2023 (10) TMI 1268 - AT - Income Tax

Assessee's method of recognizing prior period expenses when liability crystallizes upon receipt of bills upheld as acceptable accounting practice

Maharashtra State Electricity Distribution Company Ltd. Versus Asst. CIT (HQ) (Judl to CIT-14) Mumbai

ITAT Mumbai allowed the assessee's appeal regarding net prior period expenses. The tribunal held that the assessee's method of recognizing liability for ... Net prior period expenses - addition made as assessee has not proved that the same was crystallized during the year under consideration - HELD THAT:- The tribunal in earlier years has accepted the method adopted by the assessee where the liability of the work/services rendered in earlier year was allowed when the same was crystallized on receipt of the bill in the current assessment year. The Tribunal has also held that the Revenue has to adopt consistent approach and allow the expenditure which was crystallized during the year under consideration. By respectfully following the above conclusion we direct the ld. A.O. to allow the claim of the assessee as per the findings of the Tribunal mentioned hereinabove [2021 (2) TMI 733 - ITAT MUMBAI] Appeal filed by the assessee is allowed. Issues Involved:1. Disallowance of net prior period expenses.Summary:Disallowance of net prior period expenses:The appeal was filed by the assessee challenging the order of the Commissioner of Income Tax (Appeals)-22, Mumbai (ld. CIT(A)) passed u/s 250 of the Income Tax Act, 1961, for the Assessment Year 2012-13. The sole issue was the disallowance of net prior period expenses made by the Assessing Officer (A.O.) and confirmed by the ld. CIT(A) on the ground that the assessee failed to prove that the expenses were crystallized during the year under consideration.The assessee, engaged in the distribution of electricity, declared a loss in its return of income and revised return. The case was selected for scrutiny, and the A.O. determined the total income by making various additions/disallowances. The assessee appealed to the ld. CIT(A), who partly allowed the appeal.The assessee contended that similar prior period expenses were allowed in earlier years by the Tribunal. However, the ld. DR argued that the assessee failed to furnish documentary evidence to substantiate the crystallization of the expenses during the year. The Tribunal observed that the issue of prior period expenses is recurring and noted that the assessee had debited prior period expenses as per the tax audit report. The A.O. disallowed the net amount due to the lack of evidence regarding the crystallization of the liability during the year.The ld. CIT(A) upheld the disallowance, emphasizing the need for documentary evidence to substantiate the crystallization of expenses in the impugned year. The Tribunal referred to earlier decisions where similar claims were allowed and noted that the assessee's accounts are prepared according to statutory mandates, which require separate disclosure of prior period expenses and income.The Tribunal found that the method of accounting followed by the assessee was consistent and accepted by the revenue in earlier years. The Tribunal also referred to the decision of the Hon'ble Jurisdictional High Court in CIT vs. Mahanagar Gas Ltd., which upheld the allowance of prior period expenses crystallized during the assessment year. Following these precedents, the Tribunal directed the A.O. to allow the claim of the assessee.In conclusion, the Tribunal allowed the appeal filed by the assessee, directing the A.O. to follow the findings of the Tribunal in earlier decisions and allow the claim for prior period expenses. The appeal was pronounced in the open court on 10.10.2023.