Prior period expenditure is allowable on crystallisation when consistent accounting treatment has been accepted in earlier years.

Prior period expenditure was held allowable in the year of crystallisation where the liability became during the relevant assessment year and the assessee had consistently followed the same accounting treatment. The record showed separate disclosure of prior period income and expenses, and the Revenue did not rebut the finding that the impugned liabilities crystallised during the year. The consistent method of accounting under Section 145, together with acceptance of the same treatment in earlier years, supported allowance of the claim. On that basis, disallowance of the net prior period expenses was not sustainable.

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Issues: Whether the disallowance of net prior period expenses was justified when the liability was claimed to have crystallised during the relevant assessment year and the assessee had consistently followed the same accounting treatment in earlier years.

Analysis: The claim was found to be recurring in the assessee's case and had been allowed in earlier years on identical facts. The record showed that the assessee had separately disclosed prior period income and prior period expenses in its accounts, and the Revenue did not rebut the factual finding that the liability for the impugned items crystallised during the year. The assessee's accounting treatment was consistent with its regular method of accounting under Section 145 of the Income-tax Act, 1961, and the principle of consistency required the Revenue to adopt the same approach where similar liabilities were accepted in earlier years. Reliance was also placed on the jurisdictional precedent holding that prior period expenditure is allowable when the liability crystallises in the relevant year.

Conclusion: The disallowance of prior period expenses was not sustainable, and the claim of the assessee was allowed.

Final Conclusion: The appeal succeeded because the prior period expenditure was held allowable on crystallisation in the relevant year, following the consistent accounting practice accepted in earlier years.

Ratio Decidendi: Prior period expenditure is allowable in the year in which the liability crystallises, particularly where the assessee has consistently followed the same accounting method and the Revenue has accepted the treatment in earlier years.

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