Disallowing Expenses as ‘Prior Period Expenses’ Requires Examination of Liability Crystallization Year

DCIT Vs National Bank for Agriculture & Rural Development (ITAT Mumbai)

Without examining Year of year of crystallization of liability expenses cannot be disallowed merely because same was categorized as “Prior Period Expenses”

The dispute between the Deputy Commissioner of Income Tax (DCIT) and the National Bank for Agriculture & Rural Development (NABARD) before the Income Tax Appellate Tribunal (ITAT) in Mumbai revolves around the disallowance of prior period expenses for the assessment years (AY) 2012-13, 2013-14, and 2015-16.

The Assessing Officer (AO) observed that NABARD had categorized certain expenses as “Prior Period Expenses” in its Profit and Loss account for these years. The AO disallowed these expenses, arguing that since they related to earlier years and not the current years under consideration, they were not allowable deductions under the Mercantile System of Accounting.

However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the expenses for AY 2012-13 and 2015-16, citing a precedent set by the Mumbai bench of the Tribunal in the case of Toyo Engg India Ltd vs. JCIT (2006). This case established that if routine expenses are delayed due to procedural or administrative reasons, they are allowable in the year of payment. For AY 2013-14, the CIT(A) directed the AO to examine the nature of the expenses and allow those that were revenue-related.

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