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2021 (5) TMI 1030 - AT - Income TaxDisallowance made on account of prior period expenses - crystalization of work/services rendered in earlier year - mercantile system of accounting followed - HELD THAT - We find that similar disallowances made by the ld. AO were deleted by this Tribunal in assessee s own case upto Asst Year 2005-06 2021 (2) TMI 733 - ITAT MUMBAI Respectfully following the aforesaid decision we find no infirmity in the order of the ld. CIT(A) deleting the disallowance made on account of prior period expenses. Accordingly the grounds raised by the Revenue are dismissed.
Issues Involved:
1. Justification of disallowance of prior period expenses. 2. Consistency in the method of accounting for prior period expenses. 3. Applicability of statutory mandates and accounting standards. 4. Examination of the Tribunal and High Court precedents on prior period expenses. Issue-Wise Detailed Analysis: 1. Justification of Disallowance of Prior Period Expenses: The core issue in this appeal was whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the disallowance made on account of prior period expenses. The Assessing Officer (AO) had disallowed a sum of Rs. 158,21,51,478/- on account of prior period expenses, arguing that these expenses did not crystallize during the year under consideration. However, the CIT(A) deleted this disallowance by relying on a previous order for the assessment year (A.Y.) 2001-02, where similar disallowances were also deleted. 2. Consistency in the Method of Accounting for Prior Period Expenses: The Tribunal noted that the assessee, a State Government undertaking engaged in electricity generation and distribution, followed a consistent accounting method. The CIT(A) observed that the expenses had crystallized during the year under consideration and were in accordance with the method of accounting regularly followed by the assessee in previous years. The Tribunal upheld this view, emphasizing that the accounting method was consistent and accepted by the Revenue in earlier assessments. 3. Applicability of Statutory Mandates and Accounting Standards: The Tribunal highlighted that the assessee's accounts were prepared as per the mandate provided under the Electricity Act and the Commercial Accounting System for State Electricity Boards, which required prior period expenses and revenues to be shown separately. The CIT(A) recognized that the assessee's method of accounting was compliant with the statutory mandates and the Accounting Standard No. II issued by the CBDT, which requires prior period items to be separately disclosed in the Profit & Loss account. This statutory mandate supported the assessee's practice of accounting for prior period expenses. 4. Examination of the Tribunal and High Court Precedents on Prior Period Expenses: The Tribunal referred to its own previous decision in the assessee's case for A.Y. 2001-02, where similar disallowances were deleted. The Tribunal also cited the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Mahanagar Gas Ltd., which dealt with a similar issue. The High Court upheld the CIT(A)'s decision to allow prior period expenses that crystallized during the assessment year, emphasizing the need for consistency in accounting practices. The Tribunal found no infirmity in the CIT(A)'s order, which was in line with these precedents. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance of prior period expenses. The Tribunal found that the assessee's method of accounting was consistent, compliant with statutory mandates, and had been accepted by the Revenue in previous years. The Tribunal also relied on precedents from both the Tribunal and the High Court, which supported the allowance of prior period expenses that crystallized during the assessment year.
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