Dinesh Kumar Goel vs Commissioner of Income Tax

A.K. Sikri, J.—ITA No. 790 of 2006 relates to the assessment year 1997-98, which was admitted on the following substantial questions of

law:

Whether the income tax Appellate Tribunal was correct in law in sustaining the disallowance of Rs. 18,99,255 under the head ''advertisement

expenses''?

Whether the income tax Appellate Tribunal was correct in law in sustaining the disallowance of the claim of expenses of Rs. 11,68,905 under

the head ''printing and stationery'' on the ground that same was to be considered in the block assessment proceedings and not under Chapter XIV

of the income tax Act, 1961?

Other appeal is in respect of assessment year 1998-99 which also involves the aforesaid two questions with difference in amounts only. It is for this

reason, both the appeals were heard together. For the sake of convenience, we may take note of the facts of ITA No. 790 of 2006 giving rise to

the questions formulated above. Concededly, outcome of these questions in this appeal would lead to same results in the other appeal as well.

The assessee furnished return of total income on 29-10-1997 declaring an income of Rs. 3,42,621 inter alia claiming a deduction of expenditure

incurred on advertisement at Rs. 1,00,36,975.75. The return was prepared on the basis of accounts. A search operation u/s 132(1) of income tax

Act (hereinafter referred to as ''the Act'') was conducted on 18-8-1998 on the assessee. On 31-3-1999, the assessee revised the return of

income, within the statutory period u/s 139(5) of the Act, wherein he returned a loss of Rs. 58,39,070. In the revised return of income, he inter alia

enhanced the claims of expenditure incurred by:

(a) Rs. 3,69,500 on printing and stationery (based on two bills), as he found that, the expenditure incurred under the aforesaid head was debited in

his books for the financial year 1997-98 instead of the financial year 1996-97 i.e., for the assessment year 1997-98, in which the said expenditure

had been incurred. In fact, apart from these two bills further amounts incurred under the aforesaid head of Rs. 7,99,405 (supported by seven

credit bills"") were found, related to the assessment year 1997-98 which too, had also been claimed as a deduction. Thus, an aggregate deduction

of expenditure incurred under the head ''printing & stationery'' of Rs. 11,68,905 was made.

(b) Apart from the aforesaid sums, a claim of expenditure of Rs. 40,78,858 incurred was also made. The expenses incurred were supported by

credit bills but remained to be ledgerized. Out of the sum of Rs. 40,78,858 a sum of Rs. 21,79,603 related to assessment year 1998-99 and

remaining sum of Rs. 18,99,255 related to the assessment year 1997-98.

On 29-3-2000, the assessment was framed u/s 143(3) of the Act at an income of Rs. 85,17,334. The Assessing Officer (AO) though

proceeded to compute income on the basis of revised return, but disallowed the claim of the aforesaid expenditure incurred by holding that the

claim of deduction of Rs. 3,69,500 incurred on ''printing & stationery'' was incorrect and ""against the provisions of the Act"". Rs. 7,99,405 in

respect of printing and stationery bills pertaining to financial year were not recorded and were found during search proceedings. On this premise,

he held the view that it had to be dealt with in the block assessment. In respect of advertisement expenditure of Rs. 40,78,858, the Assessing

Officer held that out of the advertisement bills, Rs. 18,99,255 were not ledgerized in respect of which entry was made as per seized ledger in

financial year 1997-98, which narrated ""provision for bill"". According to him, this had to be dealt with block assessment. In respect of remaining

sum of Rs. 21,79,603, he held that these bills were raised in financial year 1997-98 and had been entered in the books of account for 1997-98

and thus would be considered in financial year 1997-98. He, thus, disallowed the claim of expenditure.

Being aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the CIT(A). It was contended that since

genuineness of expenditure incurred had not been disputed, the Assessing Officer had erred in law in holding that the said expenditure incurred in

the financial year 1996-97 of Rs. 3,96,500 and Rs. 7,99,405 aggregating to Rs. 11,95,905 and of Rs. 18,99,255 under the two heads had to be

allowed, as the assessee was following mercantile method of accounting and could not be disallowed. It was submitted that there was no

justification to say that it had to be dealt with in block assessment and that in any case, it has not been allowed thereto. The CIT(A) obtained a

remand report of the Assessing Officer on 16-1-2001, who confirmed that the amounts credited in the account of advertisers are genuine and

were incurred for the services rendered. In other words, there was no dispute about the incurring of expenditure. The assessee furnished his

comments on 31-1-2001 with submissions that the deductions claimed as aforesaid be directed to be allowed. The CIT(A), however, held that the

expenditure incurred was since not ledgerized and thus could be a part of block assessment proceedings.

Still dissatisfied, the assessee went in appeal before the income tax Appellate Tribunal (hereinafter referred to as ''the Tribunal''). However, here

also, the assessee remained unsuccessful as disallowance sustained by the CIT(A) has been upheld by the Tribunal on the same ground, viz., the

expenditure was not ledgerized even though it pertained to the assessment year in question and therefore, deduction could not be considered in

regular assessment.

It is clear from the above that there is no dispute that the expenditure was incurred, and genuineness thereof is not disputed. At the same time,

legal question that arises is as to whether the expenditure incurred under these two heads could be disallowed for the reasons stated in the orders

passed by the Authorities below.

