2017 (5) TMI 1480 - HC - Income Tax

Deletion of Prior Period Expenses - following mercantile system of accounting - reasons to believe must record reasons - eligible for deduction during the current year provided the liability was determined and crystallized during the relevant year.- Held That - Mere suspicion is not enough for disallowance but proper reasons to believe must record reasons the reading of which should demonstrate that such a reasonable belief could be formed on some basis/foundation that income has escaped assessment. - Decided in favor of assessee and against revenue.

Summary

Issues:
Appeal against Tribunal's order dismissing department's appeal; Deletion of prior period expenses by Assessing Officer under mercantile system of accounting.

Analysis:
The appellant challenged the Tribunal's decision dismissing the department's appeal. The Court framed the question of law regarding the deletion of prior period expenses amounting to ?1,55,40,777 by the Assessing Officer under the mercantile system of accounting. The case involved the filing of a return of income declaring a loss, which was processed under section 143(1) of the Income Tax Act, 1961. The assessment proceedings were initiated under section 143(2) with notices issued to the assessee. The Assessing Officer (AO) observed an allocation error in the profit and loss account, leading to an inflation of expenditure. The management's response did not provide a satisfactory explanation, and the AO decided to add the amount of allocation error to the total income of the assessee. This decision was upheld by the Tribunal.

The respondent's counsel argued that the issue was covered by previous court decisions, citing the Chambal Fertilizers case and a Delhi High Court judgment. These decisions emphasized that prior period expenses are deductible in the current year if the liability was determined and crystallized during that year. The counsel highlighted that the Assessing Officer's reasons to believe that certain expenses had not crystallized were not based on concrete evidence, as the notes to the accounts indicated otherwise. The Court agreed with the respondent's arguments, stating that the Assessing Officer's suspicion of income escaping assessment was not sufficient to disallow the prior period expenses. Relying on the legal precedents, the Court ruled in favor of the assessee, leading to the dismissal of the appeal against the department.

In conclusion, the High Court upheld the deletion of prior period expenses by the Assessing Officer, emphasizing the importance of concrete evidence and adherence to accounting principles under the mercantile system. The decision was based on legal precedents and the lack of a valid basis for disallowing the expenses, ultimately resulting in the dismissal of the department's appeal.