2021 (4) TMI 760 - AT - Income Tax

Addition of Prior period expense - AO has disallowed prior period expenses on the ground that same pertain to earlier years - justification of how the expenses crystallized in the year under consideration - HELD THAT - The assessee is following Mercantile system of accounting. Prior period expense are generally those expenses which are relating to the current year in the sense they are crystallized during the year, though relating to activities of an earlier year. For accounting purposes these are generally known as prior period items and required to be shown separately. Normally, where mercantile system of accounting is followed, expenses relating to relevant year are accounted for in that year. However, prior period expenses had to be allowed in subsequent years if those expenses are crystallized in that year. CIT(A), which have been reiterated before us, the assessee has contended that bill in respect of professional charges of ₹ 42,000/-was received on 30/04/2008 - Counsel before us referred to page No. 7 of the paper-book, which is a copy of the said Bill and submitted that bill was processed finally on 19/01/2009 by the finance division, before travelling through various Department of the assessee company. Regarding other bills of ₹ 43,491/-; ₹ 50,000; and ₹ 23,021 also similar submissions have been made by the learned Counsel of the assessee. We find that Tribunal Jaipur bench in the case of State Bank of Bikaner and Jaipur 2014 (11) TMI 264 - ITAT JAIPUR held that expenses of the previous year are allowable in the respective year to which they pertained but information as regard to such expenses with evidence was received by the assessee from the various branches after closing of books of accounts, and hence same are allowable during the year under consideration. Before us also, the genuineness of the expenses has not been doubted by the lower authorities. Since in the instant case the bills for expenses under consideration have been processed by various divisions of the assessee and finally approved in the year under consideration, and thus, respectfully following the decision of the Tribunal in the case of State Bank of Bikaner and Jaipur (supra), the liability for the expenses was finally settled and crystallised in the year under consideration. Accordingly, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete the addition made by the Assessing Officer for prior period expenses. The ground of the appeal of the assessee is accordingly allowed.

Summary

Issues Involved:
1. Disallowance of Royalty Expenditure.
2. Rejection of Comparable in Comparability Analysis.
3. Disallowance of Prior Period Expenses.

Detailed Analysis:

1. Disallowance of Royalty Expenditure:
The Revenue's appeal contended that the Commissioner of Income Tax (Appeals) erred in deleting the addition of ?1,39,00,000/- made by the Assessing Officer (AO) on account of disallowance of royalty expenditure. However, the Learned Departmental Representative (DR) submitted that the tax effect involved in the appeal of the Revenue is less than the prescribed limit for filing an appeal before the Income Tax Appellate Tribunal (ITAT), as per the CBDT Circular No. 17/2019 dated 08th August 2019. Consequently, the appeal by the Revenue was dismissed as withdrawn with the liberty to file an application for recalling the appeal if the tax effect is found to be more than the prescribed limit or if the case falls under any exceptions in the circular.

2. Rejection of Comparable in Comparability Analysis:
The assessee's appeal raised issues regarding the rejection of a comparable in the comparability analysis by the AO/Transfer Pricing Officer (TPO). However, during the hearing, the counsel for the assessee did not press Grounds No. 1 and 2 of the appeal. Consequently, these grounds were dismissed as infructuous.

3. Disallowance of Prior Period Expenses:
The assessee contested the disallowance of ?1,58,512/- on account of prior period expenses, arguing that these expenses accrued during the relevant assessment year despite pertaining to the previous accounting period. The AO disallowed these expenses on the grounds that they pertained to earlier years. The assessee provided a detailed submission with a breakup of the expenses, justifying how the expenses crystallized in the year under consideration. The CIT(A) upheld the disallowance, following the order of his predecessor, stating that the expenses were prior period expenses and could not be allowed unless proved otherwise.

The ITAT, upon hearing the rival submissions and perusing the relevant material on record, found that the expenses, though related to earlier years, were crystallized in the year under consideration. The Tribunal referred to a similar case (State Bank of Bikaner and Jaipur Vs ACIT 2014) where expenses of the previous year were allowed in the respective year if the information and evidence regarding such expenses were received after closing the books of accounts. The ITAT concluded that since the bills for the expenses were processed and approved in the year under consideration, the liability for these expenses was settled and crystallized in that year. Therefore, the ITAT set aside the CIT(A)'s findings and deleted the addition made by the AO for prior period expenses of ?1,58,512/-.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed, specifically concerning the prior period expenses. The ITAT pronounced the order in the open court on 19th March 2021.