Question No. 1

As noted above, the assessee had claimed a sum of Rs. 40,78,858 on account of expenditure on advertisement and marketing expenses

claimed in the revised return for the assessment year 1997-98. The assessee had submitted that these expenses had been accounted for in the

assessment year 1997-98 as per ledger. However, he was claiming the same in this assessment year in the revised return on the ground that he was

following mercantile system of accounting. The Assessing Officer has found that the assessee had not recorded advertisement bills totalling Rs.

18,99,255 in the books of account for financial year 1996-97. As per seized ledger for financial year 1997-98, one entry of this amount had been

recorded on 1-4-1997 with narration ""provision of bill"". He, thus, observed that this consolidated entry passed on 1-4-1997 represented

advertisement bill, was only an after-search-thought and was an attempt to convert undisclosed income assessable under the block assessment

proceeding into allowable deduction. He even asked the assessee to clarify the reason for not recording the aforesaid advertisement bills amounting

to Rs. 18,99,255 during financial year 1996-97 when these bills had been raised on dates falling during financial year 1996-97, but reply was not

furnished by the assessee. Accordingly, the Assessing Officer opined that this expenditure had to be dealt with during block assessment, which was

pending in the case of the assessee. He disallowed the claim of deduction of Rs. 18,99,255. This reasoning of the Assessing Officer had been

accepted by the CIT(A) as well the Tribunal.

We fail to understand logic given by the Authorities below in disallowing the expenditure. Such an expenditure cannot be considered in block

assessment, as provisions of section 158B of the Act would not apply. Section 158B of the Act deals with special procedure for assessment of

search cases, i.e., assessment of ""undisclosed income"" as a result of search. Clause (b) of section 158B of the Act defines ""undisclosed income"" as

under:

(b) ""Undisclosed income"" includes any money, bullion, jewellery or other valuable article or thing or any income based on any entry in the books of

account or other documents or transactions, where such money, bullion, jewellery, valuable article, thing, entry in the books of account or other

document or transaction represents wholly or partly income or property which has not been or would not have been disclosed for the purposes of

this Act.

Thus, when during the search, it is found that there is wholly or partly undisclosed income or property, assessment can be carried out for the

entire block period. It, thus, applies to income which is undisclosed and is found during search which may be in the form of money, bullion,

jewellery or other valuable article or thing or any income based on any entry in the books of account, etc. It does not apply to ""expenditure

claimed which was incurred in the particular financial year. Even the assessee is claiming deduction of the said expenditure as business expenditure

u/s 37 of the Act and this has to be dealt with in the regular assessment and not in the block assessment.

In the present case, the assessee had revised the return within stipulated period prescribed under the Act. He was, thus, entitled to do so. His

plea was that the expenditure was incurred during the year in question and even if the bills were not received and they were not ledgerized, he had

right to claim the same as deduction, as he was following mercantile system of accounting. In these circumstances, the Assessing Officer was

required to go into the issue. He, however, did not apply his mind at all on this aspect and merely on the ground that the expenditure was not

ledgerized, they proceeded on wrong premise that it could be taken care of in the block assessment year.

The orders of the Authorities below are, therefore, set aside. At the same time, we may point out that the assessee has claimed that the

expenditure is actually incurred and payments are made by account payee cheques. This aspect has not been looked into by the Assessing Officer

at all. Therefore, it would be necessary to verify as to whether the expenditure was incurred and for this limited purpose, we remit the case back to

the Assessing Officer. If it is found that the expenditure was incurred, it would be allowable as expenditure in the year in question. The question of

law is answered in the aforesaid manner.

Question No. 2

In the revised return filed by the assessee, he claimed the deduction of printing and stationery bills wrongly included in financial year 1997-98

instead of 1996-97 amounting to Rs. 3,69,500. When the assessee was asked to give details of these printing and stationery bills, his reply was

that two bills, both dated 27-5-1996 of Rs. 1,89,000 and Rs. 1,80,500 were previously not entered in the books of account. The Assessing

Officer, however, disallowed the claim when he noticed that these were neither ledgerized in financial year 1996-97 nor in financial year 1997-98.

Another claim of Rs. 7,99,405 was also disallowed on the ground that the same was not recorded in the books of account of the assessee and

same was found during search proceeding. Only when the Department seized during the course of search, the assessee made the claim by filing the

revised return. Again, it was observed by the Assessing Officer that since the amount is not ledgerized, it can be taken care of in the block

assessment proceeding u/s 158BC i.e., Chapter XIV-B of the Act.

Again, this is an expenditure item and for the reasons given while answering the Question No. 1, provision of Chapter XIV-B would not be

applicable and it was incumbent upon the Assessing Officer to consider the allowability or otherwise this expenditure in the regular assessment.

However, it would be open to the Assessing Officer to go into the veracity/genuineness of the expenditure. Thus, for the same reason, we remit

back this issue as well to the Assessing Officer. If the expenditure is found to be genuine, the same shall be allowed in this assessment year. This

issue is answered accordingly.

The same conclusion in drawn in respect of the next assessment year 1998-99 in ITA No. 553 of 2007. Both the appeals are disposed of in

the aforesaid terms.