T.R. Sood, Accountant Member - In this appeal, assessee has raised the following ground:

"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax Appeals, Central Circle IV, hereinafter referred to as the ld. CIT(A) has erred in law in confirming the disallowance of Rs. 6,64,72,870/- in respect of Excise Duty paid by the Appellant. The said Expenses in respect of Payment of Excise duty may please be allowed."

2. The appeal has been filed late by 27 days and a condonation petition along with an affidavit has been filed. The Ld. Counsel of the assessee referred to the affidavit of Shri Bhavin Parikh, Chartered Accountant, in which it is stated that appeal papers had been received by him but because of the heavy rush for filing of return, he lost sight of the appeal which was filed late. The Ld. Counsel submitted that delay is because of the Chartered Accountant and, therefore, same should be condoned.

3. On the other hand, Ld. DR left it to the discretion of the Bench.

4. After considering the submissions, we find that assessee had sufficient reason for filing the appeal late and, therefore, the delay is condoned.

5. Brief facts of the case are that assessee paid excise duty amounting to Rs. 6,64,72,870/- under Kar Vivadh Samadhan Scheme (KVSS), pursuant to the show cause notices issued by the Central Excise Department for alleged suppression of sales in A.Yrs. 1993-94 & 1994-95. These show cause notices were issued after a search action by the Excise Department in which some suppressed sales were discovered by them. The fact of suppressed sales was informed to the Income Tax authorities also and accordingly assessments of the assessee were reopened. It was noticed that assessee has not offered such suppressed sales which have been suppressed as per Excise Deptt., amounting to Rs. 5.36 crores and Rs. 16.62 crores in A.Yrs. 1993-94 & 1994-95, respectively. However, additions were made only at Rs. 1,01,92,569/- being gross profit @ 19% declared by the assessee for A.Y. 1993-94 and Rs. 3,32,34,424/- being GP @ 20% declared by the assessee in A.Y. 1994-95. These orders were challenged before the CIT(A) who held reopening of the assessments as null and void in both the years. The matter was taken up before the Tribunal by the Revenue and the Tribunal reversed the orders of the CIT(A) in both these years and restored the matter to the file of the CIT(A) to be decided on merits.

6. In the second round, addition of Rs. 1,01,92,569/- for A.Y. 1993-94 and Rs. 3,32,24,424/- for A.Y. 1994-95 was confirmed by the Ld. CIT(A) in fresh order. This matter was again taken to the Tribunal this time by the assessee and the Tribunal deleted the additions on the ground that the Assessing Officer who had made assessment had no jurisdiction to pass such orders.

7. In A.Y. 1999-2000 i.e. the year before us when the issue regarding the claim for payment of excise duty amounting to Rs. 6,64,72,870/- for A.Yrs. 1993-94 & 1994-95 came up before the AO, he disallowed the same because the additions on account of suppressed sales had already been deleted by the orders of the CIT(A).

8. Aggrieved by this order assessee filed an appeal before the CIT(A) and it was mainly contended that excise duty was paid in pursuance of the KVSS scheme announced by the government and the claim was allowable u/s.43B. It was also pointed out that since orders of CIT(A) have already been set aside by the Tribunal, therefore, orders of the AO were no longer valid. The ld. CIT(A) decided the issue vide paras 8 to 11 which are as under:

"8. The appeal relates to the appellant's claim that the excise duty of Rs. 6,64,72,870, paid by it for the assessment years 1993-94 and 1994-95, related to suppressed sales, as found by the Central Excise Department, be allowed as a deduction. Subsequent to the institution of this appeal, pursuant to the order dated 14.8.2006, of the Hon'ble ITAT, Mumbai, the matter related to the taxation of income from sales suppressed by the appellant has been adjudicated by me, for the assessment years 1993-94 and 1994-95, vide my order No. CIT(A)/C-IV)T-6291 2006-07, dated 01.08.2007 and order No.CIT(A)IC-IVIIT-6301 2006-07, dated 01.08.2007 respectively. It maybe mentioned here that the appellant's orders for the said years viz. AYs 1993-94 and 1994-95, were readjudicated by me, on the direction of the Hon'ble ITAT, that the appellant's case related to taxation of income from suppressed sales be decided upon merit.

