2021 (8) TMI 509 - AT - Income Tax

Disallowance relating to prior period expenses made - assessee is engaged in the business of design, development and testing of software - HELD THAT - It is a fact that the assessee has offered no prior period income which has been arrived at after deducting prior period expenditure from the prior period income - Though the A.O. initially added both prior period income and prior period expenditure in the original assessment order, yet in the rectification order passed by the A.O. u/s 154 of the Act, he has deleted the disallowance relating to prior period income. The net effect of the action of AO resulted in disallowance of prior period expenses. As held in the case of Dishman Pharmaceuticals Chemicals Ltd. 2019 (10) TMI 1195 - GUJARAT HIGH COURT that once the prior period income is assessed to tax, then the corresponding prior period expenditure also should be allowed to be set off. Hence the action of the AO was contradictory to the decision rendered by Hon ble Gujarat High Court in the above said case. We notice that the assessee has offered ₹ 16,86,334/- as per the principle laid down by the Hon ble Gujarat High Court in the above said case. Thus we direct the AO to allow the prior period expenditure as deduction against prior period income. Accordingly, we direct the A.O. to delete the disallowance relating to prior period expenditure. - Decided in favour of assessee.

Summary

Issues:
Whether tax authorities justified in disallowing prior period expenses alone while assessing prior period income?

Analysis:
The appeal challenged the order confirming the disallowance of prior period expenses by the Ld. CIT(A) for the assessment year 2014-15. The AO initially added both prior period income and expenses but later rectified the order to delete the disallowance of prior period income, resulting in disallowance of expenses only. The main issue was whether the tax authorities were correct in disallowing only the prior period expenses. The assessee argued that as per the decision of the Hon'ble Gujarat High Court in Principal CIT Vs. Dishman Pharmaceuticals & Chemicals Ltd., once prior period income is assessed, corresponding expenses should be allowed as a set-off. The assessee had already offered the net income after deducting expenses, so no separate disallowance was warranted.

The ITAT, after considering the arguments, found merit in the assessee's contentions. They noted that the AO's actions were contradictory to the Gujarat High Court decision, which mandated allowing prior period expenses against income. As the assessee had followed the principle laid down by the High Court, the ITAT directed the AO to delete the disallowance of prior period expenses amounting to ?1,12,42,226. The ITAT's decision was based on aligning with the Gujarat High Court's ruling and ensuring consistency in the treatment of prior period income and expenses.

In conclusion, the ITAT allowed the appeal filed by the assessee, directing the AO to permit the deduction of prior period expenses against prior period income, as per the decision of the Hon'ble Gujarat High Court. The judgment clarified the correct approach in such cases and emphasized the importance of following established legal precedents for consistent and fair tax assessments.