Tribunal allows deduction of prior period expenses and higher depreciation rates for specific assets.

The tribunal upheld the deletion of disallowance of prior period expenses, emphasizing that expenses crystallized during the current year should be deductible regardless of the financial year they pertain to. The tribunal also supported the higher depreciation rates allowed by the ld.CIT(A) for assets like plant & machinery, kitchen equipment, and electrical fittings in the guest house, based on their functionality. The appeal filed by the Revenue was dismissed, affirming the ld.CIT(A)'s decisions on both issues.

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Issues Involved:
1. Deletion of disallowance of prior period expenses.
2. Disallowance of depreciation on guest house.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Prior Period Expenses:

The first issue concerns the deletion of disallowance of prior period expenses. The assessee company, engaged in the business of poultry products, had a subsidiary in the Netherlands, M/s. SKM Europe BV, with which it had an agreement for reimbursing transportation and storage expenses. During the year under consideration, the assessee claimed expenses amounting to Rs. 2,26,09,204/- for the financial years 2007-08 to 2009-10. The AO disallowed this claim, stating that it was a prior period expense and did not pertain to the current accounting period. The AO referred to Accounting Standard-5, asserting that these expenses should have been accounted for in the relevant financial years as the assessee was aware of them.

The ld.DR argued that the assessee could have booked these expenses regularly based on the agreement with the subsidiary. The ld.DR cited the Delhi High Court's decision in the case of Delhi Tourism & T.D.C. Ltd. vs. CIT, emphasizing that known expenses from previous years cannot be claimed in subsequent years.

The ld.AR for the assessee contended that the liability for these expenses crystallized during the current year due to the resolution of disputes with the subsidiary, making them deductible in the current year. The ld.CIT(A) supported this view, stating that the expenses were crystallized during the current year and should not be considered prior period expenses.

Upon review, the tribunal found merit in the assessee's argument, noting that the expenses were indeed crystallized during the current year after resolving disputes. The tribunal emphasized that any expenditure incurred wholly and exclusively for business purposes should be allowed as a deduction regardless of the financial year it pertains to. The tribunal upheld the ld.CIT(A)'s decision, finding no error in the deletion of the addition made by the AO towards reimbursement of expenses to the subsidiary company.

2. Disallowance of Depreciation on Guest House:

The second issue involves the disallowance of depreciation on the guest house. The assessee claimed depreciation at 10% for the guest house building and 15% for plant & machinery, kitchen equipment, and electrical fittings installed in the guest house. The AO restricted the depreciation to 5% for all assets, arguing that the guest house was used for residential purposes, thus applying the rate for residential buildings.

The ld.CIT(A) partially allowed the assessee's claim, restricting depreciation on the building to 5% but allowing 15% depreciation on other assets like plant & machinery, kitchen equipment, etc., based on their functionality as specified in Appendix-I to Rule 5 of the Income Tax Rules, 1962.

The ld.DR argued that these assets were integral parts of the guest house building and should be depreciated at the rate applicable to the building. The ld.AR for the assessee countered that different assets have different rates of depreciation based on their functionality, and clubbing them together under the building category was incorrect.

The tribunal reviewed the case and noted that each asset has a specific rate of depreciation based on its function as per the Income Tax Rules. The tribunal found that the AO erred in restricting the depreciation to 5% for all assets. The tribunal upheld the ld.CIT(A)'s decision to allow higher depreciation for assets like plant & machinery, kitchen equipment, and electrical fittings, as these assets are entitled to 15% depreciation based on their functionality.

Conclusion:

The tribunal dismissed the appeal filed by the Revenue, upholding the ld.CIT(A)'s decisions on both issues. The order was pronounced on 31st August 2021 at Chennai.

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