2015 (6) TMI 1169 - AT - Income Tax

Addition of Prior Period Expenses - addition for want of proof and necessary evidence - Held that - CIT(A) has duly associated the assessing authority with assessee s additional submissions. It submitted its report on 5.8.2011. The lower appellate order relies upon the assessee s Board s resolution dtd. 15.9.2003 to prove the direct payments in question. The assessee s payments made in the earlier assessment years have nowhere been doubted. The assessee has been able to prove both payment of liability as well as its crystallization. The Revenue fails to point out any irregularity or infirmity in the findings under challenge during the course of hearing. Nor has it placed on record any evidence disputing payment made in preceding assessment years. - Decided against revenue.

Summary

Issues Involved:
Appeal against deletion of prior period expenses disallowance/addition of Rs. 16,65,118 for AY 2004-05 under section 143(3) of the Income Tax Act 1961.

Analysis:

1. Nature of Expenditure and Accounting System:
The appellant, engaged in manufacturing automobile components, claimed Rs. 16,65,118 as prior period expenses related to labour contractors. The Assessing Officer (AO) disallowed the claim, citing lack of proof of crystallization of the expenditure in the relevant financial year and rejected the appellant's explanations. The AO made the disallowance/addition of the claimed amount.

2. Appellant's Submissions and CIT(A) Decision:
The CIT(A) reversed the AO's decision based on the appellant's submissions. The appellant detailed the payments made to labour contractors due to a dispute in 2002, which led to the contractors running away. The appellant argued that the disputed liabilities were settled in the financial year 2003-04, justifying the claim of prior period expenditure. The CIT(A) considered the Board Resolution of 2003 and accepted the appellant's justification for the liability crystallization in FY 2003-04. The CIT(A) found no irregularity in the appellant's submissions and deleted the addition of Rs. 16,65,118.

3. Judicial Precedents and Mercantile Accounting System:
The appellant relied on legal precedents like CIT v. Phalton Sugar Works Ltd. and Saurashtra Cement & Chemical Industries Ltd. v. CIT to support its claim that disputed liabilities under the mercantile accounting system could be claimed when settled. The appellant's compliance with the accounting system and the settlement of disputes in FY 2003-04 were crucial in justifying the prior period expenses.

4. Appellate Tribunal's Decision:
The Appellate Tribunal upheld the CIT(A)'s decision, emphasizing that the appellant had proven the payments made in earlier assessment years and the crystallization of liability in FY 2003-04. The Tribunal found no fault in the CIT(A)'s findings and rejected the Revenue's appeal, stating that no irregularity or evidence disputing the payments in previous years was presented. The Tribunal dismissed the Revenue's appeal, affirming the deletion of the prior period expenses disallowance/addition.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 16,65,118 for prior period expenses, emphasizing the appellant's compliance with the accounting system and the settlement of disputed liabilities in the relevant financial year.