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Income Tax Appellate Tribunal, NAGPUR BENCH : : NAGPUR
Before: SHRI S.S.GODARA & DR. DIPAK P. RIPOTE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This is an appeal filed by the Revenue directed against the order of ld.Commissioner of Income Tax (Appeal) dated 23.12.2022 for A.Y.2018-19 passed under section 250 of the M/s.Mineral Corporation Corporation Limited [R] Income Tax Act, 1961. The Revenue has raised the following grounds of appeal :
Submission of ld.AR : 2. The ld.Authorised Representative(ld.AR) of the assessee explained that the ld.CIT(A) has decided the assessee’s appeal regarding issue of prior period expenses following the decision of ITAT in assessee’s own case in order dated 13.03.2013. The ld.AR filed copy of the said order. The ld.AR pleaded that there is no merits in the case of the Revenue.
Submission of ld.DR: 3. The ld.Departmental Representative(ld.DR) for the Revenue relied o the order of the Assessing Officer(AO).
Findings & Analysis : 4. We have heard both the parties and perused the records. The ld.CIT(A) in para 7.2 has discussed the issue and allowed the assessee’s ground following ITAT Nagpur Decision in assessee’s own case for A.Y.2008-09 in ITA No.42/NAG/2012.
M/s.Mineral Corporation Corporation Limited [R] 4.1 Before us, the ld.DR for the Revenue has not pointed out any distinguishing factor, therefore, we agree with the ld.CIT(A) and respectfully following the law of consistency, we dismiss the appeal of the Revenue following the ITAT Nagpur Decision in assessee’s own case in ITA No.42/NAG/2012. The operative part of the ITAT order is reproduced here as under : “ITA No. 42/NAG /2012-AY.2008-09 8. The First Ground of Appeal is about dis-allowance of depreciation on office appliances @ 15%. While deciding the same, issue for the earlier AY, we have upheld that order of the FAA.
Following the same, Ground No.1 is decided against the assessee.
Ground No.2 is about disallowance of prior period expenditure amounting to Rs. 3.65 lakhs. During the assessment proceedings, AO found that assessee was following mercantile system of accounting and had debited Rs.3,65,000/- as prior period expenses in its Books of Accounts. He directed the assessee to justify the above expenses shown in the P&L A/c. After considering the submissions of the assessee, AO held that expenses accrued during the year under consideration were allowable, that as per the matching principles of accounting prior period expenses could not be allowed while computing the income for the AY 2008-09. He added Rs. 3.56 lakhs to the total income of the assessee.
M/s.Mineral Corporation Corporation Limited [R]
9.1. Assessee preferred an appeal before the First Appellate Authority (FAA).After considering the reply of the assessee- company, FAA held that issue of the claim of expenditure under the mercantile system of accounting was considered by the Hon’ble Jurisdictional High Court in the case of Taparia Tools Ltd., (260 ITR 102), that the claim for expenses of particular year should be made against the income of the same period, that the assessee by accounting prior period expenses pertaining to an earlier year had not adhered to the principles of mercantile system of accounting, that claim of this nature resulted in distorting the profit of the year. Finally, following the principles laid down by the Hon’ble Bombay High Court in the case of Taparia Tools Ltd., (supra), FAA dismissed the appeal filed by the assessee.
Before us, AR submitted that prior period adjustments were made in special circumstances only, that the expenditure or income of the earlier year, though accrued in that year, finally, got crystalised during a particular year, adjustments were made, that such method of accounting was regularly followed by the assessee since inception and was allowed by the AO in the earlier AYs. He relied upon the orders of Jagatjit Industries Ltd., (194 Taxman 158) and Toyo Engg. India Ltd., [(5 SOT 616 (Mumbai Tribunal)]. DR submitted that treatment give by the assessee for prior period expenses was not as per the matching number.
We have heard the rival submissions. There is no doubt that assessees, following the Mercantile system of accounting should take care of all expenses of that particular AY while preparing the Books of Accounts of the relevant period. But there are certain circumstances where the liabilities/expenses crystalise
M/s.Mineral Corporation Corporation Limited [R] after the 31st March of that particular year. Prior period expenses are not a new phenomenon in the filed of accounting or taxation laws. Courts are of the view that if the expenditure incurred in particular year are crystalised in a subsequent year because of certain reasons, same cannot be dis-allowed only on the ground that assessee is following Mercantile system of Accounting. If assessee is following a particular system of accounting and it is not distorting income, treatment of prior period expenses loses its importance. In the case under consideration, assessee was following the same system for the last so many years and the AO was allowing the prior period expenses for the relevant years. AO/FAA has not challenged the claim made by the assessee that it was following this practice consistently. They have also not held that because of prior period expenses, the taxable income of the assessee remained un- taxed. The issue can be seen from another angle – expenditure incurred by the assessee is not in doubt. It is not the case of the Revenue Authorities that expenditure was never incurred. The allowability of such expenditure in a particular year has to be decided in pragmatic manner. We have perused the orders of the Hon’ble High Courts of Delhi, Gujarat and order of the Mumbai Tribunal in the cases of Jagatjit Industries Ltd., (supra), Saurashtra Cement & Chemical Industries Ltd., and Toyo Engg. India Ltd., (supra) respectively.
In the case of Jagatjit Industries Ltd., the Hon’ble Delhi High Court has held as under:
As assessee was following consistently the same accounting method and such expenses were allowed in past and in the various years and there was no material to M/s.Mineral Corporation Corporation Limited [R] show distortion of profits or books of account, the prior period expenses was therefore, allowable to the assessee.
In the case of Saurashtra Cement & Chemical Industries Ltd., the Hon’ble Gujarat High Court has held as under:
Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis of the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gain of a previous year are required to be computed for the purpose of determining tax aliability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be M/s.Mineral Corporation Corporation Limited [R] cryastallized, which is to be taken into account under the mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year. To illustrate, we find from the details of the expenses that certain expenses related to the fees paid to the experts, out of pocket expenses incurred by the consultation firm and discharge of liability on account of demurrage claimed by the port authorities. Such items without investigation into the facts about the crystallization of such dues cannot be disallowed merely on the ground that they relate to transactions pertaining to an earlier accounting year….”
Respectfully following the above decisions, we decided Ground No.4 in favour of the assessee.
As a result, appeal filed by the assessee for the AY 2008-09 stands partly allowed.”
4.2 In the result, Ground No.1, 3 & 4 of the Revenue are dismissed.
Ground No.2: The Co-ordinate Bench in assessee’s own case for A.Y.2008-09 in has discussed the decision of the Hon'ble Bombay High Court in the case of Taparia Tools Ltd., 260 ITR 102. After considering the said decision, the ITAT Nagpur Bench in ITA No.42/NAG/2012 has allowed the appeal of the assessee.
M/s.Mineral Corporation Corporation Limited [R] Therefore, there is no merit in Ground No.2 of the Revenue, accordingly, Ground No.2 is dismissed.
In the result, appeal of the Revenue is dismissed. Order pronounced in the open Court on 28th March, 2024.