The Mumbai bench of Income Tax Appellate Tribunal ( ITAT ) directed readjudication regarding the prior period expenses after finding out the year of crystallization.
The Assessee National Bank for Agriculture & Rural Development is engaged in development of agricultural and rural activities throughout the Country. Its business consisted of providing and regulating credit to agricultural and rural areas, providing grants, subsidies and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, rural infrastructure, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promote rural development in an integrated way.
The AO during the assessment proceedings of assessment years 2012-13, 2013-14 & 2015-16 noticed in these years that the assessee has claimed in the Profit and Loss account certain expenses categorized as “Prior Period Expenses”. Since these expenses, but the name itself, is related to earlier years and do not pertain to the respective current years, the AO disallowed the same on the reasoning that they are not allowable as deduction under Mercantile System of Accounting.
Aggrieved by the order the assessee filed an appeal before the CIT(A) who restored the issue to the file of AO with the direction to examine the claim of the assessee and allow those expenses, which are revenue in nature. Therefore the assessee filed another appeal before the tribunal.
Counsel for the assessee submitted that all the relevant expenses, even though titled as “prior period expenses” in the books of account, actually got crystallized during the relevant years under consideration
It was viewed by the tribunal that the settled proposition is that an expenditure shall be allowable in the year of crystallization of its liability, even though the said expenditure was related to an earlier period. The said expenditure is treated as current year’s expenditure in the year of crystallization and accordingly allowable as deduction in that year
Although AO was not right in disallowing expenses merely on the reasoning that the same has been booked as “Prior period expense” in the books of account.
Hence the bench said that details of prior period expenses were not examined by both the tax authorities and the year of crystallization was also not examined. In the absence of relevant details, it would not be possible to adjudicate the matter by applying above said principle
After reviewing the facts the ITAT bench of Justice (Retd.) C.V. Bhadang, ( President)and B.R. Baskaran,(Accountant Member)Accordingly, set aside the order passed by CIT (A) on this issue and restore the same to the file of AO in AY 2012-13, 2013-14 and 2015-16 and directed readjudication regarding the prior period expenses after finding out the year of crystallization.
Jehangir D. Mistry, the counsel appeared for the assessee and S. Srinivasu,counsel appeared for the revenue.
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