Disallowance of Expenditure of Interest in year of actual Payment in merchandise system of Accounting: ITAT deletes Addition made by AO

Income Tax Appellate Tribunal (ITAT), New Delhi deleted addition made by Assessing Officer (AO) on the ground of disallowance of expenditure of interest in year of actual payment in merchandise system of accounting.

The assessee, Gurgaon Gramin Bankfiled its income for Assessment Year 2011-12 declaring total income at Rs. 1,06,69,74,349/-. The assessee being a regional rural established under RRBs Act, 1976, during the year under consideration engaged in the business of providing banking services. The case of the assessee was selected under CASS scrutiny and an assessment u/s 143(3) of the Act was completed at an assessed income of Rs. 1,07,59,71,080/-.

The case of the assessee was reopened u/s 148 of the Act. As per the AIR Information, the assessee has made a deduction of the expenditure of Rs. 13,90,612/- which was paid/credited in Financial Year 2010-11, but was accrued/became due during Financial Year 2009-10. The assessment order came to be passed on 25/02/2104 by making an addition of Rs. 13,90,612/- on the ground that the assessee was following the merchandise system of accounting and the expenditure of interest must be crystallized on the previous year in which it was accrued and not in the year of actual payment.

As against the assessment order, the assessee has preferred an Appeal before the CIT(A). The CIT(A) vide order 30/09/2019, allowed the Appeal and deleted the addition made by the AO.Aggrieved by the order, the Revenue has preferred the present Appeal.

The DR, Gayasuddin Ansari, submitted that the CIT(A) has erred in deleting the addition of Rs. 13,90,612/- which was paid in Financial Year 2010, but was accrued /became due during Financial Year 2010. The fact is that the assessee is following the merchandise system of account, so the expenditure of income must have been crystallized in the previous year in which it was accrued and not in the year of actual payment, therefore, sought for interference by the Tribunal.

The Counsel for the assessee, Naveen Kumar Goyal submitted that, the assessee was managing regular books of accounts which has been duly provided to the A.O. The A.O has not disputed or declared the expenditure as bogus per se, but found untenable. Apart from the same, the assessee has already paid more tax in the Financial Year 2009-10 in the tax bracket of 30-1. Therefore, submitted that, there is no loss to the Revenue in deleting the addition made by the A.O.

The bench consisting of observed that “The expenditure has been incurred for the business and it is not the case of the A.O that, it is not allowable u/s 37 (1)of the Act. Since, the assessee has already paid more tax in Financial Year 2009-10, which is in the tax bracket of 30% and the claim is revenue neutral, i.e. that is there is no loss of Revenue. While deleting the addition made by the A.O, CIT(A) has also considered all the above facts.”

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