2015 (10) TMI 732 - AT - Income Tax

Tribunal allows deduction for prior period expenses, emphasizes liability recognition and TDS impact

The Tribunal ruled in favor of the Assessee, overturning the disallowance of prior period expenses by the Ld CIT(A). It found that the liability ... Disallowance of prior period expenses - Held that:- In the instant case, there is no material to show that the assessee had acknowledged the liability by 31.3.2008. Since the contractor has raised the bill on 30-06-2008 and both the parties have agreed for the said amount by that date, the liability relating to the above bill gets crystallized only on 30-06-2008 and accordingly, in our view, it cannot be considered as prior period expenses. We find merit in the alternative contention of the Ld A.R also, i.e., even, if it is considered as an item of prior period expenses, the same is required to be allowed as deduction during the instant year only since the assessee has deducted TDS during the current year. As the assessee submitted that it is declaring income on completion of flats for accounting the income from building activities. If that be the case, the construction expenses will have been shown as Work in progress only in the immediately preceding year and the same would have been allowed as deduction only in the year in which the flats are sold. In that angle also, the impugned expenses may not fall in the category of “Prior period expenses”. - Decided in favour of assessee. Issues:Disallowance of prior period expenses of 29.23 lakhs made by the AO.Analysis:The appeal was filed against the order confirming the disallowance of prior period expenses of 29.23 lakhs by the Ld CIT(A). The Assessee, engaged in trading, financing, and construction, had expenses reported as prior period expenses in the tax audit report. The Assessee disallowed some expenses but did not add back the cost of construction to the total income. The Assessee explained that the contractor's work was unsatisfactory, leading to a dispute and eventual redoing of the work. The liability was quantified in the current year, and the Assessee claimed deduction based on the liability crystallizing during the year under consideration.The AO disallowed the claim based on the mercantile system of accounting and the belief that the expenses could have been booked in the preceding year. The Delhi Tribunal's decision was cited to support disallowance. The Assessee contended that the liability crystallized in the current year, and TDS was deducted during that year. Correspondence with the contractor was presented to prove the dispute over liability.The Tribunal analyzed the correspondence and found that the liability crystallized only when the contractor raised the bill in the current year. The Tribunal rejected the argument that the expenses should have been booked in the preceding year. Even if considered prior period expenses, they should be allowed as a deduction in the current year due to TDS deduction. The Tribunal also considered the Assessee's method of declaring income on completion of flats, indicating that the expenses may not qualify as prior period expenses. Consequently, the Tribunal set aside the Ld CIT(A)'s order and directed the AO to delete the disallowed amount, allowing the Assessee's appeal.In conclusion, the Tribunal ruled in favor of the Assessee, emphasizing that the liability crystallized in the current year and the expenses should be allowed as a deduction for that year. The Tribunal's decision highlighted the importance of recognizing when a liability becomes due and the relevance of TDS deduction in determining the deductibility of expenses.