2015 (10) TMI 1595 - AT - Income Tax

Prior period expenditure disallowed - assessee canvassed that though the impugned expenses were incurred during the period January 2002, to March 2002 but the liability therein had crystallized only on execution of the agreement in August 2002 and, therefore, such expense was an allowable deduction in the assessment year 2003-04 - Held that - Decision of the CIT Vs. Exxon Mobil Lubricants P. Ltd. 2010 (9) TMI 36 - DELHI HIGH COURT does not support the case of the Revenue before us, and, rather it supports the proposition canvassed by the assessee to the effect that the liability is to be allowed as deduction in the year in which it has crystallized. Factually speaking, the liability in question has crystallized during the year under consideration, as noted by us in the earlier paras and, therefore, in our view, the lower authorities have erred in disallowing the impugned expense. As a consequence, we set aside the order of CIT(A) and direct the Assessing Officer to delete the addition - Decided in favour of assessee.

Summary

Issues: Disallowance of interest expenditure as prior period expenditure.

Analysis:
1. The appeal was filed against the CIT(A)'s order arising from the Assessing Officer's decision disallowing interest expenditure of Rs. 38,98,474 paid to M/s. Hindalco Industries Ltd. The Assessing Officer held the expenditure was not allowable for the current year as it pertained to the previous assessment year under the mercantile system of accounting.

2. The appellant argued that the liability for the interest expenditure crystallized during the current assessment year, supported by debit notes issued by Hindalco Industries Ltd. within the relevant period. The Revenue contended that the expenditure related to purchases from the previous year and was a prior period expenditure rightly disallowed by the lower authorities.

3. The Tribunal found merit in the appellant's argument that the liability for the interest expenditure crystallized in the current assessment year upon receiving debit notes, despite the interest being charged for purchases from the earlier year. The appellant consistently accounted for the expenditure in the same manner as in previous years, which was not disputed by the Revenue.

4. Citing the judgment of the Hon'ble Bombay High Court in CIT Vs. Mahanagar Gas Ltd., the Tribunal supported the appellant's claim for deduction of the expenditure in the current assessment year, emphasizing the crystallization of liability during the relevant period.

5. The CIT(A) had relied on the judgment of the Hon'ble Delhi High Court in CIT Vs. Exxon Mobil Lubricants P. Ltd., which dealt with a similar prior period expenditure claim. However, the Tribunal noted that the Delhi High Court's decision supported the appellant's position that the liability should be allowed as a deduction in the year it crystallized, as in the current assessment year under consideration.

6. Consequently, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the addition of Rs. 38,98,474 as the interest expenditure, allowing the appeal of the assessee.