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Facts
The assessee claimed deduction for prior period expenses of Rs. 1,41,51,738/-, which were debited to the profit and loss account in the current year. The expense related to an earlier year but was booked in the current year due to delayed receipt of invoices. The original adjudication omitted this ground, leading to the recall of appeals.
Held
The Tribunal held that for prior period expenses to be allowed as a deduction in the current year, it must be proven that the liability was crystallized during that year. Since the assessee did not provide complete information regarding the crystallization of these expenses, the matter was restored to the Assessing Officer for further adjudication.
Key Issues
Whether prior period expenses can be allowed as a deduction in the year of debit if the liability was not crystallized in that year, and what evidence is required to prove crystallization.
Sections Cited
143(3)
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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
These appeals were originally adjudicated by the Tribunal vide order dated 09.01.2023, but the additional ground related to claim of ‘prior period expenses’ was omitted to be adjudicated and therefore, these appeals were recalled to the extent of adjudication
Excel Industries Ltd 2 to 5474/MUM/2017 & to 5474/MUM/2017 914/Mum/2018 of the issue of the prior period expenses by the order of the Tribunal of the issue of the prior period expenses by the order of the Tribunal of the issue of the prior period expenses by the order of the Tribunal dated 03.02.2025 vide MA No. 489 to 492/Mum/2023 and thus the dated 03.02.2025 vide MA No. 489 to 492/Mum/2023 and thus the dated 03.02.2025 vide MA No. 489 to 492/Mum/2023 and thus the Registry has fixed these appeals before us for adjudication fixed these appeals before us for adjudication fixed these appeals before us for adjudication of additional ground of the assessee related additional ground of the assessee related to prior perio to prior period expenses.
The additional ground which was raised in assessment year The additional ground which was raised in assessment year The additional ground which was raised in assessment year 2010-11 is reproduced as 11 is reproduced as under:
Deduction in respect of prior period expenses : Deduction in respect of prior period expenses : On the facts and in the circumstances of the case and in law, On the facts and in the circumstances of the case and in law, On the facts and in the circumstances of the case and in law, the appellant prays that the Assessing the appellant prays that the Assessing Officer be directed to Officer be directed to allow deduction of prior period expenses in the year in which allow deduction of prior period expenses in the year in which allow deduction of prior period expenses in the year in which the said expenses are debited to the Profit and the said expenses are debited to the Profit and Loss Account. Account.
We have heard rival We have heard rival submissions of the parties on the issue in submissions of the parties on the issue in dispute and perused the relevant material o dispute and perused the relevant material on record. Before us, the n record. Before us, the Ld. counsel for the assessee filed detail of the prior period expenses Ld. counsel for the assessee filed detail of the prior period expenses Ld. counsel for the assessee filed detail of the prior period expenses and income. The Ld. counsel referred to the letters sent by the income. The Ld. counsel referred to the letters sent by the income. The Ld. counsel referred to the letters sent by the assessee during the course of the assessment proceedings to the assessee during the course of the assessment proceedings to the assessee during the course of the assessment proceedings to the Assessing Officer. The relevant Assessing Officer. The relevant para of said letter is reproduced as is reproduced as under:
“1. Prior Period Expenses “1. Prior Period Expenses During the previous year relevant to the above Assessment During the previous year relevant to the above Assessment During the previous year relevant to the above Assessment Year, the Prior Period Expenses (Net) amounting to Year, the Prior Period Expenses (Net) amounting to Year, the Prior Period Expenses (Net) amounting to Rs.1,89,52,924/ Rs.1,89,52,924/- have been added to the income while have been added to the income while computing the business computing the business income for the previous year ended income for the previous year ended 31" March, 2010. 31" March, 2010. In this regard, we would like to state that the expenditure of In this regard, we would like to state that the expenditure of In this regard, we would like to state that the expenditure of Rs.1, 41,51,738/ Rs.1, 41,51,738/- being related to a prior year has been being related to a prior year has been debited, the details of which are enclosed in Annexure XXIV debited, the details of which are enclosed in Annexure XXIV debited, the details of which are enclosed in Annexure XXIV
