TMI Blog2008 (8) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that the deduction had been claimed in the preceding assessment year, but deducted the same amount in respect of pre-paid rent relating to the next financial year. This method had been adopted by the assessee since the assessment year 1996-97. In the course of assessment proceedings, the Assessing Officer asked the assessee to explain as to why the expenditure should not be disallowed since the same pertained to next financial year. Explanation of the assessee was that had this amount not been paid in order to fulfil the condition mentioned in the agreement, the assessee would have been liable to face legal action for non-fulfilment of the condition mentioned in the agreement. Explanation of the assessee was rejected by the Assessing Officer by holding that the aforesaid amount represented only advance payment of the expenditure relating to the subsequent year. It was also observed by the Assessing Officer that similar disallowances were made in the preceding assessment years. 3. On appeal, the CIT(A) decided the issue in favour of the assessee after following his decision for assessment year 1996-97 wherein it was held as under: "I have considered the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in paragraph 1 of this order. 6. Learned Departmental Representative, at the outset of hearing, submitted before us that the question framed by the assessee for adjudication by this Bench is not proper inasmuch as it incorrectly pre-supposes incurring of liability which has been disputed by the Assessing Officer. Accordingly, it has been prayed that question be suitably modified. Learned counsel for the assessee has no objection for such modification. Accordingly, with the mutual consent of the parties, following question was reframed for adjudication: "Whether on the facts and circumstances of the case, assessee is entitled to get deductions of pre-paid lease rent relating to the next financial year." 7. Learned DR has assailed order of the CIT(A) and justified the disallowance made by the Assessing Officer by raising various submissions. First submission is that an expenditure can be allowed as deduction only when the liability is incurred where the mercantile system of accounting is being followed by the assessee. He drew our attention to audit report to point out that mercantile system of accounting is being followed by the assessee. According to him, liability was inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction was held to be allowable by spreading over expenditure over the years to which expenditure pertained. According to him, if the expenditure is relevant for the subsequent years, then the same should be spread over the years and the income should be computed after considering expenditure relevant to the year under consideration. In view of the above submissions, it has been prayed by him that order of the CIT(A) be reversed and the order of the Assessing Officer be restored. 8. At this juncture of hearing, the Bench made a query from the learned DR as to why the Assessing Officer had not allowed deduction in respect of the expenditure relating to the financial year under consideration, particularly, when the disallowance was made by him in the earlier years rejecting the case of the assessee for claiming deduction on the basis of advance payment. After going through the computation of income made by the Assessing Officer, learned DR was not in a position to answer this query and he simply stated that the Assessing Officer may be directed to allow the expenditure pertaining to the financial year under consideration since leased asset has been used in the year. 9. Learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR reiterated that in applying the theory of matching concept, the expenditure incurred and generation of income by use of the leased asset must be for the same year and the matching concept would not apply if the expenditure is incurred in one year and generation of income in the second year. 11. Rival submissions of the parties have been considered carefully in the light of material placed and case laws referred to. The question for our consideration is whether on the basis of payment of lease rent pertaining to the next financial year made by the assessee under the terms of the agreement, can it be said that liability was incurred by the assessee in the year of payment for the purpose of claiming deduction in computing the income of the assessee. 12. In our opinion, a distinction has to be made between the date on which liability is incurred and the date on which the payment is made. The parties to the agreement may choose the dates of payment irrespective of the date of liability. Such date of payment may be the date prior to or subsequent to the date of liability or payment may be made on the same date on which liability is incurred. In our opinion, a liability can be sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that assessee is not permitted to use the leased asset. Even the lessor can get back the possession of such asset by terminating the contract but the lessor cannot force the assessee to make the payment if the asset is not used by the assessee. The advance payment under the terms of agreement is to ensure the speedy recovery of the lease rent and to avoid litigation for recovery of rent in case of failure. However, if the assessee chooses not to use the asset in the next financial year, he may, therefore, refuse to make the payment in advance but the lessor cannot enforce the recovery of the same since the asset was not used by the lessee. In such cases, the lessor could only terminate the contract and prevent the assessee from using the same. Therefore, in our opinion, no liability can be said to have been incurred merely on the basis of advance payment. 15. The learned counsel of the assessee has vehemently contended to submit that the moment the payment was made, the liability was incurred since payment so made could not be recouped even if the asset is not used in the next financial year. The contention appears to be attractive but is without force because the test to dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will not reflect the true profits of either of the years. Accordingly, the spreading the expenditure over the years was held to be justified by the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. There is another reason for holding so. Since the expenditure incurred results in generation of income, it is all the more fair, and reasonable that period cost must be allowed in the year to which such expenditure relate to. Hence, if the asset is used in one particular year, it will generate income by use of such asset and therefore, in our opinion, it would be logical that expenditure relating to use of such asset should also be allowed in the year of use in view of the theory of matching concept. Accordingly, we are of the view that such expenditure should be allowed only in the year in which asset is used. Since in the present case, the asset was used in the next financial year, the lease rent should also be allowed in the next year and not in the year of payment. 17. Coming to the case law relied upon by the assessee, we find that the same does not help the assessee. First, we refer to the decisions which were relied on by the assessee in making representation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case. We have gone through the said judgment and find from the questions referred that rent of equipment in question No. (1) does not show that such expenditure was pre-paid or related to the subsequent year. Therefore, the submission of the learned counsel for the assessee does not help him. No doubt, the second question referred to pre-paid expenses but the Court decided the issue by merely following its earlier decisions which does not lay down that pre-paid expenses are allowable deduction. As already pointed out, the earlier decision related to the expenditure incurred in respect of services already provided by the postal authorities which is clear from the fact that demand was raised by such authority. Therefore, in our view, that judgment also does not help the assessee in the present case. 18. The decision of the Special Bench in the case of K.C.P. Ltd. also does not help the assessee. In that case, the Bench was not concerned with the kind of expenditure with which we are concerned in the present case. In that case, the assessee was required to take insurance policy and also to provide guarantee in respect of the project to be commissioned in Sri Lanka. The Bench held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions relied upon by the learned counsel of the assessee are held to be distinguishable. 20. In view of the above discussion, it is held that the assessee is not entitled to get deduction in respect of the pre-paid lease rent pertaining to the next financial year. Question is therefore, answered in negative. 21. However, before parting with this order, we would like to mention that the Assessing Officer, while denying the claim of the assessee in respect of pre-paid expenses, observed at Page No. 4 of his order that the assessee was eligible to claim this advance in the financial year to which rent was actually paid as revenue expenditure. Despite such observations, the Assessing Officer has not allowed deduction in respect of the rent pertaining to the years under considerations. Had the Assessing Officer allowed such deduction, perhaps, the assessee would not have come up in appeal. Since we are not required to dispose of the appeal, we are unable to adjudicate on this aspect of the issue. However, Division Bench may consider this aspect while disposing of the appeal. 22. Matter would now go to the Division Bench for disposing of the appeal. The registry is, therefore, direc ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
