2010 (9) TMI 36 - HC - Income Tax

Prior period expenses allowed as liability crystallized on agreement date, netting off income under Section 37

HC dismissed the Revenue's appeal concerning disallowance of prior period expenses claimed by the assessee. It held that the liability arose and ... addition on account of prior period expenses - expenditure incurred in the assessment year under consideration though it had been admitted that these expenses were incurred with effect from January 1, 2002 - HELD THAT:- We are of the view that liability of the assessee under the agreement had arisen and accrued in August 2002, when the agreement was executed and, therefore, the liability of the assessee to pay for the period January 2002 to March 2002 arose and crystallized in August 2002. It is pertinent to mention that the Commissioner of Income-tax (Appeals) had observed that the assessee had shown prior period expense of Rs.1,34,34,500 against which the prior period income was shown as Rs.83,21,000 and the net amount of Rs. 51,13,000 had been shown as expenditure in the profit and loss account. The Commissioner of Income-tax (Appeals) held that if the assessee has shown the prior period income and the Assessing Officer has not excluded it while working out the current year's taxable income then there was no reason on the part of the Assessing Officer to disallow only one part of the prior period adjustments, i.e., the prior period expenditure. Consequently, the addition made by the Assessing Officer cannot be sustained. In any event, in view of the settled legal position, no substantial question of law arises in the present proceedings. Hence, the present appeal, being bereft of merit, is dismissed. Issues:Challenge to deletion of addition of prior period expenses by ITAT.Analysis:1. The Income-tax Department filed an appeal challenging the ITAT's order deleting the addition of Rs. 1,34,34,500 made by the Assessing Officer on account of prior period expenses for the assessment year 2003-04.2. The respondent-assessee entered into an agreement with retrospective effect, incurring expenses from January to March 2002, leading to a dispute on the crystallization of liability during the relevant previous year.3. The CIT (A) allowed the appeal filed by the respondent-assessee against the Assessing Officer's order, which was further appealed by the Revenue.4. The ITAT upheld the decision, stating that the liability under the agreement arose in August 2002, making the expenses deductible in the assessment year 2003-04.5. The Revenue argued that the ITAT erred in law by allowing the expenses based on invoice dates, contrary to the actual expense incurrence period.6. The Revenue cited the Bharat Earth Movers case, emphasizing that business liability deduction is permissible if the liability arises in the accounting year, even if quantification and discharge occur later.7. The respondent-assessee contended that the liability crystallized in August 2002 with the agreement execution, justifying the deduction in the assessment year 2003-04.8. Legal precedents like Nonsuch Tea Estate Ltd., Saurashtra Cement case, and Farasol Ltd. case were referenced to support the respondent's position on liability crystallization.9. The court analyzed the Bharat Earth Movers case, clarifying that it addressed contingent liability, unlike the present case, which aligns with the principles in the cited legal precedents.10. The court emphasized that the liability under the agreement crystallized in August 2002, making the expenses deductible in the relevant assessment year.11. The Commissioner of Income-tax (Appeals) noted the prior period adjustments made by the assessee, highlighting the consistency in treatment of prior period income and expenditure.12. Ultimately, the court dismissed the appeal, finding no substantial question of law, and upheld the ITAT's decision to delete the addition of prior period expenses, with no costs awarded.