Excel Industries Ltd 3 to 5474/MUM/2017 & to 5474/MUM/2017 914/Mum/2018 of the Tax Audit Report of the Tax Audit Report (enclosed herewith for your ready (enclosed herewith for your ready reference). We would further like to submit that this expenditure is We would further like to submit that this expenditure is We would further like to submit that this expenditure is accounted in the previous year relevant to the above accounted in the previous year relevant to the above accounted in the previous year relevant to the above assessment year due to non assessment year due to non-receipt of the invoices from the receipt of the invoices from the supplier during earlier years. These are supplier during earlier years. These are also not claimed in also not claimed in earlier years and therefore ought to be allowed in the earlier years and therefore ought to be allowed in the earlier years and therefore ought to be allowed in the current year otherwise such expenditure may have to be current year otherwise such expenditure may have to be current year otherwise such expenditure may have to be allowed in the prior years. allowed in the prior years. This requires reopening of assessment of earlier years This requires reopening of assessment of earlier years This requires reopening of assessment of earlier years which leads to hassles to us and also to t which leads to hassles to us and also to the department. In he department. In this regard we further would like to submit that the this regard we further would like to submit that the this regard we further would like to submit that the expenditure is related to earlier year, however as and when expenditure is related to earlier year, however as and when expenditure is related to earlier year, however as and when the bills were traced by us the expenditure has been the bills were traced by us the expenditure has been the bills were traced by us the expenditure has been booked accordingly. In this regard the observations made booked accordingly. In this regard the observations made booked accordingly. In this regard the observations made by the tribunal by the tribunal for the assessment years is worth for the assessment years is worth considering (refer Para 8). If the expenditure is otherwise considering (refer Para 8). If the expenditure is otherwise considering (refer Para 8). If the expenditure is otherwise allowable, the claim should not be denied by adopting allowable, the claim should not be denied by adopting allowable, the claim should not be denied by adopting unreasonable approach of "Head I win Tail you loose" The unreasonable approach of "Head I win Tail you loose" The unreasonable approach of "Head I win Tail you loose" The tax liability of an assessee has to be determined tax liability of an assessee has to be determined tax liability of an assessee has to be determined in fair manner. We are enclosing herewith vouchers for Roha and Lote We are enclosing herewith vouchers for Roha and Lote We are enclosing herewith vouchers for Roha and Lote locations which are debited to prior period expense and we locations which are debited to prior period expense and locations which are debited to prior period expense and shall be submitting other vouchers pertaining to the shall be submitting other vouchers pertaining to the shall be submitting other vouchers pertaining to the same in due due course.” 3.1 From above, it is evident that prior period expend From above, it is evident that prior period expend From above, it is evident that prior period expenditure of Rs.1,41,51,738/- was debited was debited in profit and loss account for the year in profit and loss account for the year under consideration. under consideration. For claim of said expenses, the assessee was the assessee was required to file all the documentary evidence in support thereof to required to file all the documentary evidence in support thereof to required to file all the documentary evidence in support thereof to substantiate that whether the liability corr substantiate that whether the liability corresponding the prior esponding the prior period expenses was was crystallized in the year under consideration. the year under consideration. From the submission of the assessee before the Assessing Officer as From the submission of the assessee before the Assessing Officer From the submission of the assessee before the Assessing Officer reproduced above, it is evident that assessee had filed only part reproduced above, it is evident that assessee had reproduced above, it is evident that assessee had Excel Industries Ltd 4 to 5474/MUM/2017 & ITA Nos. 5472 to 5474/MUM/2017 914/Mum/2018 information before him. The Ld. coun information before him. The Ld. counsel for the assessee relied on sel for the assessee relied on the decision in the case of the assessee in assessment year 1987-88 the decision in the case of the assessee in assessment year 1987 the decision in the case of the assessee in assessment year 1987 in in ITA No. 5630/Mum/1991 and submitted that following the same 1991 and submitted that following the same prior period expenses should be allowed in the year under prior period expenses should be allowed in the year under prior period expenses should be allowed in the year under consideration. We have considered th consideration. We have considered the decision of the Tribunal cited e decision of the Tribunal cited by the assessee, the Tribunal has noted that expenses should be by the assessee, the Tribunal has noted that expenses should be by the assessee, the Tribunal has noted that expenses should be considered as crystallize considered as crystallized during the year. The relevant submission during the year. The relevant submission of the Tribunal is reproduced as under: of the Tribunal is reproduced as under:
“6. Mr. Sohrab E, Dastur, the learned counsel for t “6. Mr. Sohrab E, Dastur, the learned counsel for t “6. Mr. Sohrab E, Dastur, the learned counsel for the assessee, submitted that the impugried expenditure formed assessee, submitted that the impugried expenditure formed assessee, submitted that the impugried expenditure formed a very insignificant part of the total, expenditure. Assessee: a very insignificant part of the total, expenditure. Assessee: a very insignificant part of the total, expenditure. Assessee: became conscious of the said expenditure only in the year became conscious of the said expenditure only in the year became conscious of the said expenditure only in the year under; consideration and hence the same should be under; consideration and hence the same should be under; consideration and hence the same should be considered as crystalliz considered as crystallized during the year. It was also ed during the year. It was also submitted it is quite normal