ITAT dismisses Revenue's appeal due to tax limit, allows part of assessee's appeal on prior period expenses.

The Revenue's appeal was dismissed due to the tax effect falling below the limit for filing an appeal before the ITAT. The rejection of a comparable in the comparability analysis was deemed infructuous as the assessee did not press certain grounds. Regarding the disallowance of prior period expenses, the ITAT found that the expenses, though related to earlier years, were crystallized in the relevant assessment year. Consequently, the ITAT set aside the CIT(A)'s findings and deleted the addition made by the AO for prior period expenses. The appeal of the Revenue was dismissed, while the appeal of the assessee was partly allowed concerning prior period expenses.

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Issues Involved:
1. Disallowance of Royalty Expenditure.
2. Rejection of Comparable in Comparability Analysis.
3. Disallowance of Prior Period Expenses.

Detailed Analysis:

1. Disallowance of Royalty Expenditure:
The Revenue's appeal contended that the Commissioner of Income Tax (Appeals) erred in deleting the addition of Rs. 1,39,00,000/- made by the Assessing Officer (AO) on account of disallowance of royalty expenditure. However, the Learned Departmental Representative (DR) submitted that the tax effect involved in the appeal of the Revenue is less than the prescribed limit for filing an appeal before the Income Tax Appellate Tribunal (ITAT), as per the CBDT Circular No. 17/2019 dated 08th August 2019. Consequently, the appeal by the Revenue was dismissed as withdrawn with the liberty to file an application for recalling the appeal if the tax effect is found to be more than the prescribed limit or if the case falls under any exceptions in the circular.

2. Rejection of Comparable in Comparability Analysis:
The assessee's appeal raised issues regarding the rejection of a comparable in the comparability analysis by the AO/Transfer Pricing Officer (TPO). However, during the hearing, the counsel for the assessee did not press Grounds No. 1 and 2 of the appeal. Consequently, these grounds were dismissed as infructuous.

3. Disallowance of Prior Period Expenses:
The assessee contested the disallowance of Rs. 1,58,512/- on account of prior period expenses, arguing that these expenses accrued during the relevant assessment year despite pertaining to the previous accounting period. The AO disallowed these expenses on the grounds that they pertained to earlier years. The assessee provided a detailed submission with a breakup of the expenses, justifying how the expenses crystallized in the year under consideration. The CIT(A) upheld the disallowance, following the order of his predecessor, stating that the expenses were prior period expenses and could not be allowed unless proved otherwise.

The ITAT, upon hearing the rival submissions and perusing the relevant material on record, found that the expenses, though related to earlier years, were crystallized in the year under consideration. The Tribunal referred to a similar case (State Bank of Bikaner and Jaipur Vs ACIT 2014) where expenses of the previous year were allowed in the respective year if the information and evidence regarding such expenses were received after closing the books of accounts. The ITAT concluded that since the bills for the expenses were processed and approved in the year under consideration, the liability for these expenses was settled and crystallized in that year. Therefore, the ITAT set aside the CIT(A)'s findings and deleted the addition made by the AO for prior period expenses of Rs. 1,58,512/-.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed, specifically concerning the prior period expenses. The ITAT pronounced the order in the open court on 19th March 2021.

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