Provision for expenses not claimed as applied income during the year need not be disallowed. 

ORDER

Rathod Kamlesh Jayantbhai, Accountant Member. – This appeal filed by the Revenue is directed against the order of the ld. CIT(A) dated 06-05-2024, National Faceless Appeal Centre, Delhi [hereinafter referred to as (NFAC)] for the assessment year 2012-13 wherein the Revenue has raised the following grounds of appeal:-

2.1 Apropos Grounds of appeal of the Department (supra), it is noticed that the ld. CIT(A)/NFAC, Delhi allowed the appeal of the assessee vide its order dated 06-05-2024 raised before him, giving therein following finding :

8.2 Decision

8.2.1 The appellant has challenged the addition of Rs.2,30,26,342/- in the rectification order u/s. 154 dated 31.10.2023. The appellant has submitted that in the order giving effect to the order of the CIT(A) passed us 250 rw.s.143(3), the A.O. had assessed at Rs. Nil Income. But subsequently in the order u/s 154, the appellant has withdrawn and added back ”provisions of expenses withdrawn” of Rs.s2,30,26,s342/-

8.2.2 In the original assessment order u/s 143(3) dated 27.03.2015, the A.O. had made an addition of Rs.2,30,26,342/- on account of disallowance of provision for the expenses. In the appeal before the CIT(A) vide order u/s 250 dated 24.12.2021. CIT. NFAC had adjudicated the ground of appeal against the above disallowance stating that-

10.3.1 The issue is disallowance of provision of expenses of Rs.2,30,26,342/- on the ground that in the absence of information as to whether the same has bee incurred or not. From the submissions of the appellant, it is clear that the appellant did not claim above amount as applied during the year. If the appellant has not claimed any amount as applied, the question of its disallowance naturally does not arise. The AO may verify the same and subject to the same the disallowance is deleted and Ground No appeal is allowed.

8.2.3 In further appeal by Revenue before Hon’ble ITAT, vide order dated 21.06.2022, Hon’ble ITAT has upheld the order of the CIT(A) and the order of the Hon’ble ITAT is as under:

Ground no, 3 relates to adopting accrual system of accounting and not the payment system of accounting as the Trust/AOP/Society/Institution exempted under the IT Act is not employed to adopt accrual system of accounting.

14. The brief facts of the case are that during the course of scrutiny assessment proceedings, the AO noticed that in the Balance Sheet the assessee has shown provision for expenses of Rs. 2,30,26,342/-. As per the AD, the provisions are not allowable and thus the assessee was required to furnish the details of the provisions made as well as justification for the claim. The AO held that for claiming any expenditure it should have been incurred and provisions are not the expenditure Incurred. It is an estimate for the expenses to be incurred in subsequent period. In absence of details furnished by the assessee, the AO disallowed the provision for expenses of Rs. 2,30,26,342/- and added to the total income of the assessee. Aggrieved by the order, the assessee preferred appeal before the Id. CIT (A). The assessee furnished the written submissions dated 14.01.2021 before the Id. CIT (A) explaining the provision of expenses. The Id. CIT (Appeals) considering the submissions of the assessee, allowed the claim of the assessee by observing in para 10.3.1 as under :-

”10.3.1. The issue is disallowance of provision of expenses of Rs. 2,30,26,342/- on the ground that in the absence of information as to whether same has been incurred or not. From the submissions of the appellant, it is dear that the appellant did not claim the above amount as applied during the year. If the appellant has not daimed any amount as applied, the question of its disallowance naturally does not arise. The AO may verify the same and subject to the same the disallowance is deleted and Ground No. 5 of the appeal is allowed.”

15. Before us, the Id. D/R submitted that the ground raised is basically for method of accounting in relation to the provision of expenses as mentioned in the order of the AO, for which the Id. CIT(A) has also mentioned in para 10.3.1, that AD may examine if there is any application claimed of the amount given in the Balance Sheet as provision apart from the expenditure as per the Income and Expenditure Account, this was just to draw the attention of the Hon’ble Bench.