in large companies that it comes submitted it is quite normal in large companies that it comes submitted it is quite normal in large companies that it comes to light only in the subsequent year that a particular to light only in the subsequent year that a particular to light only in the subsequent year that a particular expenditure pertained to earlier year and hence assessee expenditure pertained to earlier year and hence assessee expenditure pertained to earlier year and hence assessee tends to lose in both the years tends to lose in both the years - in the year to w in the year to which it pertains, pertains, on on account account of of non-provision, non provision, and and in in the the subsequent year on account of it being related to earlier subsequent year on account of it being related to earlier subsequent year on account of it being related to earlier year. Hence, it was contended that this anomaly should be year. Hence, it was contended that this anomaly should be year. Hence, it was contended that this anomaly should be removed by adopting a pragmatic approach particularly removed by adopting a pragmatic approach particularly removed by adopting a pragmatic approach particularly when the expenditure claimed when the expenditure claimed is a very small percentage of is a very small percentage of the total, Mr. Hareshwar Sharma, the learned D.R. strongly the total, Mr. Hareshwar Sharma, the learned D.R. strongly the total, Mr. Hareshwar Sharma, the learned D.R. strongly supported the orders of the lower authorities, supported the orders of the lower authorities, 7. We have considered the rival contentions. Admittedly, 7. We have considered the rival contentions. Admittedly, 7. We have considered the rival contentions. Admittedly, end also as found by the Tribunal in the order cited supra end also as found by the Tribunal in the order cited supra end also as found by the Tribunal in the order cited supra for asst. Year 1986 for asst. Year 1986-87, the impugned expenditure pertains 87, the impugned expenditure pertains to asst. Year 1986 to asst. Year 1986-87. The claim for deduction 87. The claim for deduction of this amount was also made in as amount was also made in asst. Year 1986-87-but the sane but the sane was disallowed on the ground that no entries, wore made was disallowed on the ground that no entries, wore made was disallowed on the ground that no entries, wore made in the books, When the manner reached the Tribunal; the in the books, When the manner reached the Tribunal; the in the books, When the manner reached the Tribunal; the Tribunal expressed the view that the department cannot Tribunal expressed the view that the department cannot Tribunal expressed the view that the department cannot adopt the policy of Head I win’ and Tail you lose. Since th adopt the policy of Head I win’ and Tail you lose. Since th adopt the policy of Head I win’ and Tail you lose. Since the claim was also made in asst. year 1987 claim was also made in asst. year 1987-88, Tribunal 88, Tribunal
Excel Industries Ltd 5 to 5474/MUM/2017 & to 5474/MUM/2017 914/Mum/2018 directed that if the assessee gives up its claim in asst. Year directed that if the assessee gives up its claim in asst. Year directed that if the assessee gives up its claim in asst. Year 1987-88; then its request for considering the said 88; then its request for considering the said 88; then its request for considering the said expenditure for deduction in the year under appeal could be expenditure for deduction in the year under appeal could be expenditure for deduction in the year under appeal could be considered. In this connecti considered. In this connection, the Tribunal also observed on, the Tribunal also observed that the purpose of assessment was to make a fair that the purpose of assessment was to make a fair that the purpose of assessment was to make a fair determination of the tax liability of an assessee. It was determination of the tax liability of an assessee. It was determination of the tax liability of an assessee. It was therefore necessary to adopt reasonable approach' for therefore necessary to adopt reasonable approach' for therefore necessary to adopt reasonable approach' for determination of the tax liability. determination of the tax liability. 8. in other words, accordin 8. in other words, according to our understanding of the g to our understanding of the order of the Tribunal, If the expenditure, is otherwise order of the Tribunal, If the expenditure, is otherwise order of the Tribunal, If the expenditure, is otherwise allowable, the claim should not be denied by adopting, an allowable, the claim should not be denied by adopting, an allowable, the claim should not be denied by adopting, an unreasonable approach of 'Head I win unreasonable approach of 'Head I win - tall you lose'. The tall you lose'. The tax liability of an assessee has to be determined in tax liability of an assessee has to be determined in tax liability of an assessee has to be determined in a fair manner, The assessee, by way of abundant caution would manner, The assessee, by way of abundant caution would manner, The assessee, by way of abundant caution would take the ground in both the years, i.e: in asst, Year 1986 take the ground in both the years, i.e: in asst, Year 1986 take the ground in both the years, i.e: in asst, Year 1986-87 as well as in asst. Year 1987 as well as in asst. Year 1987-88, Since the assessee did 88, Since the assessee did not withdraw its claim in ass, Year 1987 not withdraw its claim in ass, Year 1987-88 le, the year 88 le, the year under consideratio under consideration, the same should now be allowed, n, the same should now be allowed, which would be in conformity with the order of the Tribunal which would be in conformity with the order of the Tribunal which would be in conformity with the order of the Tribunal for assessment for assessment year 1986-87.” 