2017 (7) TMI 533 - AT - Income Tax

Disallowance of prior period expenditure - Held that - One point which clearly emerges is that there is no dispute insofar as the nature of the expenditure is concerned, as being relatable to the business of the assessee. It is also correct that the assessee is following the mercantile system of accounting, so however, the impugned expenses may relate to an earlier period, but they cannot be said to arise in the preceding year. Quite clearly, the expenses have arisen and crystallized during the year under consideration inasmuch as the requisite bills, details, etc. have been received by the assessee for incorporation in accounts by its Head office during the year under consideration and, therefore, the same have been rightly accounted for in the instant year. There is no controversion to the assertion of the learned representative that such practice has been consistently followed by the assessee and that such practice evens out any difference in deductibility of the total expenses over a period of time. Considering the aforesaid, we find no reason to deny the claim of assessee for deduction of the impugned expenditure.- Decided in favour of assessee.

Summary

Issues:
Disallowance of prior period expenditure.

Analysis:
The appeal pertains to the disallowance of a prior period expenditure of ?24,84,082 by the CIT(A), which was further affirmed by the Assessing Officer. The appellant, a company engaged in marketing research, contended that the expenses in question were incurred in the previous year but booked in the current year due to the company's accounting practices. The Assessing Officer disallowed the expenses as they were considered prior period expenses under the mercantile system of accounting. The appellant argued that this practice had been consistently followed for over 15 years. The representative highlighted a past decision in favor of the appellant by the CIT(A) in a similar dispute. The appellant's stance was supported by the argument that the expenses were related to the business and had crystallized during the current year, justifying their deduction. The Tribunal agreed with the appellant, emphasizing the consistency of the practice and the nature of the expenses, directing the Assessing Officer to delete the disallowance.

The Tribunal noted that the expenses, although related to an earlier period, had arisen and crystallized during the current year, as evidenced by the receipt of bills and details for incorporation in the accounts. The Tribunal acknowledged the appellant's consistent practice of closing accounts on April 30, aligning with the foreign holding company's practice. The Tribunal found no reason to deny the deduction claimed by the appellant, emphasizing the business nature of the expenses and the adherence to the mercantile system of accounting. The Tribunal referenced past decisions by the Hon'ble Delhi High Court and distinguished them from the current case, focusing on the consistency of practice and the year of crystallization of liability. Consequently, the Tribunal allowed the appeal, setting aside the CIT(A)'s order and directing the deletion of the disallowance of ?24,84,082.

In conclusion, the Tribunal's decision favored the appellant, emphasizing the consistent practice followed in booking expenses, the nature of the expenses, and the adherence to the mercantile system of accounting. The Tribunal found no grounds to uphold the disallowance of the prior period expenditure, directing the Assessing Officer to delete the disallowance amount from the appellant's total income for the relevant year.