16. On the other hand, the Id. A/R submitted that the method of accounting followed by the assessee Rajasthan Cricket Association is as per provisions of section 145(1) of the Income Tax Act 1961, the income chargeable under the head “Income from Other Sources, shall also be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. The assesse is following the mercantile system of accounting consistently, which is dearly allowed as per the provisions of the Act and duly accepted by the department in assessor’s own case in assessment of earlier years as well and the said provision is followed universally. The provisions are accounted and adjusted from time to time and year to year and only the closing balance as at the end of the year is reported in the Balance Sheet, it cannot be claimed separately. The revenue expenditure accounted for in the Income and Expenditure account is only claimed as revenue application. The Ld. CIT (A) has already given the opportunity to the AO and if any separate claim is there, he may so examine. Hence the ground of the revenue does not survive. It is, therefore, requested that the ground no. 3 of the revenue shall be dismissed.

17. We have heard the rival contentions, perused the material available on record and it is noted that the method of accounting shall be cash or mercantile as per section 145(1) of the Income Tax Act 1961, as consistently followed is allowed. Regarding the provision of expenses, it is noted that the same is provided and adjusted from year to year and the amount shown in the Balance Sheet is the closing balance at the end of the year. Regarding the separate claim, if any, the Id. CIT (A) has already given opportunity to the AO in this matter. Accordingly, the Ground no. 3 of revenue is dismissed.

8.2.4 However, subsequently, the A.O. vide order u/s.154 has withdrawn and added back the provision of expenses of Rs.2,30,26,342/- in the order which is under challenge and on perusal of the above order it is seen that the A.O. has rectified and again made the disallowance mainly for the reason that the appellant has not provided the supporting evidences because of which the provision of expenses of Rs.2,30,26,342/- is not verifiable.

8.2.5 The written submission filed by the appellant has been extracted in the preceding para and I have considered the same. As stated above, the disallowance was already deleted by the CIT, NFAC and also upheld by Hon’ble ITAT vide the orders, relevant part of which has already been extracted. As regards the direction for verification while giving effect to the order passed by the CIT, NFAC, the A.O. had already passed the order at Rs.NIL assessed income and there was no mention of any pending verification on pretext of which the rectification order u/s.154 has been passed and the A.O. has not pointed out any mistake apparent from record.

8.2.6 As regards the merits of the issue in hand, the appellant had clearly stated that it had made provision for the above expenses but had not claimed the above amount as applied during the year. It was therefore clearly held in the order of the CIT, NFAC that when the appellant has not claimed any amount out of the above amount of provision for expenses as applied, the question of its disallowance naturally does not arise. The A.O. was only directed to verify whether the factual aspect of the above claim but the A.O. has proceeded to again rectify u/s.154 without specifying as to what documentary evidence was not provided by the appellant to arrive at such conclusion of it being a mistake apparent from record. The appellant has given a ledger account for the above provision of expenses of Rs.2,30,26,345/- The appellant has also provided the copy of computation of income as per which the amount considered for application of income comprises of: (a) amount applied to charitable purpose during the year of Rs.22,62,39,303/-(b) amount deemed to be applied during the previous year clause (2) of the explanation to section 11(1) of Rs.5,00,00,000 and (c) amount accumulated or set apart for specified purpose – Rs.8,00,00,000 totaling to Rs.35,62,39,303/- which is restricted to Rs.34,12,86,837/- being the income before application and arrived at gross total income at Rs.NIL. The appellant has also submitted a copy of the letter dated 20.01.2022 addressed to the A.O. wherein it had given the detail as to how the above amount of Rs. 22,62,39,303/- was worked out as amount applied to charitable purpose. This includes total expenditure as income and expenditure account of Rs.23,11,86,505/-, total addition to fixed assets of Rs.1,34,98,309/-(68,56,602/- + 66,41,707) less depreciation of Rs.1,84,45,511/- to arrive at the figure of Rs.22,62,39,303/-. From the above, it is apparent that the amount of Rs.2,30,26,342/- is not included in the amount considered as applied during the year for the computation purpose as has been the contention of the appellant right from the assessment proceedings. And therefore, the question of its disallowance or adding back the provisions of expenses as income does not arise. It appears that the A.O. has not perused the above documentary evidences filed by the appellant at various stages and the computation of income and the financials of the appellant which would be available in the assessment record and after giving the appeal effect of order of CIT(A) which has also been confirmed by the Hon’ble ITAT, has made the order u/s.154 withdrawing the appeal effect/making addition of Rs.2,30,26,342/- without an iota of verification or application of mind about the issue and the facts Involved.

