores an amount of Rs.20.14 Crores was accounted on cash basis. Therefore essentially the accounting system followed by the assessee is more of cash basis as it is the requirement of the nature of the business and less of mercantile basis. It is apparent that since beginning the assessee has been giving the treatment of kist payment on cash basis and the Assessing Officer accepted the same because of the reason that the department has taken a stand that the provisions of section 43B are applicable on the kist payment to the Government. Only after the judgment of Hon’ble jurisdictional High Court and final settlement of the issue of applicability of section 43B, the Assessing Officer first time disallowed the expenditure in question. Therefore the assessee as well as revenue were under bona fide belief that the provisions of section 43B of the Act are applicable in respect of the kist payment uptil. The issue was finally closed by Hon’ble Supreme Court once the practice of accounting for a particular item of expenditure on cash basis was accepted for such a long time then it becomes revenue neutral as it was not claimed on due basis in the earlier assessment year. In view of the undisputed fact that in substance the system of accounting followed by the assessee is cash basis and further consistent treatment of expenditure of kist payment has been given and accepted over several years on payment basis then disallowance for this year is not justified. It is not the case of the department that this method of accounting of kist payment on cash basis is not consistently followed by the assessee. Therefore following this system of accounting consistently should not be disturbed in a particular year and particularly for the year under consideration when this claim was not made on accrual basis in the earlier year due to consistently followed accounting treatment otherwise it would result double taxation of the same income. In view of the above facts and circumstances of the case, we allow the claim of the assessee.

7. In the result, the appeal of the assessee is allowed.

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