2011 (7) TMI 537 - AT - Income Tax

Disallowances - Prior period expenses - rectification order under sec. 154 - Held that - It is well settled that merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallized in that year on the basis of maintaining accounts on the mercantile method - In each case, where the accounts are maintained on the mercantile basis, it has to be found in respect of any claim, whether such liability was crystallized and quantified during the relevant previous year so as to be required to be adjusted in the books of account of that previous year - If any liability, though relating to the earlier year, depends upon making a payment and its acceptance by the assessee and such liability has been actually claimed and paid in the later years, it cannot be disallowed as a deduction merely on the basis the accounts are maintained on mercantile basis and is related to a transaction of the earlier year - Therefore, hold that allowability or otherwise of prior period expenses claimed in the profit and loss account is a debatable matter and, therefore, it does not come within the purview of sec. 154 - Decided in favour of assessee. Excess depreciation claimed on computers and computer related items - Held that - As decided in the case of Containers Corp. Ltd. (2009 (2) TMI 499 - ITAT DELHI) printers, scanners and other peripherals are part and parcel of computer and are entitled for depreciation @ 60% - The Hon ble Delhi High Court has also upheld the order of the Tribunal allowing depreciation @ 60% on computer accessories and peripherals in the case of CIT vs. BSES Rajdhani Powers Ltd 2010 (8) TMI 58 - DELHI HIGH COURT - The question as to whether the computer accessories and peripherals are allowable for depreciation at higher rate of 60% is a subject matter of debate and deliberation and cannot be said to be an error apparent on record so as to rectify the matter u/s 154 of the Act - Decided in favour of assesseee.

Summary

Issues Involved:
1. Deletion of addition on account of prior period expenses.
2. Deletion of addition on account of excess depreciation claimed on computers and computer-related items.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Prior Period Expenses:
The original assessments for the Assessment Years (AY) 2003-04 and 2004-05 were completed under section 143(3) of the Income-tax Act, 1961, and subsequently revised. The Assessing Officer (AO) observed that the assessee had claimed prior period expenditure in the Profit and Loss Account, which was disallowed by the AO on the grounds that the assessee followed the mercantile system of accounting. The AO contended that only expenses relevant to the current year should be allowed, thus disallowing prior period expenses.

The assessee appealed this decision, arguing that there was no mistake apparent from the record in the original assessment orders, and hence, the AO was not justified in passing an order under section 154 of the Act to disallow prior period expenditure. The assessee cited several judicial decisions supporting the claim that such disallowances cannot be rectified under section 154, as they do not constitute a mistake apparent from the record.

The Commissioner of Income-tax (Appeals) [CIT(A)] agreed with the assessee, holding that the issues involved were debatable and could not be categorized as mistakes apparent from the record. The CIT(A) emphasized that determining whether prior period expenses should be allowed requires examining when these expenses were actually crystallized, which is a matter of investigation and not a clear-cut error. Consequently, the CIT(A) deleted the additions made by the AO.

2. Deletion of Addition on Account of Excess Depreciation Claimed on Computers and Computer-Related Items:
The AO also disallowed the depreciation claimed by the assessee at the rate of 60% on computer accessories such as printers, scanners, UPS, etc., arguing that the correct rate should be 25%. This disallowance was also made under section 154 of the Act.

The assessee contended that the rate of depreciation on computer accessories was a debatable issue, supported by decisions from the ITAT and the Delhi High Court, which held that computer peripherals are part of computers and eligible for 60% depreciation. The CIT(A) concurred with the assessee, stating that the rate of depreciation on computer peripherals is a matter of debate and cannot be rectified under section 154 as a mistake apparent from the record.

Conclusion:
The Tribunal upheld the CIT(A)'s orders for both AY 2003-04 and 2004-05, agreeing that the issues of prior period expenses and the rate of depreciation on computer peripherals are debatable and do not fall within the scope of section 154 for rectification of mistakes apparent from the record. Thus, the appeals filed by the revenue were dismissed.