9. Upon a detailed consideration of the submissions put forward by the appellant's AR, and the facts on record, my findings as stated in paras 22 to 24 of my said orders, were as under:

"22 The reopening of assessment in this case has taken place, because of the detection of a huge amount of suppression of sales and excise duty evasion by the appellant, during a search and seizure action, conducted by the excise duty department, at the business premises of the appellant. A huge amount of independent third party evidence too has been found, which indicates such evasion. It is a case where the assessee has not recorded a large amount of its revenue transactions in its books of account and has also not returned it to taxation. His very act of suppression of sales, draws out severe adverse inference about his conduct and the veracity of his returns of income and records produced before the income tax department. The appellant has evidently not filed his true return of income, nor did he produce his true records during the course of the income tax assessment proceedings. The search action by the excise department unearthed a huge gap between the actual figures and the returned figures of income.

23. Since the appellant had concealed these figures from the revenue authorities, the AO was obviously not aware of the true position in respect of the appellant's sales and income. The reopening of assessment has taken place because incriminating information was received by the Income Tax Department, from the Excise Department. In other words, the income tax department received incriminating information, about the appellant's sales and income, which he sought to conceal and evade, from a third independent source and not because the appellant chose to come clean. The appellant has further chosen to not accept the concealment of income and thus has not provided with all the facts and information to the AO. The appellant has also not furnished any explanations to the AO, in the reassessment proceeding in respect of these documents found to have been concealed. Neither were any details, apart from those given to the AO, filed before me.

24. The appellant by his very conduct has not just concealed but has thwarted the truth, leaving no option for the AO, but to frame the assessment on the basis of facts unearthed by the Excise Department. It was not out of place to point here that the show-cause notice issued by the Excise Department was founded on thousands of incriminating documents found by the said department during the course of the search action, in the case of the appellant…"

10. Based on my aforesaid findings, I adjudicated as under:

For the A.Yrs. 1993-94 & 1994-95

"…Subject to these observations, I uphold the action of the AC in placing reliance on the Central Excise Department's finding of evasion of sales to the tune of Rs. 5,36,45,105. The AO's estimation of appellant's income from such sales equal to the GP rate declared by the appellant himself, works out to Rs. 1,01,92,569. After allowing set off of losses of Rs. 4,27,672, the taxable income is rightly computed at Rs. 9764807."

For the AY 1994-95

"Subject to these observations, I uphold the action of the AO in placing reliance on the Central Excise Department's finding of evasion of sales to the tune of Rs. 16,61,22,120. The AO's estimation of appellant's income from such sales equal to the GP rate declared by the appellant himself at 20% works out to Rs. 3,32,24,424. After allowing set off of losses of Rs. 203716, the taxable income is rightly computed at Rs. 3,30,20,708."

11. It is pertinent to point out that for the assessment years 1993-94 and 1994-95, to which the appellant's claim of excise duty payment of Rs. 6,64,72,870 relates, by virtue of my impugned orders, what has been subjected to tax is not the gross income from suppressed sales, but the net income therein, - as represented by the gross profit. In other words, while subjecting the income from suppressed sales to tax, all expenses thereagainst, including excise duty have already been allowed as a deduction, in the process of taxing the net income (represented by the GP) and not the total gross income (as represented by the gross suppressed sales). Permitting the appellant to claim the excise duty as a deduction now, would amount to a double deduction in respect of the same expenditure which is not permissible. The appellant's claim for excise duty payment of Rs. 6,64,72,870 as a deduction, is therefore rejected, in view of my aforesaid discussion."

