2018 (6) TMI 1502 - AT - Income Tax

Tribunal allows appeal, deems prior period expenses legitimate.

Electronics Corporation of India Ltd. Versus Dy. Commissioner of Income tax, Circle – 2 (2), Hyderabad

Electronics Corporation of India Ltd. Versus Dy. Commissioner of Income tax, Circle – 2 (2), Hyderabad - TMI Issues:Disallowance of prior period expenses for AY 2011-12.Analysis:The appeal pertains to the disallowance of prior period expenses by the Assessing Officer (AO) for the Assessment Year (AY) 2011-12. The assessee, a central public sector undertaking, filed its return of income admitting 'NIL' income. The AO disallowed an amount of Rs. 32.20 lakhs out of the total prior period expenditure of Rs. 52.56 lakhs, citing that it did not relate to the current financial year. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this disallowance, emphasizing that the nature of these expenses indicated they were not crystallized during the year.Upon further appeal, the Tribunal considered the arguments presented. The assessee contended that large organizations might inadvertently miss certain expenses, and upon realization, these were accounted for as prior period expenses. The Tribunal referenced a judgment by the Bombay High Court and agreed with the assessee's position. It noted that the expenditure claimed was related to the corresponding sales and services income, following the matching principle. The Tribunal highlighted that as long as the expenses were matched with income and disclosed as prior period expenses, they should be considered allowable expenditure.The Tribunal distinguished a case law cited by the Revenue, emphasizing that the facts in that case were not analogous to the present situation. It directed the AO to delete the disallowance of Rs. 32.20 lakhs made on account of prior period expenditure. The decision was based on the rationale that the expenses were legitimate and related to the business's ongoing operations, aligning with the principles of matching income and expenses. Consequently, the appeal of the assessee was allowed.This detailed analysis of the judgment showcases the interpretation of the law regarding the treatment of prior period expenses, emphasizing the importance of matching principles and the context-specific nature of such determinations.