8.2.7 Considering the factual aspect of the issue involved, orders of the CIT, NFAC and Hon’ble ITAT, already passed, and also the submissions filed by the appellant, I do not find any merit in the order u/s 154 passed by the A.O withdrawing and making the addition on the above account. The AO. is accordingly directed to delete the same and the grounds of the appeal are allowed.

2.2 During the course of hearing, the ld. DR straight way submitted that the order passed by the ld. CIT(A) needs to be quashed as the decision made by the ld. CIT(A) is not acceptable on merit as the provisions for expenses of Rs.2,30,26,342/- was part of the amount claimed as application for charitable purposes of Rs.22,62,39,308/- and deserves to be disallowed. Thus, she relied on the finding recorded in the order of the assessing officer while adding the provision for expenses to the income of the assessee.

2.3 On the other hand, the ld. AR of the assessee relied upon the order of the CIT(A)/ NFAC dated 06-05-2024 and submitted the following written submission in support of the ld. CIT(A)’s order:

”I- It is to submit before your goodself that the provisions of section 154 of the Income Tax Act, 1961, can only deal with the mistake apparent on record and that the law does -not provide any such power to review the order already passed. Such matter of interpretation can only be dealt by the Department by way of appeal before the higher appellate/judicial authorities.

It is mentioned at page 9 of the 154 order that, “Replies of the assessee furnished without supporting as relevant documentary evidences, are not found acceptable for the reason that for claiming any expenditure, it should have been incurred and provisions are not the expenditure incurred. It is an estimate for the expenses to be incurred in subsequent period. Furthermore, in the absence of the details it cannot be examined whether the assessee has incurred any expenditure for which provision has been made or not.”

It is to bring to your kind Honors notice that the same issue is already settled by the decision of the Honorable Coordinate Bench in ITA no. 66,67 and 68/JP/2022 dated 24.03.2022.

As apparent from the order of the Ld AO above, no such apparent mistake could have been observed in this particular case where the Department has already contested the same ground before the Honorable ITAT. Has it been question of any mistake, the same could have been raised before the Honorable ITAT through the representative of the Department standing before the Honorable Tribunal.

Here, it is important to mention two issues in the impugned order, one is about the view of the ld AO that “that for claiming any expenditure, it should have been incurred and provisions are not the expenditure incurred” and the other issue mentioned is that, “Furthermore, in the absence of the details it cannot be examined whether the assessee has incurred any expenditure for which provision has been made or not.”

Firstly, the learned assessing officer had completely changed his opinion from observing double claim of expenditure tomaking interpretation that the provisions should have not been allowed to the appellant. While in the order dated 24.01.2022, giving effect of the order of Learned CIT (Appeals)/ITAT, the Ld AO has already re-assessed the total income of the appellant observing that there is no double claim as also being directed by the Ld CIT(Appeals). While, at the time of rectification under section 154 of the Income Tax Act, 1961, it was mentioned that the expenditure can only be allowed upon payment.

Hence, it is very clear from the above that the intention of the ld AO is to review the order already passed on the basis of a mere change in opinion and such powers are against the provision of the section 154 of the Income Tax Act, 1961.

Secondly, it is to submit before your good self that all the information was already on record, as the proceedings were already completed under section 143(3) and also under section 147 of the Income Tax Act, 1961, where the complete ledger of the ‘Provision for Expenses’ were submitted during the proceedings, in spite of this, it was mentioned in the order that the information available on record is insufficient.

