2012 (12) TMI 662 - AT - Income Tax

High Court remits matter back to AO for reconsideration, allowing deduction for prior period expenditure.

The High Court remitted the matter back to the AO for reconsideration. The AO again denied the claim, stating the expenditure is revenue in nature and ... Prior period expenditure - Power Lines Service charges excluded in the valuation of the current assets - hand over of power lines to KEB free of cost - whether assessee can claim the expenditure incurred by it for the earlier assessment years as a deduction of expenditure of the relevant assessment year - Held that:- The assessee has earned income from the said power lines and the same has also been offered in the years of receipt. By treating the expenditure as work-in progress, the assessee in the year in which the power lines are to be handed over in K.E.B, free of cost, has to set off the work-in progress, from the profits of the relevant year as the assessee is no longer going to earn income out of the said power lines. By debiting the expenditure to profit and loss account and credibility the closing stock, it is clear that the assessee has not claimed this expenditure as deduction in the earlier years. As held by the Hon’ble Courts in CIT Vs. Standard Radiators Pvt. Ltd [2005 (12) TMI 70 - GUJARAT HIGH COURT] wherever there is a change of method of accounting, for genuine reasons, there is every chances of claim of double deduction arising during the year on change of accounting. The necessity and the crystallization of the liability during the relevant period is to be consider for allowing the expenditure. Thus as the assessee has not claimed the expenditure in the earlier years and there is no claim of double deduction in the relevant assessment year & the assessee who has changed the method of accounting due to genuine reason of having to hand over the power lines to KEB can claim the expenditure relating to earlier years in this year, even if it results in double deduction - in favour of assessee. Issues:1. Disallowance of Power Lines Service charges in the valuation of current assets.2. Interpretation of accounting policy and notes on account.3. Allowance of deduction for prior period expenditure.4. Change in method of accounting and its impact on expenditure claims.5. Nature of expenditure on power lines and its treatment as revenue expenditure.Issue 1: Disallowance of Power Lines Service charges in the valuation of current assets:The assessee incurred expenditure on power line infrastructure facilities for industrial estates, accumulating to Rs. 13,63,460, which was classified as current assets. The AO disallowed the claim of prior period expenditure, stating that the assessee was following the mercantile system of accounting and cannot write off expenditure in a subsequent year due to a change in accounting method. The CIT(A) upheld the AO's decision, leading to an appeal before the ITAT, which was allowed. The High Court remitted the matter back to the AO for reconsideration. The AO again denied the claim, stating the expenditure is revenue in nature and should be allowed in the year it is incurred. The CIT(A) confirmed the AO's order, leading to a second appeal before the ITAT.Issue 2: Interpretation of accounting policy and notes on account:The assessee argued that the expenditure on power lines was necessary for the relevant assessment year due to handing over the lines to Karnataka Electricity Board (KEB). The change in accounting method led to disputes regarding the allowability of earlier years' expenses. The assessee relied on various court decisions, including the Supreme Court and High Courts, supporting the right to change accounting methods unless it distorts profits of the year.Issue 3: Allowance of deduction for prior period expenditure:The AO denied the claim for prior period expenditure, adding it to the total income of the assessee. The ITAT allowed the appeal, emphasizing that the expenditure relating to earlier years can be claimed in the relevant assessment year, even if it results in double deduction, as long as there is a genuine reason for the change in accounting method.Issue 4: Change in method of accounting and its impact on expenditure claims:The ITAT considered the necessity and crystallization of the liability during the relevant period for allowing the expenditure. It noted that the assessee did not claim the expenditure in earlier years and there was no risk of double deduction in the relevant assessment year. The change in accounting method due to genuine reasons allowed the assessee to claim the expenditure for earlier years in the current year.Issue 5: Nature of expenditure on power lines and its treatment as revenue expenditure:The Revenue authorities held that the expenditure on power lines was revenue in nature. However, the ITAT emphasized that the nature of the expenditure does not change even if it is treated as a current asset in the accounts. The key consideration was whether the assessee could claim the expenditure for earlier years in the relevant assessment year when handing over the power lines to KEB free of cost.In conclusion, the ITAT allowed the appeal filed by the assessee, permitting the deduction for prior period expenditure on power lines, considering the change in accounting method and the genuine reasons behind it. The judgment emphasized the necessity of considering the liability crystallization during the relevant period for allowing such expenditure claims.