Expenses crystallized during the relevant year is not prior-period expenses
The Tribunal in the case of Delhi Tribunal: Dixon Technologies India (ITA No 7261/Del/2019) has allowed the appeal filed by Dixon Technologies for AY 2016-17. The Tribunal remanded the issue of disallowance of royalty and interest payments amounting to Rs. 14,48,93,346 back to the AO for fresh adjudication, considering additional evidence. The Tribunal also directed the AO to verify and grant full MAT credit as per law and clarified the application of interest under Sections 234B and 234C of the Act.
Let us have a Short Overview of the case:
Primary Issues:
Disallowance of royalty and interest payments amounting to Rs. 14,48,93,346 as prior period expenses.
Non-granting of full MAT credit under Section 115JAA of the Act.
Assessee’s arguments:
The liability for royalty and interest crystallized during the relevant AY and should not be considered prior period expenses.
The royalty and interest payments were made pursuant to a settlement agreement with Philips, which was finalized during the AY.
The statutory auditor classified the payment as an exceptional item, not a prior period item.
The assessee had deducted and deposited tax at source on the payments, making them allowable under the proviso to Section 40(a)(ia) of the Act.
The AO and CIT(A) erred in not granting full MAT credit and in charging interest under Sections 234B and 234C.
Revenue’s arguments:
The royalty and interest payments were prior period expenses as they pertained to earlier years.
The assessee did not create a provision for these expenses in the preceding years.
The settlement agreement with Philips was not executed on stamp paper.
The liability towards royalty payment was not shown as a contingent liability in the balance sheet of the earlier year. The AO and CIT(A) followed the matching concept in disallowing the expenses.
Tribunal’s decision:
The Tribunal remanded the issue of disallowance of royalty and interest payments back to the AO for fresh adjudication, considering additional evidence provided by the assessee. The Tribunal prima-facie also found that the liability for royalty and interest crystallized during the relevant assessment year due to the settlement agreement with Philips, making the expenses allowable in that year. The Tribunal admitted additional evidence provided by the assessee, which was crucial for adjudicating the issue of disallowance, thereby remanded the issue to AO.
The Tribunal emphasized the need for factual verification by the AO to grant full MAT credit as per law. Thereby, the Tribunal directed the AO to verify and grant full MAT credit as per law.
The Tribunal clarified that interest under Section 234B is consequential and interest under Section 234C should be charged only on the returned income, not on the assessed income.
The copy of the order is as under:
