2016 (12) TMI 176 - AT - Income Tax

Prior period expenses allowance - Held that - The project was sold in the preceding year but based on the minor defects and deficiencies pointed out by the buyer during the previous year relevant to the assessment year, these expenses were incurred by the assessee during the previous year relevant to the impugned assessment year to rectify those minor defect and deficiencies pointed out by buyers and hence cannot be considered to be prior period expenses as the same were arisen, accrued and incurred in the impugned assessment year and are wholly and exclusively for the purposes of business of the assessee. In our considered view, these are not prior period expenses but have arisen, accrued and incurred during previous year relevant to impugned assessment year and are wholly and exclusively connected with the project which was already sold in March, 2008 and hence have direct and live nexus with the business carried on by the assessee. Thus, based on our detailed discussion and reasoning as set-out above, we order deletion of the additions as made by the AO and sustained by the learned CIT(A). - Decided in favour of assessee.

Summary

Issues:
1. Confirmation of addition made by the Assessing Officer of expenses not considered as prior period.
2. Assumption by the Commissioner of Income tax (Appeals) regarding provisions for unforeseen expenses.

Analysis:
1. The appeal was filed against the appellate order confirming the addition of expenses not considered as prior period. The Assessing Officer disallowed expenses related to a project, stating they were not related to any project undertaken by the assessee and were not allowable under section 37(1) of the Income Tax Act, 1961. The assessee failed to make provisions for these expenses in earlier years. The Commissioner of Income tax (Appeals) upheld this decision, citing accounting standards related to prior period items. However, the Tribunal noted that the expenses were incurred to rectify defects pointed out by the buyer after the project was sold in the preceding year. The Tribunal ruled in favor of the assessee, stating that these expenses were not prior period expenses but were incurred during the relevant assessment year and were necessary for the business.

2. The second issue involved the assumption by the Commissioner of Income tax (Appeals) that the assessee should have made provisions for unforeseen expenses. The assessee argued that the expenses were incurred after the completion of the project to rectify minor defects and deficiencies pointed out by the buyer. The Tribunal agreed with the assessee, stating that these expenses were not prior period expenses but were directly related to the project sold in the preceding year. The Tribunal ordered the deletion of the additions made by the Assessing Officer and upheld by the Commissioner of Income tax (Appeals), allowing the appeal filed by the assessee for the assessment year 2009-10.

In conclusion, the Tribunal ruled in favor of the assessee, stating that the expenses in question were not prior period expenses but were necessary for the business and directly related to the project sold in the preceding year. The Tribunal ordered the deletion of the additions made by the Assessing Officer and sustained by the Commissioner of Income tax (Appeals), allowing the appeal for the assessment year 2009-10.