2015 (7) TMI 993 - AT - Income Tax

Disallowance of Prior Period Expenses - CIT(A) deleted the addition made on account of demurrage charges - Held that - These charges are in the nature of late payments/detention charges paid to freight forwarders and clearing agents for keeping the goods beyond prescribed time in the respective ports. None of these are penalties for violation of law of land. From the details of demurrage charges payments it is seen that none of these payments is made to any government agency and hence the same is in the nature of non fulfillment of contractual obligations to which the explanation to 37(1) does not apply. Thus demurrage charges claimed by the assessee is an allowable expenditure and hence Assessing Officer is directed to allow the same - Decided against revenue. Prior period expenditure cannot be claimed as deduction in the year under consideration - Held that - alternative submission that both prior period income and prior period expenditure was shown in the annual reports and only the net figure was taken into consideration in the books of account; if the prior period expenditure is disallowed on the ground that it does not pertain to this year, the assessing officer cannot blow hot and cold and accept the prior period income as pertaining to this year. In short his contention is that even prior period income should be excluded if it is not crystalised in this year. Similar issue was considered by us in the appeal for the assessment year 2007-08. For the reasons given therein, we uphold the order of the CIT(A) with regard to prior period expenses but direct the assessing officer to consider the plea of the assessee with regard to the prior period income. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of prior period expenses.
2. Deduction of demurrage charges.
3. Addition of prior period expenses.
4. Assessment of prior period income.

Issue-wise Detailed Analysis:

1. Disallowance of Prior Period Expenses:
The assessee, a Public Sector Undertaking, claimed various prior period expenses in the assessment years 2007-08 and 2008-09. The assessing officer disallowed these claims, stating that there is no provision in the Act for claiming prior period expenditure in subsequent years. The CIT(A) upheld this view, noting that the expenses were not related to the current year and were already crystallized in previous years. The tribunal concurred, stating that the expenses did not pertain to the current year and were not crystallized during the year under consideration. However, it directed the assessing officer to reconsider the prior period income, implying that if the prior period income was not crystallized during the current year, it should not be taxed.

2. Deduction of Demurrage Charges:
The revenue argued that demurrage charges paid by the assessee were in the form of infraction of law and thus not allowable as a deduction under section 37(1) of the Act. The CIT(A) disagreed, stating that these charges were late payments or detention charges paid to freight forwarders and clearing agents, not penalties for violating the law. The tribunal upheld the CIT(A)'s decision, confirming that demurrage charges are allowable as a deduction since they were not penalties.

3. Addition of Prior Period Expenses:
For the assessment year 2007-08, the department contended that the CIT(A) erred in deleting the addition of Rs. 2.16 crores, arguing it was prior period expenditure. The assessee claimed that the liabilities were based on estimated expenditures and got crystallized only during the relevant previous year. The CIT(A) accepted this explanation, stating that some approvals and finalizations naturally spill over to the next year. The tribunal upheld this view, agreeing that the expenditure was crystallized during the year under consideration.

4. Assessment of Prior Period Income:
The assessee argued that if prior period expenses are disallowed, prior period income should also not be considered for the current year. The tribunal noted that the assessing officer had implicitly accepted the prior period income, which amounted to a "pick and choose" method. It directed the assessing officer to reconsider the prior period income, ensuring that only amounts crystallized during the current year are taxed.

Summary Judgment:
The tribunal partly allowed the appeals filed by the assessee for both assessment years, directing the assessing officer to reconsider the prior period income. The appeals filed by the revenue for both years were dismissed, confirming that demurrage charges are deductible and upholding the deletion of additions related to prior period expenses.