Tuesday, July 25, 2017

Sec. 68 couldn't be applied for sundry creditors arising out of purchase expenses: Patna ITAT


a) Assessee-partnership firm had shown sundry creditors arising out of purchase expenses in its return but failed to establish genuineness of such sundry creditors.

b) Assessing Officer (AO) disallowed provision for such creditors and added it to total income of assessee under section 68.

c) CIT (Appeals) confirmed the order of AO. The aggrieved-assessee filed the instant appeal before the Tribunal.

The ITAT held in favour of assessee as under:

1) The provisions of section 68 are applied to the cash credit which has not been explained by assessee. In the instant case sundry creditors arose out of the purchases as claimed by assessee which had been duly accepted by the authorities.

2) AO had invoked section 68 to tax the sundry creditors whereas the assessee was claiming that the aforesaid amount represented the trade creditors and, therefore, it couldn’t be applied.

3) Admittedly, the creditors were found by the AO and the onus lay on assessee to justify that these were sundry creditors. In order to justify the impugned trade creditors, the assessee had to produce copies of PAN, ledger copies, bills / invoices details of payments, income tax return, mode of payments, etc.

4) In the instant case, assessee had summarily failed to observe the directions issued by the AO. Therefore, issue was restored to AO for fresh adjudication as per law. - [2017] 83 taxmann.com 187 (Patna - Trib.)

Compensation paid to clients due to negligence of employees was allowable as business exp.


a) Assessee was engaged in Marketing of Financial products of various companies as distributor. He claimed Rs.1.54 lakh as expenses in its profit and loss account on account of compensation paid to clients for loses occurred due to negligence of on the part of its employees.

b) Assessing officer (AO) held that assessee had not been able to prove as to how the loss was payable by it as the losses were suffered by the clients and, therefore, assessee was not entitled to claim such losses its profit and loss account.

c) CIT (Appeals) also upheld order of AO. Aggrieved-assessee field the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1) Assessee had claimed that the losses which had occurred to its clients due to negligence of employees as the employees of assessee could not square off the positions taken by clients in NIFTY index of National Stock Exchange.

2) Amount paid to these clients was necessarily an exp. which was allowable under section 37 as section 37 clearly states that any expenditure not in the nature of capital expenditure or personal expense laid out or expenditure wholly and exclusively incurred for the purposes of business or profession shall be allowed.

3) Moreover Circular no. 35-DCXLVII-20 of 1965 dated 24-11-1965, clearly states that losses arising due to negligence of employees has to be allowed as expense if loss took place in normal course of business

4) In the instant case, the losses were necessarily incurred in the normal course of business of assessee and therefore, the expenditure was allowable. - [2017] 83 taxmann.com 230 (Amritsar - Trib.)

Ind AS: Exposure Draft of revised lease standard Ind AS 116 issued

Exposure Draft on revised lease standard Ind AS 116 has been issued by the Institute of Chartered Accountants of India (ICAI). Ind AS 116 will replace the existing lease standard Ind AS 17. Last year, International Accounting Standards Board (IASB) revised the lease standard and issued new IFRS 16, Leases.

Ind AS 116, Leases sets out the provisions for the recognition, measurement, presentation and disclosures of leases. There are differences between Ind AS 116 and Ind AS 17. The major differences are as follows:

1. Under Ind AS 116, a part of the contract can also be treated as lease if the same conveys the right to use an asset for a period of time for certain consideration.

2. The principles of Ind AS 116 with regards to accounting of lease by the lessee is substantially different from that of Ind AS 17. However, requirements of Ind AS 116 with regard to lessor is substantially similar to Ind AS 17

3. Recognition of leases having lease term less than 12 months or value of underlying asset of the lease is low, by lessee is not mandatory under Ind AS 116. In such cases, lessee have to recognise the lease rentals as expense on a systematic basis considering pattern of benefits from the asset.

4. Ind AS 116 provides for a single accounting model for lessee. Classification of lease as either finance or operating lease by the lessee is not required under Ind AS 116. Initially, lessee should recognise right-of-use assets at cost similarly to other non-financial assets, like property, plant & equipment, intangible assets etc. and lease liabilities at the present value of all future payments.

5. Subsequently, lessee should measure the right-of-use assets either at cost or other specified models like revaluation model. The amount of interest paid on lease liability should be recognised as finance cost.

6. Under Ind AS 116, lessee shall depreciate the right-of-use asset in accordance with Ind AS 16, Property, Plant and Equipment.

Apart from this the Draft also provides principles with regard to transition from Ind AS17 to Ind AS 116. Ind AS 116 will be applicable from April 1, 2019.