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These are cross appeals by assessee and Revenue against the orders of the CIT(A) XXXIX, Mumbai dated 02.02.2010 for the respective assessment years. These appeals are considered together and disposed off by this common order.

ITA Nos. 3344 & 3345/Mum/2010; A.Y. : 2005-06 & 2006-07

2. Assessee has raised the following common ground of appeal for both the assessment years.

2 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.

9. Perusal of the assessment order shows that the AO has disallowed the expenditure on the ground that it was incurred on creating apparatus which had been utilized for preparation of advertising materials and therefore was in the nature of capital expenditure. The ld. CIT(A) has simply confirmed the order of the AO without any discussion. Neither the AO nor the CIT(A) has stated about the life of the bromides or the frequency with which they are prepared or discarded. The mere fact they are used for preparing labels and cartons to be pasted on the bottles and the products does not ispo facto lead to the conclusion that the expenditure incurred on preparing them are in the nature of capital expenditure. It is like the expenditure incurred on preparing a negative with the help of which positive prints of photographs are prepared. Can it be said that the expenses incurred on preparing the negatives are in the nature of 3 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.

Since the facts are similar for these years also, respectfully following the above decision of the Coordinate Bench, we restore the matter back to the file of the A.O. to decide the issue in accordance with law. Ground is considered allowed.

5. The issue in ground No. 2 in ITA No. 3344/Mum/2010 is with reference to prior period expenses of Rs.10,11,152/-. Assessee claimed the prior period expenses in the P & L Account below the line and in the return filed it made a specific claim in the computation of income as the computation started from net profit. In the course of assessment proceedings, it was the submission of the assessee, that they have made detailed explanation with reference to the nature of expenses and also supporting evidence but, without any discussion the A.O. did not allow the amount. He started the computation with net profit and made adjustment to that amount. Assessee contested the same before the CIT(A) who gave a finding that these are genuine expenses met out by the assessee for business purpose. He also agreed that it is a settled principle that the expenses which arose in the accounting year relevant to the assessment year only can be allowed as deduction since assessee follows mercantile system of accounting. By holding thus, he considered that prior period expenses cannot be allowed a deduction. However, keeping in the spirit of the decision relied upon by the assessee and also keeping in view that business expenses have to be allowed as deduction while computing the total income, he directed the A.O. for allowing the prior period expenses disallowed in A.Y. 2006-07 as deduction in A.Y. 2005-06 if it is incurred in 4 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.

7. The learned D.R., however, relied on the order of the CIT(A) to submit that prior period expenses cannot be allowed in this year as assessee maintained books on mercantile system of accounting.

8. We have considered the issue. As far as prior period expenses are concerned the issue revolves on the fact whether the liability has crystallised during the year under consideration or not. Neither the A.O. nor the CIT(A) discussed the nature of prior period expenses and examined whether the expenditure has crystallised during the year or not. The CIT(A) allowed the expenditure claimed in later year as a deduction in this year and as far as the expenditure claim in this year was concerned, he declined to give any direction stating that the appeal in earlier year was not pending before him. We are of the view that the CIT(A) has erred in considering the issue on legal principles alone without examining the nature of expenditure and its crystallisation during the year as claimed by assessee. In the course of business there can be certain situations where the amounts are disputed or the bills have not been received or claims were made subsequently and in those cases the company records the expenditure as prior period expenses as per accounting principles and guide lines under Company Law. As far as 5 ITA 3345, 3346, 3636 & 3637/Mum/2010 M/s. Parle Agro Pvt. Ltd.