9. Before us, Ld. Counsel of the assessee narrated the facts and submitted that any expenditure which has been incurred for the purpose of business is allowable. It was contended that the expression "for the purpose of business" in sec.37(1) is wider in scope than the expression "for the purpose of earning profits" and reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140. It was further argued that it was not necessary that for claiming expenditure there has to be a presence of receipt also. In this regard, he relied on the following decisions:

(a) Hughes (Inspector of Taxes) v. Bank of NewZealand [1938] 6 ITR 636 (HL);

(b) Travancore Rubber & Tea Co. Ltd. v. C. Ag. IT. [1961] 41 ITR 751 (SC);

(c) C. Ag.IT v. Calvary Mount Estates (P.) Ltd. [1961] 41 ITR 755 (SC);

(d) Sree Meenakshi Mills Ltd. v. CIT [1967] 63 ITR 207 (SC);

(e) Anglo - Persian Oil Co. (India) Ltd. v. CIT [1933] 1 ITR 129 (Cal.);

(f) Tata Sons Ltd.…Assessees v. The Commissioner Of Income-Tax, Bombay….* [1950] 18 ITR 460 (Bom.);

(g) T.S.P.L.P Chidambaram Chettiar, Tiruchirapalli…Applicant; v. Commissioner Of Income-Tax, Madras…. [1960] 39 ITR 320 (Mad.);

(h) Cuchterlony Valley Estates (1938) Ltd. v. Government Of Madras [1962] 44 ITR 770 (Mad.);

(i) M.S.M.M Meyyappa Chettiar v. Commissioner Of Income-Tax, Madras. [1962] 44 ITR 775 (Mad.);

(j) P.V Mohamed Ghouse v. Commissioner Of Income-Tax, Madras. [1963] 49 ITR 127 (Mad.);

(k) Mysore Spinning & Manufacturing Co. Ltd. v. CIT [1966] 61 ITR 572 (Bom.);

(l) M.N. Ramaswamy Iyer v. CIT [1969] 71 ITR 218 (Ker.);

(m) Orissa Cement Ltd. v. CIT [1969] 73 ITR 14 (Delhi);

(n) Plantation Corporation of Kerala v. CIT (sic).

He further submitted that whether expenditure is commercial expedient or not has to be judged by a business person and the only condition was that the same should have been incurred for the purpose of business and in this regard he relied on the following decisions:

i. Sassoon J David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC).

ii. CIT v. Raman & Raman Ltd. [1969] 71 ITR 345 (Mad.).

iii. CIT v. Vijaylakshmi Mills Ltd. [1974] 94 ITR 173 (Mad.).

iv. Bralco Metal Industries Pvt. Ltd. v. Commissioner Of Income-Tax. [1994] 206 ITR 477 (Bom.).

He also argued that each assessment year is a self-contained and the receipts and expenditure pertaining to one assessment year cannot be taken into consideration in any other assessment year. Further it was not necessary to show the necessity of the expenditure. In this regard he relied on the following decisions:

(a) Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 (SC).

(b) Calcutta Company Ltd. v. Commissioner Of Income Tax, West Bengal [1959] 37 ITR 1 (SC).

(c) Commissioner Of Income Tax, Madras. v. A. Gajapathy Naidu, Madras [1964] 53 ITR 114 (SC).

10. On the other hand, Ld. DR has filed written submissions in which facts have been given in detail. It has been pointed out in these submissions that since no income has been offered against which excise duty has been claimed, therefore, such expenditure was not available on the basis that there is no corresponding matching revenue.

11. We have considered the rival submissions in the light of the relevant material on record. We find that the claim has been made by the assessee for payment of excise duty amounting to Rs. 6,64,72,870/-. As noted while discussing the facts, this excise duty pertained to suppressed sales of A.Yrs. 1993-94 and 1994-95 amounting to Rs. 5.36 crores and Rs. 16.62 crores respectively. Therefore, obviously, the expenditure relates to A.Yrs. 1993-94 and 1994-95 but has been claimed in this year on the basis of payment. This means the claim has been made because of sec.43B. Section 43B reads as under:

