2018 (6) TMI 1502 - AT - Income Tax

Disallowance on account of prior period expenses - Held that - As the business of the assessee is going concern and the tax rates are rationalized and same in the respective AY under consideration, there is no loss to the revenue to allow the prior period expenditure. In large organisation, there are chances of pending approval or some issue with administration, the expenses may be claimed in the subsequent year. As per disclosure norms, assessee is to disclose the same as prior period expenses but there are regular business expenditure and as long as these expenditures are matched with the income, then, expenses are allowable expenditure. Assessee has offered both income as well as expenses. Therefore, AO is not correct in disallowing expenses selectively - we direct the AO delete the disallowance made on account of prior period expenditure. - decided in favour of assessee.

Summary

Issues:
Disallowance of prior period expenses for AY 2011-12.

Analysis:
The appeal pertains to the disallowance of prior period expenses by the Assessing Officer (AO) for the Assessment Year (AY) 2011-12. The assessee, a central public sector undertaking, filed its return of income admitting 'NIL' income. The AO disallowed an amount of ?32.20 lakhs out of the total prior period expenditure of ?52.56 lakhs, citing that it did not relate to the current financial year. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this disallowance, emphasizing that the nature of these expenses indicated they were not crystallized during the year.

Upon further appeal, the Tribunal considered the arguments presented. The assessee contended that large organizations might inadvertently miss certain expenses, and upon realization, these were accounted for as prior period expenses. The Tribunal referenced a judgment by the Bombay High Court and agreed with the assessee's position. It noted that the expenditure claimed was related to the corresponding sales and services income, following the matching principle. The Tribunal highlighted that as long as the expenses were matched with income and disclosed as prior period expenses, they should be considered allowable expenditure.

The Tribunal distinguished a case law cited by the Revenue, emphasizing that the facts in that case were not analogous to the present situation. It directed the AO to delete the disallowance of ?32.20 lakhs made on account of prior period expenditure. The decision was based on the rationale that the expenses were legitimate and related to the business's ongoing operations, aligning with the principles of matching income and expenses. Consequently, the appeal of the assessee was allowed.

This detailed analysis of the judgment showcases the interpretation of the law regarding the treatment of prior period expenses, emphasizing the importance of matching principles and the context-specific nature of such determinations.