Revenue's appeal dismissed on disallowance of prior period expenditure under mercantile accounting system

ITAT Nagpur dismissed Revenue's appeal regarding disallowance of prior period expenditure under mercantile accounting system. The tribunal held that prior period expenses cannot be disallowed merely because assessee follows mercantile accounting, if the expenditure actually crystallized in subsequent year due to certain reasons. Since assessee consistently followed this accounting practice for years and AO previously allowed such expenses without challenging the system's validity, and the expenditure was genuinely incurred without distorting income, the prior period expenses were allowable. The decision relied on precedent from assessee's own case and Bombay HC ruling in Taparia Tools Ltd.

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Issues involved: Appeal against order of ld. Commissioner of Income Tax (Appeal) for A.Y. 2018-19 u/s 250 of the Income Tax Act, 1961 regarding prior period expenses.

Issue of Prior Period Expenses:
The ld. Authorised Representative of the assessee explained that the ld.CIT(A) decided the appeal based on ITAT Nagpur Decision in assessee's own case for A.Y. 2008-09. The ld.AR argued that the Revenue's case lacks merit. The ld. Departmental Representative for the Revenue relied on the Assessing Officer's order. The ITAT, after hearing both parties, agreed with the ld.CIT(A) and dismissed the Revenue's appeal following the law of consistency and the ITAT Nagpur Decision in the assessee's own case. The ITAT considered the issue of disallowance of depreciation on office appliances and disallowance of prior period expenditure amounting to Rs. 3.65 lakhs. The ITAT referred to previous decisions and held that prior period expenses were allowable to the assessee as they were consistently followed and did not distort profits. The ITAT cited decisions of various High Courts and the Mumbai Tribunal to support its conclusion. Consequently, Ground No.1, 3 & 4 of the Revenue were dismissed, and Ground No.2 was also dismissed based on previous decisions.

Decision and Analysis:
The ITAT found that the assessee's treatment of prior period expenses was in line with the mercantile system of accounting. It noted that the expenses accrued after the end of the relevant year and were consistently accounted for by the assessee. The ITAT emphasized that the allowability of such expenses should be decided pragmatically, considering the circumstances. It highlighted that the Revenue Authorities did not challenge the consistent practice of the assessee or claim that the taxable income remained untaxed due to prior period expenses. The ITAT referred to various High Court decisions and the Mumbai Tribunal to support its decision in favor of the assessee. The ITAT dismissed the Revenue's appeal, upholding the assessee's treatment of prior period expenses.

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