HIGH COURT OF DELHI CIT v. Panacea Biotech Ltd. ITA No. 422/ 2007 July 27, 2009

In mercantile method of accounting, incurring of expenditure is not based on payment but on liability to pay



Once the goods have been purchased, the invoices raised and the purchase considerations are accounted for in the books of the assessee, the expenditure can be said to have been incurred as per the method of accounting - mercantile basis – followed by the assessee.

RELEVANT EXTRACTS:

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3. So far as the contention with regard to the disallowing the claim on the expenditure incurred on the purchase of two machineries is concerned, the counsel for the Revenue has urged that though with respect to the first machinery an advance payment was made within the Assessment year, with respect to the second machinery no payment at all was made. It was, therefore, urged that since expenditure was not incurred within the meaning of the provision of section 35(2)(i)(a), it was said that in the present assessment year the benefit of the same cannot be claimed and it would be entitled only in the next assessment the benefit of the same cannot be claimed and it would be entitled only in next assessment year. Per contra the counsel for the assessee has urged that the books of accounts were maintained on mercantile basis and, therefore, since the invoices were raised within the relevant financial year and since a letter of credit was already opened with respect to the second machinery, it cannot be said that expenditure was not incurred. It was argued that a debt incurred is an expenditure incurred within the meaning of the expression ‘expenditure is incurred’ occurring in section 35(2)(i)(a). The counsel for the assessee drew the attention of this Court to section 43 sub-section 2 of the Act which defines the expression “paid” to means actually paid or incurred according to the method of accounting upon the basis of which profits or gains are computed. It is not disputed by the Revenue that the books of accounts are maintained by the assessee on mercantile basis. This is also the concurrent finding of the two authorities below. In the mercantile method of accounting incurring of the expenditure is not based on payment but on the liability to pay. Once the goods have been purchased, the invoices, raised and the purchase considerations are accounted for in the books of the assessee, the expenditure can be said to have been incurred as per the method of accounting followed by the assessee. Counsel for the assessee has rightly relied upon the judgment reported as Belapahar Refractories Ltd. v. CIT, 2007 ITR 144 (Orissa) in which the Division Bench of the Orissa High Court has held that incurring of expenditure for scientific research means “to become liable to” i.e. to incur a debt and at such time the expenditure can be said to have been incurred. It was further held that the expression “incurring” includes either an actual payment or that the concerned person has become liable for payment but had not actually made payment. We agreed with this view since in the facts of this case the position which has emerged from the record is that the assessee has maintained its books on a mercantile basis.



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