That where the ldITOhad already made an assessment in the case under section 143(3) and further under section 147 r.w.s 143(3) of the Income tax act, 1961, it cannot be claimed the ld AO, who also happens to be the jurisdictional AO of the appellant,that “in the absence of the details it cannot be examined whether the assessee has incurred any expenditure for which provision has been made or not” and thereby making an addition to the income of the assesse under section 154 of the Income Tax Act, 1961.

It is apparent from the above that such powers can not be used by the Ld assessing officer under Section 154, and even if, the order of Ld CIT (Appeals) is referred, it was clear that the Ld Assessing officer just had to see that whether, the ‘Provision of Expenses’ was claimed separately in the Income Tax Return.

The whole issue was diverted and notices issued itself suggests that the Ld Assessing Officer was keen to review the assessment order already passed and powers to review the order already passed cannot be exercised under section 154.

II Thelearned ITO (Exemptions) had an opportunity to verify any separate claim, which was exercised by the Ld AO and provided the effect of the Ld CIT order after verifying all the facts of the case and reassessing the income of the appellant after making nil addition on the same ground.

Thereafter, the Department challenged the order of the Ld CIT(Appeals) in an appeal filed before the Honorable Jaipur Bench of ITAT. Kindly take note of the grounds of appeal as available at sr. no 4 of the paper-book at page34, where the Department has taken ground no. 3 as below, “On the facts and circumstances of the case the assessee has erred in adopting the accrual and not the payment system of accounting as the trust/AOP/society/institution exempted under the income tax act is not employed to adopt accrual system of accounting”.

Here, we would like to mention that the Department was convinced that there is no any separate claim and therefore the Department raised ground of appeal before the Honorable Jaipur Bench of ITAT on the basis that the assesse has erred in adopting the accrual system of accounting instead of the cash system.

The Department contested this ground before thehonorable Jaipur Bench of ITAT (represented through the Commissioner of Income Tax as D/R),where it was held that, “17. We have heard the rival contentions, perused the material available on record and it is noted that the method of accounting shall be cash or mercantile as per section 145(1) of the Income Tax Act 1961, as consistently followed is allowed. Regarding the provision of expenses, it is noted that the same is provided and adjusted from year to year and the amount shown in the Balance Sheet is the closing balance at the end of the year. Regarding the separate claim, if any, the ld. CIT (A) has already given opportunity to the AO in this matter. Accordingly, the Ground no. 3 of revenue is dismissed.”

It is therefore finally concluded by the Honarable ITAT that the method of accounting as mercantile is allowed and even if, there was any separate/double claim of expenditure, the opportunity was already provided by the Ld CIT(A).

It is apparently clear from the above that the proceedings undertaken under section 154 of the I.T. Act, where, the ground of appeal of the revenue was dismissed by the Honorable Income Tax Appellate Tribunal after taking note of the contention made by the representative of the Department, who had clearly pleaded,is unlawful.

Further, in case the intention of the Department was to disagree with the facts of the case and even not to follow the clear decision of the higher appellate authorities binding upon them, the ld AO could have exercised an option to contest the order of Honorable ITAT at the level of Honorable Rajasthan High Court.

III- The Ld CIT(A) has categorically mentioned at last para 8.2.6 on page 10 of the order that “It appears that the A.O. has not perused the above documentary evidences filed by the appellant at various stages and the computation of income and the financials of the appellant which would be available in the assessment record and after giving the appeal effect of order of CIT(A) which has also been confirmed by the Hon’ble ITAT, has made the order u/s.154 withdrawing the appeal effect/making addition of Rs.2,30,26,342/- without an iota of verification or application of mind about the issue and the facts involved”

Hence, here remains no doubt that the contention of the Ld AO is devoid of any merit, which is made very clear by the Ld CIT (A) in its order.

