Prior period expenses are allowable when liability crystallises during the year and consistent accounting treatment is maintained.

Prior period expenses were treated as allowable where the related liabilities crystallised during the year and the assessee consistently followed the statutory electricity-board accounting framework. The Tribunal noted that prior period income and expenses were separately reflected under that method, and the accounts had been accepted by internal auditors, statutory auditors and the CAG without adverse comment. It also found that the Assessing Officer's adjustment caused double addition for items already disallowed by the assessee in its return. On that basis, and applying the principle that expenditure is deductible when liability crystallises with consistent accounting treatment, the disallowance was held unsustainable except for items voluntarily disallowed.

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Issues: Whether prior period expenses were allowable in the relevant assessment years where the liabilities had crystallized during the year and the assessee had followed a consistent accounting method.

Analysis: The assessee, a State electricity undertaking, maintained its accounts under the statutory accounting framework applicable to electricity boards, under which prior period income and expenses were required to be shown separately. The Tribunal noted that the assessee regularly followed this method, its accounts were scrutinized by internal auditors, statutory auditors and the CAG, and no adverse finding was recorded regarding the accounting treatment. It further found that the disallowances made by the Assessing Officer led to double addition in respect of items already disallowed by the assessee in its return. Relying on the finding that the remaining prior period expenses had crystallized during the year, and following the jurisdictional High Court's approach that expenditure is allowable when the liability crystallizes and consistency is maintained, the Tribunal held that the disallowance was not sustainable.

Conclusion: Prior period expenses, other than items already voluntarily disallowed by the assessee, were allowable; the Revenue's challenge to deletion of the disallowance failed.

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