43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

A plain reading of the above section makes it clear that the above provision starts with the non-obstante clause. However, at the same time the above provision is not for allowance of any extra claim, and rather has only put a rider on allowability of an expenditure which is "otherwise allowable under this Act". That means an expenditure which is in the nature of expenditure provided in sec.43B which is otherwise allowable under any provisions of the Act, would not be allowed if such expenditure has not been paid during that year. In other words, the allowability of an expenditure mentioned in sec.43B has been further curtailed and the expenditure mentioned in this provision has been made to be allowable only when the payment has been made. This clearly means that the allowability of an expenditure mentioned in sec.43B has to be first tested under other provisions of the Act and if such expenditure is allowable under other provisions, then because of this provision it has to be further seen whether payment has actually been made and only then such expenditure can be allowed. Therefore, sec.43B puts a rider that an expenditure which is otherwise allowable under the other provisions of the Act can be allowed only in the year when actual payment of such expenditure has been made as mentioned in sec.43B and such expenditure would be allowed in the year of payment. Now, in the case before us though payment of excise duty has been made in this year, but it has to be seen whether such expenditure is allowable under the other provisions of the Act. The payment of excise duty would obviously fall u/s. Sec.37(1) which reads as under:

37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".

A plain reading of the above clearly shows that there are six elements involved for allowability of expenditure which are as under:

1. Any expenditure.

2. Expenditure should not be in the nature prescribed under sections 32 to 36.

3. Expenditure should not be of capital nature

4. Expenditure must have been laid out or expended

5. Expenditure should not be of personal nature.

6. Expenditure must be wholly and exclusively for the purpose of business.

We are of the opinion that since it is nobody's case that expenditure was in the nature of capital expenditure or personal expenditure, therefore, the only other four elements have to be examined. The first element is any expenditure and the amount paid towards excise duty under KVSS would definitely be covered by this definition. The second element that it should not be in the nature of expenditure prescribed under sections 32 to 36 is also not applicable because the payment of excise duty is not covered by sections 32 to 36 and, therefore, requires to be considered only under this section i.e. sec.37. We have already observed that third and fourth elements are not applicable. The fifth element is that it must have been laid out in the sense that such expenditure must have been incurred and in the case before us since excise duty has already been paid in this year, therefore, it can be said that expenditure has been incurred. Now the only element which is perhaps the most important, which is required to be examined whether the expenditure has been incurred for the purpose of business and profession i.e. whether expenditure incurred by way of payment of excise duty under KVSS is for the purpose of business or profession or not. So the answer to the question before us whether expenditure incurred by way of payment of excise duty under KVSS is covered by the sixth element that is whether the same is wholly and exclusively incurred for the purpose of business and profession.

12. Let us first deal with the arguments of the Ld. Counsel of the assessee. There is no quarrel with the first argument that the expression "for the purpose of business" is much wider than the expression "for the purpose of earning the profits". It was further argued that it is not necessary that for claiming expenditure there has to be presence of receipt. A large number of citations were given for this proposition which, we are of the opinion, that same do not require detailed discussion because there can be a situation where expenditure may have to be allowed even when there is no receipt. For example, in a newly started business, the business organisation may spend monies on administrative overheads and further on advertisements and may not receive any sale proceeds, still the expenditure incurred depending on circumstances, may have to be allowed. It is settled that whether a particular expenditure is commercially expedient has to be decided by a business person and not by the tax authorities. It is also settled that it is not necessary to show the necessity of the expenditure. However, for making a claim the expenditure must meet the criteria that it has been incurred for the purpose of the business. For meeting this test, we are of the view, that to show that the expenditure has been incurred exclusively for the purpose of business, it must be shown that such expenditure was incidental to the business of the assessee and that too in the capacity of a businessman. In fact, what is incidental to the business was considered by the Hon'ble Supreme Court in the case of Travancore Titanium Products Ltd. v. Commissioner Of Income Tax Kerala [1966] 60 ITR 277 . The headnote of the decision reads as under:

"In determining whether an amount expended by the assessee is deductible under section 10(2)(xv) of the Indian Income-tax Act, the nature of the expenditure or outgoing must be adjudged in the light of accepted commercial practice and trading principles. The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. It must be directly and intimately connected with the business and must be laid out by the taxpayer in his character as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business."

