M/S. ON SEMICONDUCTOR TECHNOLOGY INDIA PRIVATE LIMITED,BENGALURU vs. COMMISSIONER OF INCOME TAX, BENGALURU

The facts relating to the issue are stated in brief. The assessee is engaged in the business of design, development and testing of software. During the course of assessment proceedings, the A.O. noticed that the assessee has declared a sum of ON Semiconductor Technology India Pvt. Ltd., Bangalore Rs.16,86,334/- as other non-operating income (net of expenses). It was submitted that the same represents “net prior period item” as detailed below: Sale of Services - Rs.1,29,28,560/- Less: Salaries and wages - Rs.1,12,42,226/- Rs. 16,86,334/-

The A.O. expressed the view that the prior period expenses are not allowable as expenditure. However, prior period income can be brought to tax. Accordingly, the AO computed disallowance as under: Prior period Income - Rs.1,29,28,560/-

The assessee challenged the additions made in the assessment order by filing appeal before Ld. CIT(A). The first

The only that arises for our consideration is whether the tax authorities are justified in disallowing the prior period expenses alone, while assessing the prior period income?

The Ld. A.R. submitted that the assessee has deducted the prior period expenses from prior period income. The AO has assessed prior period income and disallowed prior period expenses. He submitted that the income relating to a particular year is only assessed in that year. Hence the AO has to either ignore both prior period income and prior period expenditure or assess net income only. Inviting our attention to the decision rendered by Hon’ble Gujarat High Court in the case of Principal CIT Vs. Dishman Pharmaceuticals & Chemicals Ltd. (2019) 112 Taxmann.com 91 (Guj.), the Ld. A.R. submitted that the Hon’ble Gujarat High Court has upheld the view taken by the ITAT that “Once the assessee offers prior period income, then the expenditure incurred under different heads should be given set off against that income and only the net income should be added”. The Ld. A.R. submitted that the assessee has already offered net income of Rs.16,86,334/- and hence, no separate disallowance is called for.

On the contrary, the Ld. D.R. supported the order passed by Ld. CIT(A).

Having heard the rival contentions, we are of the view that there is merit in the contentions of the assessee. It is a fact that the assessee has offered no prior period income of Rs.16,86,334/-, which has been arrived at after deducting prior period expenditure of Rs.1,12,42,226/- from the prior period income of Rs.1,29,28,460/-. Though the A.O. initially added both prior period income and prior period expenditure in the original assessment order, yet in the rectification order passed by the A.O. u/s 154 of the Act, he has deleted the disallowance relating to prior period income. The net effect of the action of AO resulted in disallowance of prior period expenses of Rs.1,12,42,226/-. The Hon’ble Gujarat High Court has held in the case of Dishman Pharmaceuticals & Chemicals Ltd. (supra) that once the prior period income is assessed to tax, then the corresponding prior period expenditure also should be allowed to be set off. Hence the action of the AO was contradictory to the decision rendered by Hon’ble Gujarat High Court in the above said case. We notice that the assessee has offered Rs.16,86,334/- as per the principle laid down by the Hon’ble Gujarat High Court in the above said case.

Accordingly, following the decision rendered by Hon’ble Gujarat High Court in the case of Dishman Pharmaceuticals & Chemicals Ltd. (supra), we direct the AO to allow the prior period expenditure as deduction against prior period income. Accordingly, we direct the A.O. to delete the disallowance of Rs.1,12,42,226/- relating to prior period expenditure.