In view of the above, it is requested your Honors to kindly consider the above and decide appeal in favor of the appellant. ”

2.4 Ld. AR of the assessee in support of the contention so raised in the written submission also filed the paper book containing following evidence / record / decisions:

2.5 We have heard the parties and perused the materials available on record. Brief facts of the case are that the return of income for the assessment year 2012-13 declaring total income of Rs. Nil was filed on 30-09-2012 by the assessee which was processed u/s 143(3) of the Act at the returned income. It is noted that the case of the assessee was selected for scrutiny and notice u/s 143(2) of the Act was issued pm 20-09-2013 by the ITO, Ward 2(3), Jaipur which was served upon the assessee in time. Conclusively, the ld. AR of the assessee filed/ produced the records before the AO which were put to test checked and the case was discussed by the AO with ld. AR of the assessee. In this case, the AO during scrutiny assessment proceedings perused the balance sheet of the assessee in which it is noticed that the assessee had shown provision for expenses of Rs.2,30,26,342/-. According to the AO, the provisions are not allowable who vide show cause notice issued on 13-03-2015 asked the assessee to furnish details of the provisions made as well as justification for the claim and the assessee did not file any reply to the show cause notice issued. According to the AO, for claiming any expenditure it should have been incurred and provisions are not the expenditure incurred. It is an estimate for the expenses to be incurred in a subsequent period and in the absence of any details before the AO, it cannot be examined whether the assessee has incurred any expenditure for which provision has been made or not. Thus, the AO in view of the facts of the case, the provision for the expenses of Rs.2,30,26,342/- was disallowed and added to the total income of the assessee. Thus an order was passed by the AO under section 143(3) of the I.T. Act for the assessment year 2012-13 by not allowing application of income under section 11, which was challenged by the assessee before the ld. CIT(A), who allowed it vide order dated 24.12.2021. It is noted that thereafter, the AO passed appeal effect of an order making reassessment of the total income of the assessee after deleting the addition made in the original order. The assessee has filed the order dated 24-01-2022 of the ITO (Exemption) giving appeal effect (PB Page 8 to10). It is noticed that the Department went before the ITAT against the order of ld. CIT(A), where the Department also took the same ground of appeal of provision for expenses and the ITAT allowed the appeal in favor of the Association allowing the mercantile system of accounting and rejecting the ground raised by the revenue. Thereafter, a notice was issued on 20.04.2023 to the appellant Association under section 154, on the basis that ld. CIT(A) had given them the opportunity to verify the claim of the appellant but the appeal effect was erroneous. It was submitted to the AO that the issue has already been heard by the Jaipur Bench of ITAT and decided in favour of the assessee, and further, it was also explained that the asesseee has not separately claimed Provision of Expenses in the income tax return, in a detailed reply dated 03.05.2023. However, ld. AO without considering the order of the Coordinate Bench of ITAT on the same issue, passed an order under section 154 of the I.T. Act, making an addition of Rs. 2,30,26,342/-which shows the high handedness of the AO to interfere in the already concluded proceedings. At this point we note the observation of the apex court in the case of Parashuram Pottery Works Co. Ltd v. ITO [1977] 106 ITR 1 (SC) wherein at page 10 highest court noted that “At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other spheres of human activity”. The Bench also that the Association filed an appeal before the Ld CIT(Appeals) against the order passed by the AO, where ld. CIT(A) allowed the appeal in the favor of the Association by holding at last para 8.2.6 on page 10 of the order that “It appears that the A.O. has not perused the above documentary evidences filed by the appellant at various stages and the computation of income and the financials of the appellant which would be available in the assessment record and after giving the appeal effect of order of CIT(A) which has also been confirmed by the Hon’ble ITAT, has made the order u/s.154 withdrawing the appeal effect/making addition of Rs.2,30,26,342/-without an iota of verification or application of mind about the issue and the facts involved”. Thus, taking into consideration the entire conspectus of the case we feels that there is no ambiguity in the order of the ld. CIT(A) and we do not incline to interfere in the order of the ld CIT(A). Hence, the appeal of the Revenue is dismissed.

3.0 In the result, appeal of the revenue is dismissed