2017 (11) TMI 1051 - AT - Income Tax

Nature and genuineness of the expenditure - addition prior period expenditure - system of accounting - Held that - AO has not examined the nature and genuineness of the impugned expenditure. He has simply disallowed for the reason that the assessee is following mercantile system of accounting and the deduction can be allowed in respect of only those expenses which are incurred in the relevant accounting year of computing the profits and gains. Thus, he had not examined the nature and genuineness of the expenditure at all. In the view of that we are of the considered opinion that the AO has to examine the nature and genuineness of the expenditure and decide the issue in accordance with law following the ratio CIT vs. Jagatjit Industries Limited 2010 (9) TMI 58 - DELHI HIGH COURT . To that extent, the revenue s appeal is treated as allowed.

Summary

Issues:
1. Addition of net prior period expenditure debited to P&L account for assessment year 2010-11.
2. Whether the accounting practices were consistently followed by the assessee.
3. Examination of the nature and genuineness of the expenditure.

Detailed Analysis:
Issue 1: The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the addition of net prior period expenditure debited to the P&L account for the assessment year 2010-11. The CIT(A) allowed the appeal based on the decision of CIT vs. Jagatjit Industries Limited, Delhi High Court, holding that the prior period expenses were deductible. The Revenue contended that the expenses claimed did not belong to the relevant accounting year and should have been claimed in the relevant financial years. The DR relied on various court decisions to challenge the CIT(A)'s order. The tribunal analyzed previous court decisions related to the accrual of liabilities and held that the impugned liability in this case did not arise from any statute or interest liability, making the cited ratios inapplicable.

Issue 2: The tribunal examined whether the assessee had consistently followed accounting practices and whether the nature and genuineness of the expenditure were examined. The CIT(A) noted that the appellant consistently followed the accounting practice of debiting expenses to the P&L account related to bills settled or received in the year of claim, even if some expenses spilled over to the next year. The tribunal found in favor of the assessee on the accounting practices issue. However, it observed that the Assessing Officer (AO) had not examined the nature and genuineness of the expenditure, merely disallowing it based on the mercantile system of accounting. The tribunal directed the AO to examine the nature and genuineness of the expenditure in accordance with the law.

In conclusion, the tribunal partly allowed the Revenue's appeal for statistical purposes, emphasizing the importance of examining the nature and genuineness of expenditures in accordance with the law, even when following the mercantile system of accounting. The judgment highlighted the need for a thorough assessment of expenses and adherence to accounting practices to ensure accurate computation of profits and gains.