2010 (12) TMI 836 - HC - Income Tax

Prior period expenses allowed as business expenditure under section 43B(d), no revenue loss, revenue appeal dismissed

HC upheld the Tribunal's decision allowing the assessee's prior period expenses as business expenditure, despite the assessee following the mercantile ... Expenses related to the prior period - expenses claimed as business expenditure - assessee followed the mercantile system of accounting - HELD THAT:- The Tribunal went into details of each and every such expense and recorded the finding of fact that all these expenses were settled during this year. It was also recorded that more than 50 per cent. of expenses could be claimed only on actual expenses, as they were covered under section 43B(d) of the Act. A specific query was put to the learned counsel for the appellant that whether the return filed in the earlier assessment year showed profit or loss in so far as the assessee-company is concerned. Learned counsel for the appellant was not in a position to answer to this. Respondent informed that even in the earlier year, the assessee had shown positive income and paid tax thereon. If that is the situation, in any case, there is no loss of revenue. Had this expense been allowed in the previous year, the assessee would have paid lesser tax. On this ground also, we do not find it to be a fit case to interfere with the order of the Tribunal. Appeal is accordingly dismissed. Issues:Assessment of prior period expenses for the financial year 2003-04 in the assessment year 2004-05 under the mercantile system of accounting.Analysis:The appeal dealt with the assessment of expenses claimed as business expenditure for the assessment year 2004-05, specifically focusing on prior period expenses amounting to Rs. 41,95,719. The Assessing Officer (AO) contended that these expenses did not relate to the relevant financial year, as the assessee followed the mercantile system of accounting. The Commissioner of Income-tax (Appeals) upheld the AO's view. However, the Income-tax Appellate Tribunal reversed these decisions, allowing the expenses based on the assessee's explanation that the expenses were not booked due to delayed receipt of information beyond their control. The assessee clarified that expenses were settled in the year for payment as per their accounting policy, and the Tribunal verified that all expenses were indeed settled during the year, with over 50% falling under section 43B(d) of the Act. The Tribunal extensively reviewed each expense and supporting evidence provided by the assessee.Moreover, the Tribunal considered various expenses like interest payments, repair costs, foreign tour expenses, excise duty, and consistent accounting practices of the assessee over the years. The Tribunal's decision was supported by evidence presented in the paper book, demonstrating the settlement of expenses during the relevant year. The assessee also referenced previous years where similar claims were allowed by the Department. Despite a query regarding the earlier year's profit or loss, the Tribunal found no grounds to interfere with its decision, especially considering that disallowing the expenses in the previous year would not have resulted in any revenue loss for the authorities. The Tribunal ultimately dismissed the appeal, affirming the allowance of the prior period expenses for the assessment year 2004-05 under the mercantile system of accounting.