2021 (2) TMI 733 - AT - Income Tax

Tribunal allows deduction for prior period expenditure, upholding accounting method and judicial precedents

The Tribunal affirmed the CIT(A)'s decision to grant deduction for prior period expenditure, finding the expenses allowable as they had crystallized ... Deduction towards prior period expenditure - crystalization of work/services rendered in earlier year - mercantile system of accounting followed - CIT-A deleted the addition - HELD THAT:- It is not in dispute that the accounts of the assessee have been prepared in accordance with the mandate provided under the Electricity Act. The clear statutory mandate issued by the Government with regard to maintenance of accounts enabled the assessee company, being a Public Sector Undertaking (PSU), to disclose the prior period expenses and prior period income separately in its accounts. CIT(A) had duly recognised the method of accounting regularly followed by the assessee in the instant case. We find that the ld. CIT(A) had taken due cognizance of each and every item pertaining to prior period expenses and had understood the modus operandi thereon and duly appreciated the fact of assessee company conducting its operations with huge net work which eventually explains the time taken for accounting of various expenses contributing to the delay and slippage of an annual accounting year. CIT(A) also took note of the accounts of the assessee company getting scrutinized by Statutory Auditors, Internal Auditors and also by the Controller of Auditor General of India. It is pertinent to note that none of them had given any adverse remarks about the aspect of prior period expenditure. We find that the ld. CIT(A) had categorically given a finding that all the expenses reflected in the prior period expenses except the one which were voluntarily disallowed by the assessee in the return of income, though debited to prior period expenditure during the year, got crystallised during the year under consideration and hence, becomes allowable expenditure. None of these findings given by the ld. CIT(A) were rebutted by the Revenue before us. We also find that the Hon’ble Jurisdictional High Court in the case of yet another Public Sector Undertaking in CIT vs. Mahanagar Gas Ltd.[2013 (7) TMI 118 - BOMBAY HIGH COURT] had an occasion to go through the same issue. Thus we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee in respect of prior period expenditure. Accordingly, the grounds raised by the revenue in this regard are dismissed Issues Involved:1. Justification of CIT(A) in directing the AO to grant deduction towards prior period expenditure.Detailed Analysis:1. Justification of CIT(A) in Directing AO to Grant Deduction Towards Prior Period Expenditure:Background and Context:The appeals in ITA Nos. 3813/Mum/2009, 1647/Mum/2010, and 1648/Mum/2010 pertain to the assessment years 2001-02, 2002-03, and 2003-04 respectively. These appeals arose from the orders of the Commissioner of Income Tax (Appeals) against the assessments made under Section 143(3) of the Income Tax Act, 1961. The core issue was whether the CIT(A) was justified in directing the AO to grant deductions for prior period expenditures.Arguments and Findings:- The assessee, a State Government undertaking involved in electricity generation and distribution, had disclosed prior period income of Rs. 84,48,47,317 and prior period expenditure of Rs. 944,00,69,767, resulting in net prior period expenses of Rs. 859,52,22,450.- The AO disallowed the entire prior period expenditure on the grounds that these expenses did not crystallize during the year under consideration, while including the prior period income in the taxable income.- The CIT(A) rectified a mistake of double addition concerning depreciation and income tax provisions and allowed the remaining disallowed expenses, stating that the expenses had crystallized during the year under consideration and were in accordance with the method of accounting regularly followed by the assessee.CIT(A)’s Detailed Observations:- The CIT(A) noted that the assessee’s accounts were prepared as per the Electricity (Supply) Annual Accounts Rules, 1985, and the method of accounting was accepted by the Comptroller and Auditor General (CAG).- It was highlighted that the assessee’s operations involved a vast network, causing delays in accounting for various expenses, which were audited by internal and statutory auditors.- The CIT(A) referred to Accounting Standard No. II issued by the CBDT, which mandates the separate disclosure of prior period items in the profit and loss account, supporting the assessee's method of accounting.- Judicial precedents were cited, including the Delhi High Court’s decision in CIT vs. Vishnu Industrial Gases P. Ltd., emphasizing that the department should not dispute the year of deduction if the tax rates were the same in both years.Tribunal’s Conclusion:- The Tribunal upheld the CIT(A)’s findings, noting that the assessee’s accounts were prepared in compliance with statutory mandates and the method of accounting was consistently followed and accepted by the revenue in earlier years.- The Tribunal found no adverse remarks from the auditors regarding the prior period expenses and recognized that the expenses crystallized during the year under consideration.- The Tribunal also referred to the Bombay High Court’s decision in CIT vs. Mahanagar Gas Ltd., which supported the allowance of prior period expenses that crystallized in the current assessment year.Final Decision:- The Tribunal dismissed the revenue’s appeals, affirming the CIT(A)’s decision to grant deduction for prior period expenditure, as the expenses were found to be allowable and had crystallized during the year under consideration.Pronouncement:- The order was pronounced on 17/02/2021 by proper mentioning in the notice board.Summary:The Tribunal upheld the CIT(A)’s decision to allow the deduction of prior period expenses, recognizing the statutory and accounting mandates followed by the assessee, and dismissed the revenue’s appeals. The Tribunal’s decision was in line with judicial precedents and consistent accounting practices accepted by the revenue in earlier years.