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2016 (10) TMI 710 - ITAT BANGALORE

2016 (10) TMI 710 - ITAT BANGALORE - TM - Disallowance of kist payment (lease rent) - section 43B applicability on kist payment - system of accounting followed - prior period item - Kist payment for the previous period - Held that:- As 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 .....

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rsus Sri Balaji And Co. [2000 (1) TMI 17 - KARNATAKA 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 practice of accounting for a particular item of expenditure on cash basis was accepted for such a long time then it become .....

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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. - I.T. A. No.1738/Bang/2013 - Dated:- 26-8-2016 .....

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peals) 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 prejudic .....

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nt 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 .....

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ear 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 ₹ 95,84,505 was not claimed in t .....

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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 su .....

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iew 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 Vs. Varun International Pvt. Ltd. as well as in bunch of other cases, the department has filed the appeals before the Hon'ble Supreme Court on this issue a .....

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er, 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, accounti .....

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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 consi .....

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tion 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. .....

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750 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 i .....

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ve 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 CIT Vs. 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 b .....

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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 .....

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as 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 Govern .....

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