You're right to be cautious — under Income Tax Act, prior period expenses are often scrutinized and can be disallowed if they pertain to a prior financial year but are claimed in a later year. However, in your case, there are legitimate options and legal reasoning you can consider to support a valid deduction, depending on the facts and documentation available.
✅ Key Tax Principle:
Under Section 37(1) of the Income Tax Act, expenses are deductible if:
They are incurred wholly and exclusively for business, and
They are incurred in the relevant previous year.
The issue arises when expenses relating to a prior year are accounted in a later year, i.e., treated as prior period expenses.
🎯 Goal:
To ensure the expense is allowed under AY 2026–27, despite relating to FY 2024–25.
📌 Available Legitimate Options
Option 1: Establish “Crystalization” in FY 2025–26
You can argue the expense crystallized only in April 2025, due to:
Ongoing disputes with the landlord (vendor).
No certainty or obligation to pay until invoices were issued and dispute was resolved.
Lack of any legal or constructive liability before April 2025.
📚 Precedent & Reasoning:
Courts have held that an expense is allowable in the year in which the liability crystallizes, even if it relates to earlier period — as long as the liability was not ascertainable or acknowledged earlier.
🔹 Key Case Law:
Rotork Controls India (P) Ltd. v. CIT (2009 (5) TMI 16 - SUPREME COURT) – liability must be reasonably estimated and must have crystallized.
CIT v. Indian Petrochemicals Corporation Ltd. - 2016 (9) TMI 110 - GUJARAT HIGH COURT – expense related to earlier period held allowable when liability was accepted in current year.
✅ Action:
Document the nature of the dispute (e.g., email trails, legal notices, internal notes).
Include a board note or internal memo stating liability was not determinable earlier.
Recognize the rent and GST in April 2025 books, with explanation in tax audit report (Clause 22 of Form 3CD) and in financial statement notes.
Option 2: Voluntary Disclosure as Prior Period Item (with justification)
If you cannot strongly support the "crystallization" argument, consider:
Disclosing the rent as a prior period expense in FY 2025–26,
Claiming it as a deduction in AY 2026–27 with full disclosure in Tax Audit Report (Form 3CD, Clause 22).
This is less ideal, as the Assessing Officer may disallow it, but:
Courts have sometimes allowed prior period expenses if not previously claimed and if actually paid in the current year.
Option 3: Revised Computation for AY 2025–26 (if possible)
If you're still within the window:
File a revised tax audit report and revised ITR for AY 2025–26,
Book the expense through back-dated provision in March 2025 accounts (with auditor’s note).
⚠️ Risk: Only viable if books are not finalized/audited or if audit report and ITR haven't been filed yet — or can still be revised.
🔍 Recommended Approach:
Situation | Suggested Action |
You can document the dispute and uncertainty | Use Option 1 — claim in FY 2025–26 as expense crystallized only on invoice receipt |
Dispute was informal or weakly documented | Use Option 2 — claim as prior period expense with disclosure |
Books not yet finalized or tax return not filed | Consider Option 3, if practically possible |
📑 Disclosures Required:
If using Option 1:
Include a note in financial statements explaining why expense is recognized in FY 2025–26.
Tax audit report (Form 3CD), Clause 22: Mention the nature and year of prior expense.
If using Option 2:
Disclose clearly as prior period item in books.
Report in Clause 22 of Form 3CD.
TaxTMI 
TaxTMI 
TaxTMI 
