2016 (7) TMI 1687 - AT - Income Tax

Disallowance of prior period expenses - AO made disallowance by observing that for the prior period expenses cannot be allowed as assessee is following mercantile system of accounting and that the assessee has not submitted any basis for determination as to when they crystallized - assessee as regularly followed same system of accounting - assessee submitted that assessee has submitted all the details pertaining to the expenses claimed under the head prior period expenses . No case has been made out that any voucher is missing or that expense is not genuine, branches spread over a vast area. The assessee is debiting the expenses split over to the subsequent years and the Assessing officer had been allowing the same - HED THAT - As system of accounting of the assessee has been regularly accepted by the Department in the past. There is no change in the facts and circumstances of the case. It has also been submitted that necessary details were duly submitted before the Assessing officer that all of the expenses are supported by proper vouchers and supporting evidence. It is not the case of the AO that any short coming has been noted in the vouchers. This is also not the case that any distortion in profit has been observed as compared to preceding year in view of the above said expenditure. In these circumstances, in our considered opinion, the Revenue has no cogent reason why the prior period expenses claimed by the assessee which have been consistently so claimed and allowed by the Department in earlier years should be disallowed in the current year. The case laws referred by assessee above duly support the above proposition. In this regard we may gainfully refer to the Hon'ble Delhi High Court decision in the case of CIT Vs. Jagjit Industries Limited 2010 (9) TMI 58 - DELHI HIGH COURT held that if a particular accounting system has been followed and accepted and there is no acceptable reason to differ with the same, the doctrine of consistency would come into play. The said accounting system has been followed for a number of years and there is no proof that there has been any material change in the activities of the assessee as compared to the earlier years. Nothing has been brought on record to show that there has been distortion of profit or the books of account did not reflect the correct picture in the absence of any reason whatsoever, there was no warrant or justification to depart from the previous accounting system which was accepted by the department in respect of the previous years. This system of accounting has been regularly followed and the Department has not disputed about this in the past. We also agree with the contention that the Assessing Officer has clearly erred in drawing adverse inference on the crystallization of these expenditures. It is not the case of the AO that any voucher of the assessee company has been found to be Jacking credibility. Thus assessee appeal allowed.

Summary

Issues Involved:
1. Disallowance of prior period expenses by the CIT(A).
2. Consistency in the accounting practice followed by the assessee.
3. Applicability of the doctrine of consistency.
4. Relevance of case laws cited by the assessee.

Detailed Analysis:

1. Disallowance of Prior Period Expenses by the CIT(A):
The primary issue in the appeals was the disallowance of prior period expenses by the CIT(A). The assessee, a public sector undertaking, had claimed prior period expenses amounting to Rs. 40,589,627/- in the P&L account for the assessment year 2010-11. The Assessing Officer (AO) disallowed these expenses on the grounds that they did not pertain to the relevant previous year, as the assessee follows the mercantile system of accounting. Additionally, the AO disallowed prior period expenses claimed under the procurement accounts for Wheat, Paddy, and Bajra, totaling Rs. 57,015,244/-, due to a lack of supporting evidence that the liability to pay arose in the relevant year.

Upon appeal, the CIT(A) partially upheld the AO's decision, granting relief of Rs. 8,581,955/- due to incorrect figures taken for prior period expenses but maintaining the disallowance of Rs. 1,178,531/- on the basis that the assessee failed to substantiate its claim with evidence that liabilities arose during the year under consideration.

2. Consistency in the Accounting Practice Followed by the Assessee:
The assessee argued that it consistently followed an accounting practice where expenses not reported or identified by the end of the year were subsequently booked as prior period expenses. This practice had been accepted by the Department in previous years. The assessee submitted that all expenses were supported by proper vouchers and evidence, and no discrepancies were noted by the AO in the vouchers.

3. Applicability of the Doctrine of Consistency:
The assessee contended that the doctrine of consistency should apply, as there was no change in the facts and circumstances of the case compared to previous years. The assessee cited several case laws to support this argument, including:
- CIT Vs. Jagatjit Industries Limited (Delhi High Court)
- Saurashtra Cement & Chemical Industries Ltd v CIT (Gujarat High Court)
- M/s Heavy Engineering Corpn Ltd, Ranchi v DCIT (ITAT Ranchi Bench)
- DCIT Vs. Mecon Ltd, Ranchi (ITAT Ranchi Bench)

The Department, represented by the Ld. DR, argued that the doctrine of consistency was not applicable in this case because the assessee was previously assessed as a charitable trust and later as an AOP. The Ld. DR also emphasized that the assessee's accounts were not governed by the Companies Act, and the case laws cited by the assessee pertained to companies, not state government undertakings.

4. Relevance of Case Laws Cited by the Assessee:
The Tribunal examined the case laws cited by the assessee and found them relevant. The Hon'ble Delhi High Court in CIT Vs. Jagatjit Industries Limited emphasized that if a particular accounting system has been consistently followed and accepted by the Department, there should be no departure from it without a valid reason. Similarly, the ITAT Ranchi Bench in DCIT Vs. Heavy Engineering Corporation Ltd upheld the consistent accounting practice of booking prior period expenses when not reported or identified by the end of the year.

Conclusion:
The Tribunal concluded that the Revenue had no cogent reason to disallow the prior period expenses consistently claimed and allowed by the Department in earlier years. The Tribunal rejected the submissions of the Ld. DR, emphasizing that the doctrine of consistency applies and that the assessee's accounting practice was valid and supported by proper vouchers and evidence. Consequently, the Tribunal set aside the orders of the authorities below and allowed the appeals filed by the assessee.