Prior period expenses on crystallisation and depreciation relief under section 40(a)(ia) were both decided in favour of the assessee.

Prior period expenses were held allowable in the year of crystallisation where the correct schedule showed the debit had been recognised in the profit and loss account during the relevant assessment year, and the contrary factual assumption was found incorrect. Depreciation on capital expenditure could not be disallowed under section 40(a)(ia) because that provision applies only to specified revenue payments such as interest, commission, rent, royalty, professional fees, technical fees, and contractor payments; it does not extend to depreciation on capital assets. The substantive additions were therefore deleted and the appeal was partly allowed.

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Issues: (i) Whether prior period expenses, having crystallized during the relevant assessment year, were allowable in that year; (ii) Whether depreciation on capital expenditure could be disallowed under section 40(a)(ia) of the Income-tax Act, 1961 for alleged non-compliance with tax deduction at source requirements.

Issue (i): Whether prior period expenses, having crystallized during the relevant assessment year, were allowable in that year.

Analysis: The prior period schedule showed that the difference between prior period debits and credits was debited in the profit and loss account. The appellate authority had proceeded on an incorrect factual assumption regarding the comparative figures. Once the correct schedule was examined, the claim that the expenditure crystallized during the year was accepted, and the assessee sought allowance in the relevant year.

Conclusion: The expenses were directed to be allowed in the relevant assessment year in favour of the assessee.

Issue (ii): Whether depreciation on capital expenditure could be disallowed under section 40(a)(ia) of the Income-tax Act, 1961 for alleged non-compliance with tax deduction at source requirements.

Analysis: Section 40(a)(ia) applies to specified revenue payments such as interest, commission, brokerage, rent, royalty, professional fees, technical fees, and payments to contractors or sub-contractors. Depreciation claimed on capital assets does not fall within those categories. The provision invoked by the revenue therefore had no application to the depreciation claim.

Conclusion: The disallowance of depreciation was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantive additions challenged by the assessee and was disposed of as partly allowed.

Ratio Decidendi: Section 40(a)(ia) cannot be invoked to disallow depreciation on capital assets, and prior period expenditure is allowable in the year of crystallization when the factual basis for the claim is established.

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