2010 (9) TMI 36 - HC - Income Tax

Business Expenditure - The respondent- assessee filed a return declaring a loss of Rs. 3.81 crores. The appeal filed by the assessee against order of the Assessing Officer before the Commissioner (Appeals) was allowed. The Tribunal held that the assessee itself could not have known about liability in the earlier assessment year and the liability of the assessee under the agreement had arisen and accrued in August 2002, when the agreement was executed. It was under the agreement that the liability to pay for the period January 2002 to March 2002 arose. Thus, the assessee could only have claimed the liability as expenditure in assessment year 2003-04. Held that - if the assessee had shown the prior period income and the Assessing officer had not excluded it while working out the current year s taxable income then there was no reason on part of the Assessing Officer to disallow only one part of the prior period adjustment. The addition made by Assessing Officer could not be sustained.

Summary

Issues:
Challenge to deletion of addition of prior period expenses by ITAT.

Analysis:
1. The Income-tax Department filed an appeal challenging the ITAT's order deleting the addition of Rs. 1,34,34,500 made by the Assessing Officer on account of prior period expenses for the assessment year 2003-04.
2. The respondent-assessee entered into an agreement with retrospective effect, incurring expenses from January to March 2002, leading to a dispute on the crystallization of liability during the relevant previous year.
3. The CIT (A) allowed the appeal filed by the respondent-assessee against the Assessing Officer's order, which was further appealed by the Revenue.
4. The ITAT upheld the decision, stating that the liability under the agreement arose in August 2002, making the expenses deductible in the assessment year 2003-04.
5. The Revenue argued that the ITAT erred in law by allowing the expenses based on invoice dates, contrary to the actual expense incurrence period.
6. The Revenue cited the Bharat Earth Movers case, emphasizing that business liability deduction is permissible if the liability arises in the accounting year, even if quantification and discharge occur later.
7. The respondent-assessee contended that the liability crystallized in August 2002 with the agreement execution, justifying the deduction in the assessment year 2003-04.
8. Legal precedents like Nonsuch Tea Estate Ltd., Saurashtra Cement case, and Farasol Ltd. case were referenced to support the respondent's position on liability crystallization.
9. The court analyzed the Bharat Earth Movers case, clarifying that it addressed contingent liability, unlike the present case, which aligns with the principles in the cited legal precedents.
10. The court emphasized that the liability under the agreement crystallized in August 2002, making the expenses deductible in the relevant assessment year.
11. The Commissioner of Income-tax (Appeals) noted the prior period adjustments made by the assessee, highlighting the consistency in treatment of prior period income and expenditure.
12. Ultimately, the court dismissed the appeal, finding no substantial question of law, and upheld the ITAT's decision to delete the addition of prior period expenses, with no costs awarded.