Thus, the expenditure has to be directly and intimately connected with the business. In the case before us, assessee was doing the business of selling of tobacco products but some part of the business has been kept outside the books and, therefore, the expenditure incurred on the activity which is outside the books cannot be said to be directly and intimately related to such business. In fact, this issue has been further discussed by the Hon'ble Supreme Court in the case of Maddi Venkataraman & Co. (P.) Ltd. v. CIT [1998] 229 ITR 534/ 96 Taxman 643. In this case the assessee was in the business of exporting tobacco. In the year 1968 the assessee had accumulated 329.2 tons of sub-standard quality of tobacco which it could not export over the last three years. Since the accumulated stock was of sub-standard quality which could not be sold at the floor price fixed by the Government of India for such tobacco, in the absence of an alternative the assessee sold such tobacco at a discount of 20% to a Singapore party. On paper full price was paid by such Singapore party but in reality 20% of the price paid by the Singapore party was remitted back to him through one 'S'. The assessee paid a sum of Rs. 2,88,000/- to 'S' who remitted the equivalent amount to Singapore party. This expenditure was claimed by the assessee which was not allowed by the ITO. When the issue travelled to the Hon'ble Apex court it was observed that where the entire business of the assessee was illegal and the income of such illegal business was sought to be taxed, then expenditure incurred in illegal activities would also have to be allowed. But if the business was otherwise lawful and assessee resorts to unlawful means to increase his profits or reduce his loss, then the expenditure incurred on such unlawful activity cannot be allowed. In the case before us though assessee was carrying on lawful business of manufacturing and selling of tobacco but some of the sales have been kept outside the books by unlawful means i.e. by not paying the excise duty, then such expenditure i.e. payment of excise duty cannot be allowed.

13. We further find that in any case the fact of suppression of sales came to the notice of Income tax authorities. The only addition made by the AO was only in respect of GP. In fact against the addition of Rs. 1,01,92,569 being GP @ 19% on the suppressed sales of Rs. 5.36 crores as declared by the assessee was made in A.Y. 1993-94. Similarly, in A.Y. 1994-95 an addition of Rs. 3,32,34,424/- being GP @ 20% on the suppressed sales of Rs. 16.62 crores was made. Though these additions have been deleted finally by the Tribunal on technical issue but we are not concerned with that. The point to be remembered is that in the first place when an addition is made on the basis of GP, then obviously all expenses in relation to such sale receipts are deemed to have been allowed. Therefore, in this case also when an addition is made only at Rs. 1,01,92,569/- against the suppressed sales of Rs. 5.36 crores in A.Y 1993-94 and Rs. 3,32,34,424/- against the suppressed sales of Rs. 16.62 crores in A.Y 1994-95, then all expenses including expenditure on excise duty has to be treated as deemed to have been allowed by implication and there is no justification for claiming payment of excise duty separately in later year. In this view of this also the expenditure on payment of excise duty cannot be allowed.

14. Lastly, we would like to examine the issue from another angle, i.e. the concept is known as matching principle. The matching principle is a well-known accounting concept. According to this concept the revenue side has to be matched with the expenditure side; that means the expenditure which has been directly related to particular receipts is allowable because revenue side is matched with the expenditure for ascertaining the cost of such revenue. Considering this principle also the expenditure incurred on payment of excise duty is not matched by the revenue because sales against which excise duty was paid have been suppressed and not offered for taxation. In fact, AO has, as observed earlier, added only the GP against such suppressed sales. The sales which were suppressed were neither offered for tax by the assessee, nor was any addition made by the AO because addition made by the AO is only for Rs. 1,01,92,569/- in A.Y 1993-94 @ 19% of GP against the suppressed sales of Rs. 5.35 crores and Rs. 3,32,34,434/- against the suppressed sales of Rs. 16.62 crores in A.Y 1994-95 @ 20% of GP. This clearly shows that the only addition made is for gross profit declared by the assessee. Therefore, the excise duty has to be treated as deemed to have been allowed as additions have been made only for the gross profit. In other words, the claim for excise duty of Rs. 6,64,72,870/- is not matched by the revenue and cannot be considered as cost of the revenue and, therefore, same is not allowable. Our view is supported by the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd. v. Joint Commissioner Of Income-Tax [2003] 126 Taxman 544 wherein the matching concept was applied following the earlier celebrated decision of Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra).

15. In view of the above detailed discussion, we are of the view, that the expenditure incurred on payment of excise duty on suppressed sales which have never been added by the department to the income of the assessee has been rightly disallowed. Accordingly, we confirm the order of the ld. CIT(A).

16. In the result, appeal is dismissed.