3.2 in the case of JCL electromet Private Limited versus additional in the case of JCL electromet Private Limited versus additional in the case of JCL electromet Private Limited versus additional CIT(22007) 83 taxmann.com 250, the coordinate bench of the CIT(22007) 83 taxmann.com 250, the coordinate bench of the CIT(22007) 83 taxmann.com 250, the coordinate bench of the Tribunal has held that where assessee is not able to prove that unal has held that where assessee is not able to prove that unal has held that where assessee is not able to prove that prior period expenses have been crystallised during relevant year, prior period expenses have been crystallised during relevant year, prior period expenses have been crystallised during relevant year, same could not be allowed as deduction. The Hon’ble Gujrat High same could not be allowed as deduction. The Hon’ble Gujrat High same could not be allowed as deduction. The Hon’ble Gujrat High Court in the case of Saurashtra Cement and chemical industries Court in the case of Saurashtra Cement and chemical industries Court in the case of Saurashtra Cement and chemical industries Ltd Vs CIT reported in 213 ITR 523, held that merely because an d Vs CIT reported in 213 ITR 523, held that merely because an d Vs CIT reported in 213 ITR 523, held that merely because an expense relates to a transaction of an earlier year, it does not expense relates to a transaction of an earlier year, it does not expense relates to a transaction of an earlier year, it does not become a liability in the earlier year unless it can be said that become a liability in the earlier year unless it can be said that become a liability in the earlier year unless it can be said that liability was determined and crystallised in the year in the question liability was determined and crystallised in the year in the q liability was determined and crystallised in the year in the q on the basis of maintaining accounts on mercantile basis. In our on the basis of maintaining accounts on mercantile basis. on the basis of maintaining accounts on mercantile basis. opinion, the assessee opinion, the assessee was required to explain when the claim of the was required to explain when the claim of the Excel Industries Ltd 6 to 5474/MUM/2017 & ITA Nos. 5472 to 5474/MUM/2017 914/Mum/2018 liability was made upon the assessee , when the assessee had liability was made upon the assessee , when the assessee had liability was made upon the assessee , when the assessee had accepted the liability to make the payment , whether there was any accepted the liability to make the payment , whether accepted the liability to make the payment , whether statutory order in forcing the liability on the assessee and when the statutory order in forcing the liability on the assessee and when the statutory order in forcing the liability on the assessee and when the payment in respect of the liability was made. All these payment in respect of the liability was made. All these payment in respect of the liability was made. All these circumstances has to be taken into consideration for determining circumstances has to be taken into consideration for determining circumstances has to be taken into consideration for determining crystallisation of the liability in the year under crystallisation of the liability in the year under consideration. The consideration. The assessee has not filed complete information in respect of filed complete information in respect of crystallization of the prior period expenses during the year under crystallization of the prior period expenses during the year under crystallization of the prior period expenses during the year under consideration. Therefore, we feel it appropriate to restore the matter consideration. Therefore, we feel it appropriate to restore the matter consideration. Therefore, we feel it appropriate to restore the matter back to the file of the Assessing Officer back to the file of the Assessing Officer with the direction to the with the direction to the assessee to file all the necessary evidence assessee to file all the necessary evidences in support that prior in support that prior period expenses claimed by the assessee had been crystallized period expenses claimed by the assessee had been crystallized period expenses claimed by the assessee had been crystallized during the year under consideration. The additional ground of the during the year under consideration. The additional ground of the during the year under consideration. The additional ground of the appeal of the assessee is accordin appeal of the assessee is accordingly allowed for statistical gly allowed for statistical purposes.
The additional ground raised in other assessment years being The additional ground raised in other assessment years being The additional ground raised in other assessment years being identical to the ground adjudicated ab identical to the ground adjudicated above in assessment year 2010 ove in assessment year 2010- 11, therefore, following our finding above, the additional ground herefore, following our finding above, the additional ground herefore, following our finding above, the additional ground raised in remaining y raised in remaining years are also restored back to ears are also restored back to the file of the Assessing Officer for Assessing Officer for adjudication as stated above. The additional as stated above. The additional grounds raised in all the assessment years are allowed for grounds raised in all the assessment years are allowed for grounds raised in all the assessment years are allowed for statistical purposes.
Excel Industries Ltd 7 to 5474/MUM/2017 & to 5474/MUM/2017 914/Mum/2018
The appeals of the assessee to the extent of appeals of the assessee to the extent of additional g additional grounds of appeal are accordingly disposed off as accordingly disposed off as stated above. above.
Order pronounced in the open Court on nounced in the open Court on 25/03/2025. /03/2025.