ITAT Holds Accrued Share of Profit Expense Allowable Despite Non-Payment:

Venus Records and Tapes LLP was engaged in the business of production, sale, distribution and exhibition of films, acquisition and exploitation of film rights, and creation or acquisition and exploitation of music and audio rights. For Assessment Year 2022-23, the assessee filed its return declaring total income of Rs 9,33,05,980. During the relevant year, it claimed expenditure of Rs 8,46,52,408 towards “share of profit in overflow” payable to the concerned parties. Out of this amount, Rs 5,22,77,057 was actually paid during the year, while Rs 3,23,75,351 remained outstanding at the year-end.

The AO accepted the payment of Rs 5,22,77,057 after verification from the bank statements but disallowed the outstanding Rs 3,23,75,351 on the ground that it had not been paid during the relevant previous year. Consequently, the assessment was completed under Section 143(3) read with Section 144B of the Income Tax Act. The CIT(A) deleted the addition. The Revenue contended before the Tribunal that the liability was contingent because the assessee had insufficient funds to discharge it and argued that the principle laid down in Bharat Earth Movers Case was distinguishable. The Tribunal, however, rejected this contention. 

The Tribunal noted that the liability had been recorded in the books pursuant to the arrangement with the concerned investors and that the AO had not brought any material on record to establish that the liability had not accrued or had ceased to exist during the relevant previous year. 

The Tribunal held that the disallowance could not be sustained merely because the liability remained unpaid at the end of the relevant previous year, particularly when it had accrued under the mercantile system and was not covered by Section 43B. Accordingly, the Tribunal upheld the CIT(A)’s order and dismissed the Revenue’s appeal.