2014 (11) TMI 1268 - AT - Income Tax

Allowability of prior period expenses - recompute the loss for assessment year 2006-07, as these were not allowable - HELD THAT - CIT(A) examined these facts and has held that prior period expenses are below the line adjustment and are carried to balance sheet but not claimed for income-tax purpose. He accordingly directed the Assessing Officer to verify the same and recompute the loss. Though the Revenue has challenged the order of the ld. CIT(A), but could not point out any infirmity therein, as the assessee has not included the prior period expenses in the computation of income. Therefore, there is no question of disallowance. He, however, referred the matter to the A.O. for re-computation of loss after verification. Therefore, we find no infirmity in the order of the ld. CIT(A) and we accordingly confirm the same. Netting of prior period expenses and prior period income - Disallowance be restricted to the net prior period expenses debited to the profit and loss account - HELD THAT - Revenue has preferred an appeal before the Tribunal with the submission that netting between prior period expenses and prior period income may be permissible, but the net prior period expenses cannot be allowed against current income of the impugned financial year. Therefore, disallowance be restricted to the net prior period expenses debited to the profit and loss account. To this effect, the ld. counsel for the assessee has no objection. Assessee has further submitted that the entire prior period expenses cannot be disallowed, as it can be set off against the prior period income. If any disallowance is required to be made, it can only be restricted to net prior period expenses debited to the profit and loss account of the current year unless and until it is crystalised in the current year. In this regard, no direction was made by the ld. CIT(A) and the AO has also not looked into this aspect of the matter. We accordingly modify the order of the ld. CIT(A) and restore the matter to the AO with a direction to make necessary verification and if any disallowance is required to be made, it can only be made with respect to the net prior period expenses debited to the profit and loss account of the current year, if it is not crystalised during the impugned financial year.

Summary

Issues:
1. Allowability of prior period expenses in computation of income for assessment year 2006-07.

Analysis:
The Revenue appealed against the order of the ld. CIT(A) on the ground that the ld. CIT(A) directed the Assessing Officer to verify the issue of allowability of prior period expenses amounting to Rs.3,62,98,289/- and recompute the loss for the assessment year 2006-07. The Assessing Officer disallowed these expenses as they pertained to a prior period and added them to the total income of the assessee. The ld. CIT(A) considered the contentions of the assessee and noted that the prior period expenses were below the line adjustment and carried to the balance sheet without being claimed for income-tax purposes. The ld. CIT(A) directed the Assessing Officer to verify this and recompute the loss. The Tribunal found no infirmity in the order of the ld. CIT(A) as the assessee did not include the prior period expenses in the computation of income, thereby confirming the decision.

In another appeal, similar issues arose regarding the allowability of prior period expenses against current income. The ld. CIT(A) examined the case in light of relevant judgments and allowed netting of prior period expenses against prior period income. The Revenue contended that net prior period expenses should not be allowed against the current income of the financial year. The Tribunal modified the ld. CIT(A)'s order and directed the Assessing Officer to verify and make any necessary disallowance only with respect to the net prior period expenses debited to the profit and loss account of the current year if not crystallized during the financial year. Consequently, the appeal of the Revenue in one case was dismissed, while in the other case, it was allowed for statistical purposes.

Overall, the judgments focused on the treatment of prior period expenses in the computation of income for the respective assessment years, emphasizing the need for proper verification and adjustment based on the nature of these expenses and their impact on the financial statements.