2021 (12) TMI 201 - AT - Income Tax

Disallowance of prior period expenses - HELD THAT - Once any particular expenditure is crystallized during relevant accounting period, the same needs to be allowed as deduction irrespective of the fact that said expenditure pertains to earlier financial year and paid in subsequent financial years. In this case, the ld.CIT(A) has recorded categorical finding that the liability towards expenditure was crystallized during the current year and hence, it does not constitute prior period expenses - As noted that it is not a case of the AO that expenditure claimed by the assessee is not deductible at all. In fact, the AO has not made any adverse comments about deductibility of expenses. In this case, on perusal of facts available on record, we find that although expenditure pertains to earlier financial years but the same was accrued and crystallized during current assessment year and hence, we are of the considered view that there is no error in the findings recorded by the ld.CIT(A) to delete addition made by the AO towards reimbursement of expenses to subsidiary company. Hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue. Disallowance of depreciation on guest house - assessee has claimed depreciation @ 10% on guest house, which is applicable to factory and office buildings - assessee had also claimed depreciation @ 15% on plant machinery, kitchen equipments and electrical fittings - AO has allowed depreciation @ 5% on total amount spent towards guest house including plant machinery, kitchen equipments, electrical fittings, on the ground that guest house was used for residential purpose and hence, depreciation as per the Act is allowable @ 5% but, not 10% / 15% as claimed by the assessee - HELD THAT - CIT(A) has recorded categorical finding that each item of asset is to be classified independently by applying functional test especially when specific categorization is made in Appendix-I to Rule 5 of Income Tax Rules and further cannot be correlated to any other asset on the basis of their place of installation. In this case, there is no doubt with regard to the fact that other assets installed in guest house building like plant machinery, furniture fittings and electrical installations are entitled for 15% depreciation. Once, a particular asset is entitled for higher depreciation as per the Act, the AO was erred in restricting depreciation on said assets to 5%, which is applicable to residential building merely because those assets are installed in guest house building. The CIT(A) after considering relevant facts, has rightly directed the AO to allow depreciation as per Appendix-I to Rule 5 of Income Tax Rules, 1962 on assets, on the basis of their functional test. We do not find any error in the findings of the ld.CIT(A) and hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue.

Summary

Issues Involved:
1. Deletion of disallowance of prior period expenses.
2. Disallowance of depreciation on guest house.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Prior Period Expenses:

The first issue concerns the deletion of disallowance of prior period expenses. The assessee company, engaged in the business of poultry products, had a subsidiary in the Netherlands, M/s. SKM Europe BV, with which it had an agreement for reimbursing transportation and storage expenses. During the year under consideration, the assessee claimed expenses amounting to ?2,26,09,204/- for the financial years 2007-08 to 2009-10. The AO disallowed this claim, stating that it was a prior period expense and did not pertain to the current accounting period. The AO referred to Accounting Standard-5, asserting that these expenses should have been accounted for in the relevant financial years as the assessee was aware of them.

The ld.DR argued that the assessee could have booked these expenses regularly based on the agreement with the subsidiary. The ld.DR cited the Delhi High Court's decision in the case of Delhi Tourism & T.D.C. Ltd. vs. CIT, emphasizing that known expenses from previous years cannot be claimed in subsequent years.

The ld.AR for the assessee contended that the liability for these expenses crystallized during the current year due to the resolution of disputes with the subsidiary, making them deductible in the current year. The ld.CIT(A) supported this view, stating that the expenses were crystallized during the current year and should not be considered prior period expenses.

Upon review, the tribunal found merit in the assessee's argument, noting that the expenses were indeed crystallized during the current year after resolving disputes. The tribunal emphasized that any expenditure incurred wholly and exclusively for business purposes should be allowed as a deduction regardless of the financial year it pertains to. The tribunal upheld the ld.CIT(A)'s decision, finding no error in the deletion of the addition made by the AO towards reimbursement of expenses to the subsidiary company.

2. Disallowance of Depreciation on Guest House:

The second issue involves the disallowance of depreciation on the guest house. The assessee claimed depreciation at 10% for the guest house building and 15% for plant & machinery, kitchen equipment, and electrical fittings installed in the guest house. The AO restricted the depreciation to 5% for all assets, arguing that the guest house was used for residential purposes, thus applying the rate for residential buildings.

The ld.CIT(A) partially allowed the assessee's claim, restricting depreciation on the building to 5% but allowing 15% depreciation on other assets like plant & machinery, kitchen equipment, etc., based on their functionality as specified in Appendix-I to Rule 5 of the Income Tax Rules, 1962.

The ld.DR argued that these assets were integral parts of the guest house building and should be depreciated at the rate applicable to the building. The ld.AR for the assessee countered that different assets have different rates of depreciation based on their functionality, and clubbing them together under the building category was incorrect.

The tribunal reviewed the case and noted that each asset has a specific rate of depreciation based on its function as per the Income Tax Rules. The tribunal found that the AO erred in restricting the depreciation to 5% for all assets. The tribunal upheld the ld.CIT(A)'s decision to allow higher depreciation for assets like plant & machinery, kitchen equipment, and electrical fittings, as these assets are entitled to 15% depreciation based on their functionality.

Conclusion:

The tribunal dismissed the appeal filed by the Revenue, upholding the ld.CIT(A)'s decisions on both issues. The order was pronounced on 31st August 2021 at Chennai.