Prior period expenses allowable when liability crystallises during the year and consistent accounting treatment is supported by the statutory framework.

Prior period expenses were held allowable where the related liabilities had crystallised during the relevant year and the assessee's consistent accounting treatment was in line with the statutory framework governing electricity undertakings. The Tribunal noted that the items were separately disclosed in a regular accounting system, the same approach had been accepted in earlier years, and the Revenue had not established any ineligibility for deduction. On that basis, the disallowance was not sustainable and the deletion of the addition was upheld in favour of the assessee.

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Issues: Whether the disallowance of prior period expenses was justified.

Analysis: The assessee, a State Government undertaking, followed a regular accounting system in which prior period items were separately disclosed. The liabilities relating to the disputed expenses had crystallised during the relevant year, and the accounts were prepared in accordance with the statutory accounting framework applicable to electricity undertakings. The same treatment had been accepted in earlier years, and the Revenue had not shown the expenses to be otherwise ineligible for deduction. The Tribunal also noted that similar disallowances had already been deleted in the assessee's own case for earlier years.

Conclusion: The disallowance of prior period expenses was not sustainable and the deletion made by the CIT(A) was upheld in favour of the assessee.

Ratio Decidendi: Prior period expenses are allowable where the liability crystallises during the relevant year and the consistent accounting treatment followed by the assessee is supported by the statutory accounting framework.

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