2017 (10) TMI 1577 - AT - Income Tax

Addition on account of prior period expenses - HELD THAT - The assessee is a government organization following the mercantile system of accounting where the expenses are recognized only when they are crystallized. It was further stated that these expenditure have been crystallized during the year and therefore there been accounted so. Assessee is also explained various reason why the expenditure have been crystallized during the year such as receipt of claim from subcontractors a later date when the work was duly carried out in completed in earlier years, acceptance of additional claims, receipt of invoices of materials and later date, measurement of work done by the client after the closing of the accounts, staff salary payments revision of pay structures etc with retrospective effect. The identical issue arose in the case of the assessee wherein for assessment year 2006 2007 the Ld. CIT appeal has allowed the claim of the assessee relying upon the decision in case of Saurashtra cement and chemicals industries Ltd versus CIT 1994 (10) TMI 30 - GUJARAT HIGH COURT . DR could not controvert the findings of the CIT appeal as well as could not place before us any reason that the expenditure has not been crystallized during the year. - Decided against revenue.

Summary

Issues:
1. Reopening of assessment and prior period expenses disallowance.

Analysis:
1. The appeal was filed by the revenue against the order of the ld CIT (A)-XIX, New Delhi for the Assessment Year 2005-06. The Revenue raised grounds related to the prior period expenses and the nature of details furnished during the original assessment proceedings under section 143(3) of the Income Tax Act. The main contention was that the assessee had not provided sufficient information regarding the prior period expenses, leading to a disallowance of a specific amount. The assessment was completed initially, but a notice under section 148 was issued later, resulting in the disallowance of a significant sum as prior period expenses.

2. The assessee, a government organization following the mercantile system of accounting, argued that the expenses in question had crystallized during the year and were accounted for accordingly. Various reasons were provided to justify the crystallization of these expenses, such as delayed receipt of subcontractor claims, acceptance of additional claims, delayed invoice receipts, and revisions in pay structures. The Ld. CIT (A) had allowed similar claims in earlier years based on legal precedents and upheld the assessee's contentions. The Tribunal referred to a decision by the Hon'ble Gujarat High Court emphasizing that expenses incurred in the current year should be recognized even if they relate to transactions from previous years, as long as the liability has crystallized during the current year.

3. The Tribunal analyzed the arguments presented by both the departmental representative and the authorized representative of the assessee. It noted that the revenue failed to provide any justification for disallowing the claim of the assessee based on abstract propositions. The Tribunal emphasized that under the mercantile system, expenses should be recognized when the liability is determined and crystallized during the relevant year. It cited a case from the Gauhati High Court to support the principle that genuine expenditures laid out during the current year, even if related to previous transactions, should be allowed as deductions. The Tribunal found no reason to overturn the decision of the Ld. CIT (A) and dismissed the appeal of the revenue, upholding the deletion of the addition related to prior period expenses.

4. Ultimately, the Tribunal dismissed the appeal of the revenue, stating that the Ld. CIT (A) had correctly deleted the addition of prior period expenses based on the merits of the case and legal precedents. The order pronounced on 27/10/2017 upheld the decision in favor of the assessee, emphasizing the recognition of expenses crystallized during the relevant assessment year under the mercantile system of accounting.