Prior period expenditure cannot be disallowed for timing alone where the claim crystallised in the year and tax effect was revenue neutral.

Prior period expenditure was held to be allowable where the claim had crystallised in the relevant previous year and the assessee was taxed at the maximum marginal rate. The timing of accrual alone was not treated as a valid basis to deny the deduction when the tax effect was revenue neutral. On that footing, the disallowance was deleted and the claim was accepted in favour of the assessee.

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Issues: Whether the disallowance of prior period expenditure was sustainable where the assessee was taxed at the maximum marginal rate and the corresponding claim had crystallised in the relevant previous year.

Analysis: The expenditure related to an earlier year, but the claim was stated to have crystallised in the relevant previous year. In such circumstances, and in view of the assessee being assessed at the maximum marginal rate, the disallowance was treated as revenue neutral. The issue was considered covered by the principle that an expenditure cannot be denied merely because of the year of accrual or crystallisation where the tax impact is neutral.

Conclusion: The disallowance of prior period expenditure was deleted and the issue was decided in favour of the assessee.

Ratio Decidendi: Prior period expenditure, when revenue neutral and supported by crystallisation in the relevant year, cannot be disallowed merely on the ground of timing of accrual.

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