2019 (3) TMI 228 - HC - Income Tax

Claim of expenditure pertaining to earlier year - accrual of expenses - mercantile system of accountancy - prior period expenses - crystallized during the previous year - HELD THAT - Assessee follows the mercantile system of accountancy, the expenditure has to be accounted for on accrual basis. For accrual of expenses to take place, it must become due. In the present case, there was no accrual of the expenditure in the earlier year had not become due. It became due only in this year i.e. it crystallized during the previous year relevant to the subject assessment year. Thus the view taken by the Tribunal cannot be found fault with. No substantial question of law.

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding claim of expenditure pertaining to earlier year under mercantile system of accountancy.

Analysis:
The appeal challenges the Income Tax Appellate Tribunal's order partly allowing the appeal filed by the respondent-assessee for Assessment Year 2010-2011. The main question raised by the revenue is whether the Tribunal was correct in allowing the claim of expenditure pertaining to an earlier year under the mercantile system of accountancy. The respondent, a public limited company engaged in sugar production, declared a loss for the subject assessment year. The Assessing Officer disallowed prior period expenses related to sugarcane purchase, leading to the issue being brought before the Tribunal.

The Tribunal noted that the respondent had paid additional prices to farmers for sugarcane purchased in the earlier season, as other factories were paying higher rates. The respondent faced threats of supply stoppage unless prices were matched, leading to additional payments to align with market rates. These payments were claimed as prior period expenses for the subject assessment year. The Tribunal concluded that the expenditure crystallized during the subject assessment year, justifying the allowance of the respondent's appeal.

The appellant argued that under the mercantile system of accountancy, expenses should have been accounted for in the earlier year and not in a subsequent assessment year. However, the Court clarified that for expenses to accrue, they must become due, which did not happen in the earlier year in this case. The expenditure became due and crystallized during the previous year relevant to the subject assessment year, supporting the Tribunal's decision. Consequently, the framed question did not raise any substantial question of law, leading to the dismissal of the appeal without costs.