2024 (4) TMI 52 - AT - Income Tax

Disallowance of prior period expenditure - Mercantile system - Matching principles of accounting - AO found that assessee was following mercantile system of accounting and had debited prior period expenses in its Books of Accounts and held that expenses accrued during the year under consideration were allowable that as per the matching principles of accounting prior period expenses could not be allowed while computing the income for the AY 2008-09 - HELD THAT - As decided in assessee s own case 2013 (3) TMI 876 - ITAT NAGPUR wherein as held Prior period expenses are not a new phenomenon in the filed of accounting or taxation laws. Courts are of the view that if the expenditure incurred in particular year are crystalised in a subsequent year because of certain reasons same cannot be dis-allowed only on the ground that assessee is following Mercantile system of Accounting. If assessee is following a particular system of accounting and it is not distorting income treatment of prior period expenses loses its importance. In the case under consideration assessee was following the same system for the last so many years and the AO was allowing the prior period expenses for the relevant years. AO/FAA has not challenged the claim made by the assessee that it was following this practice consistently. They have also not held that because of prior period expenses the taxable income of the assessee remained un-taxed. The issue can be seen from another angle expenditure incurred by the assessee is not in doubt. It is not the case of the Revenue Authorities that expenditure was never incurred. The allowability of such expenditure in a particular year has to be decided in pragmatic manner. Deferred revenue expenditure - The Co-ordinate Bench in assessee s own case for A.Y. 2008-09 2013 (3) TMI 876 - ITAT NAGPUR has discussed the decision of the Hon ble Bombay High Court in the case of Taparia Tools Ltd. 2003 (1) TMI 83 - BOMBAY HIGH COURT - After considering the said decision the ITAT Nagpur Benchin own case of assessee has allowed the appeal of the assessee. Therefore there is no merit in Ground No.2 of the Revenue accordingly Ground No.2 is dismissed.

Summary

Issues involved: Appeal against order of ld. Commissioner of Income Tax (Appeal) for A.Y. 2018-19 u/s 250 of the Income Tax Act, 1961 regarding prior period expenses.

Issue of Prior Period Expenses:
The ld. Authorised Representative of the assessee explained that the ld.CIT(A) decided the appeal based on ITAT Nagpur Decision in assessee's own case for A.Y. 2008-09. The ld.AR argued that the Revenue's case lacks merit. The ld. Departmental Representative for the Revenue relied on the Assessing Officer's order. The ITAT, after hearing both parties, agreed with the ld.CIT(A) and dismissed the Revenue's appeal following the law of consistency and the ITAT Nagpur Decision in the assessee's own case. The ITAT considered the issue of disallowance of depreciation on office appliances and disallowance of prior period expenditure amounting to Rs. 3.65 lakhs. The ITAT referred to previous decisions and held that prior period expenses were allowable to the assessee as they were consistently followed and did not distort profits. The ITAT cited decisions of various High Courts and the Mumbai Tribunal to support its conclusion. Consequently, Ground No.1, 3 & 4 of the Revenue were dismissed, and Ground No.2 was also dismissed based on previous decisions.

Decision and Analysis:
The ITAT found that the assessee's treatment of prior period expenses was in line with the mercantile system of accounting. It noted that the expenses accrued after the end of the relevant year and were consistently accounted for by the assessee. The ITAT emphasized that the allowability of such expenses should be decided pragmatically, considering the circumstances. It highlighted that the Revenue Authorities did not challenge the consistent practice of the assessee or claim that the taxable income remained untaxed due to prior period expenses. The ITAT referred to various High Court decisions and the Mumbai Tribunal to support its decision in favor of the assessee. The ITAT dismissed the Revenue's appeal, upholding the assessee's treatment of prior period expenses.