Case Law Details
Numaligarh Refinery Ltd. Vs. DCIT (ITAT Guwahati)
The issue under consideration is whether prior period items were to be included in the determination of the net profit or loss under Mercantile system of accounting?
In the present case, the AO held that under scheme of the Act, tax is levied on income of the previous year. In mercantile system of accounting, only the income that has accrued during the previous year and the expenses incurred during the said period can only be considered in computing the taxable income of a particular previous year, each year being a separate self contained unit of assessment. Hence, the ld. AO disallowed prior period expenses.
ITAT states that, in mercantile system of accounting, an assessee had not earlier debited his account with the expenditure which accrued in law in an earlier year, would not, in the absence of a barring provisions under the law, disentitle to debit his account later when an enforceable demand is made by the appropriate authority. There is no express bar in law which disallows expenditure relating to a period other than the 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, cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. Accounting Standard (AS-5) stipulates that prior period items are income or expenses which arise ‘in the current period’ as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. Therefore, incomes or expenses relatable to prior period items are those which arise in the current period i.e. the period relevant for the purposes of computing the net profit or loss. Prior period items are to be included in the determination of the net profit or loss.
Accordingly, the appeal filed by the assessee is allowed.
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