Allowability of prior period expenses as deduction

Often prior period expenses is disalllwoed by the assessing officer on the concept of “Matching principle” which provide that expenditure is allowable as deduction only if it is against earning the income which is offered for taxation during the relevant assessment year. Question arises, whether AO is correct in disallowing the prior period expense debited to Profit and Loss Account in such cases?

Here is one interesting judgment by Delhi ITAT covering the similarly issue which is worth reading.

Dakshin Haryana Bijli Vitran Nigam Ltd. Vs ACIT

[ITAT Delhi in Appeal Number : ITA No. 3412/Del/2016 vide order Dated 19/02/2020]

Challenging the orders dated 30.03.2016 for assessment year 2008-09 and 31.03.2016 for assessment year 2011-12 in appeal Nos. 191/14-15 and 194/14-15 respectively passed by the learned Commissioner of Income Tax (Appeals)- Faridabad (“Ld. CIT(A)”), both Dakshin Haryana Bijli Vitran Nigam Ltd. (“the assessee”) and the Revenue have preferred these cross appeals.

2. Brief facts of the case are that the assessee is a Government Undertaking engaged in the business of distribution of electricity in southern Haryana. In so far as the assessment year 2008-09 is concerned, the assessment u/s. 143(3) was completed by order dated 23.12.2010 at nil income but subsequently, pursuant to order dated 07.01.2013 passed by Commissioner of Income-tax u/s. 263 of the Act, assessment was taken up and concluded by order dated 30.01.2014. Since the issues arisen in the appeals of the assessee and the Revenue are emanated from common set of facts, we deem it just and convenient to dispose of them all by this common order.

Appeals for A.Y. 2008-09:

3. The only ground in assessse’s appeal relates to the addition made u/s. 43B in respect of Municipal Tax. During the assessment proceedings, Ld. Assessing Officer noticed that the statutory liability towards Electricity Duty and Municipal Tax was outstanding as was revealed from the perusal of Schedule-16. The assessee explained that the payment of Municipal Tax was made to the Municipal Committee on the basis of collection from the consumers and not on the basis of amount billed and that the amount of Municipal Tax payable to Municipal Committee is adjusted against the payment of electricity bills receivable from Municipal Committee on monthly basis. In respect of Electricity Duty, the submission of the assessee was that Electricity Duty billed to consumers in energy bills on monthly basis and its liability is shown as payable to Government, which is a continuous process and the Electricity Duty is paid to the Government on collection basis, but not on the basis of bills raised to the consumers. Government of Haryana makes the payment of Revenue Subsidy to the assessee on monthly basis for supplying the electricity on concessional tariff to agricultural consumers after adjusting the Electricity Duty against the Revenue subsidy receivable from Government of Haryana. Therefore, there are no outstanding debtors of Electricity Duty and outstanding amount will be paid to Government of Haryana as and when it is received from the consumers. The assessee also placed reliance on the decision of Hon’ble Kerala High Court in the case of Kerala State Electricity Board vs. DCIT (2011-ITS-69-HC-Ker).
4. Assessing Officer, however, did not accept the assessee’s contention but by placing reliance on the decision of Gujrat High Court in the case of CIT vs. Ahmedabad Electricity Co. Ltd., (2003) 181 CTR- Guj-222, took the view that where the assessee was maintaining its books of account on mercantile system of accounting, the expenses relating to period other than the assessment year was not to be allowed.
5. In appeal before ld. CIT(A), the assessee pleaded that as a part of electricity distribution activity, the assessee was required by the Government to collect Municipal Tax on Government behalf and therefore, section 43B of the Act has no application. Ld. CIT(A) noted that assessee merely acts as an agent in respect of collection of the Municipal Taxes. Ld. CIT(A), however, held that the assessee was unable to prove its point and did not submit any case law on this aspect and therefore, confirmed the view taken by the Assessing Officer.
6. In respect of Electricity Duty, ld. CIT(A) followed the decision of Hon’ble Calcutta High Court in the case of CESC Ltd. Vs. CIT dated 14.05.2015, wherein the decisions of both Hon’ble Kerala High Court and Gujrat High Court were considered and held that the Electricity Duty deserves to be deleted and granted relief to the assessee. Assessee, therefore, challenged the finding of the ld. CIT(A) confirming the addition made on account of Municipal Tax whereas the Revenue challenged the deletion of addition on account of Electricity Duty vide ground No. 3.
7. It is submitted before us by the ld. AR that collection of Municipal Taxes in the hands of the assessee is not its income and the Government of Haryana makes an adjustment in respect of the Revenue Subsidy payable to the assessee against the amount of Electricity Duty collected by the assessee and payable to the Government. Ld. AR submitted that section 43B of the Act is applicable in respect of deduction claimed in the profit and loss account and in this matter, no amount of Municipal Tax was debited against the business profits and therefore, section 43B has no application to the facts of the case.
8. He submitted that similar issue has arisen in assessee’s own case for the assessment year 2006-07 also and the coordinate Bench of this Tribunal in ITA No. 3411 and 3217/Del/2016 by order dated 24.12.2019 dealt with the same vide para 16 to 18 and reached a conclusion that disallowance u/s. 43B of the Act is not sustainable.
9. Learned DR places reliance on the orders of the Assessing Officer.
10. As submitted by the ld. AR, both these issues are covered by the order of Co-ordinate Bench of Tribunal in ITA No. 3411 and 3217/Del/2016 by order dated 24.12.2019, the relevant observations of the Tribunal at para 16 to 18 read thus :
11. Coming to the merits of the addition upheld by the CIT(A) i.e. in respect of outstanding Municipal Tax liability of Rs.11.63 crores. The relevant facts of the issue are that the Governor of Haryana had notified that the committee shall impose tax on the consumption of electricity @ 5 paise for every unit of electricity consumed by any person within the limits of the municipality in the State of Haryana. The said tax had to be collected by Haryana Vidyut Prasaran Nigam Ltd. (in short “HVPNL”) and paid as an Electricity Duty payable to the State Government under the Punjab Electricity (Duty) Act, 1958. Similar practice was adopted in case of Municipal Taxes by the Municipal Committee/Council while paying their dues on account of consumption of electricity to the Nigam as per Government of Haryana circular dated 16.05.2000. The Assessing Officer did not accept the plea of the assessee and held that since the said amount of Municipal Taxes collected by it, have not been deposited before the due date of filing of return of income, the same is liable to be disallowed u/s 43B of the Act. The CIT(A) has upheld the order of the Assessing Officer in this regard. The question which arises is whether the same is to be allowed as deduction in the hands of the assessee or not. The case of the assessee is that it was not the liability of the assessee to deposit the said Municipal Taxes collected by it on behalf of the state authorities. The assessee was acting as collecting agent and the amount had to be paid by the State authority. The assessee after collecting the amount had not debited it to the P & L Account and whatever amount was not collected, was shown as receivable and contra entry was passed as payable to the State. Once the amount had been debited to the P&L Account of the assessee, then the provision of section 43B of the Act were not attracted. In any case, the assessee was only a collecting agent on behalf of the State and it was the amount which was not collected, which was shown as receivable and also on the other side shown as payable to the State. The liability if any, would arise after the amount is collected and that also of the State. In such circumstances, the provision of section 43B of the Act could not be applied and the amount could not be disallowed in the hands of the assessee. Similar accounting has been carried out by the assessee in its books of accounts from Assessment Year 1999-2000 and no disallowance has been made in any of the year.
12. Further, the Hon’ble Calcutta High Court in the case of CESC Ltd. vs CIT (supra) has held that where the assessee merely acts as Collecting agent for the State Government and pays the same to the State Government on collection, then, the licencee merely acts as a conduit and the Electricity Duty was not chargeable to the licencee. It was concluded by holding that Electricity Duty not being a sum payable by the assessee as a primary liability by way of tax, duty, cess or fee, then provisions of section 43B of the Act were not attracted to the licencee/assessee in respect of the Electricity Duty collected by it for being passed on to the State Government.
13. Applying the said proposition to the issue before us, we hold that there is no merit in the orders of the authorities below in making the aforesaid disallowance u/s 43B of the Act. We reverse the same and allow Ground No.2 raised by the assessee on merits.
14. Since facts are identical and no contrary decision is brought to our notice, while respectfully following the view taken by co-ordinate Bench, we hold that both the additions u/s. 43B cannot be sustained. Accordingly, ground of assessee’s appeal is allowed and ground No. 3 of Revenue’s appeal is dismissed.
15. Ground No. 1 of the Revenue’s appeal is in respect of deletion of addition of Rs.2,93,40,534/- on account of cost variance reserve. According to assessee, as per the accounting policy, the material supplied to them by the supplier was taken in store at the value mentioned in the purchase order, but while issuing the same, the rate fixed by Nigam dependent upon the price of material CST/ST, Excise Duty and other charges as per purchase order were considered and the variance that arise is being debited and credited during the year to the cost variance account. Further, according to the assessee, the balance, if any at the end of the year under such account
    is charged to profit and loss account of the current year and credit balance under the head is shown as cost variance reserve under Reserve and Surplus head of balance sheet, which, in so far as financial year 2007-08 is concerned, is credit balance of Rs.2,93,40,534/-.
16. Learned Assessing Officer, however, held that credit balance should be added to the income side of profit and loss account and, therefore, the portion of cost debited to profit and loss account equivalent to this provision is not to be allowed as it was inflated.
17. Ld. CIT(A) having considered the contentions of the assessee that in the next financial year 2008-09, the reserve of Rs.2,93,40,534/- was adjusted and the same was disclosed in 10th and 11th Annual Report for F.Y. 2008-09 and therefore, there is no loss to the Revenue as the assessee credited the amount of entire 2.93 crores in the profit and loss account of next assessment year. According to ld. CIT(A), accepting the contention of the Assessing Officer would amount to double taxation, which is not permissible. On this premise, ld. CIT(A) allowed the ground of assessee’s appeal and deleted the addition.
18. Before us, the assessee placed reliance on the decision of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd., 358 ITR 295 (SC). On a careful consideration of this issue we are of the considered opinion that inasmuch as there is no dispute in the current year and subsequent year, the rate of tax remained the same and the dispute raised by the Revenue is entirely academic or it may have a minor tax effect. By respectfully following the decision of Hon’ble Apex Court in the case of Excel Industries Ltd. (supra), we endorse the view taken by the ld. CIT(A) and hold that this is a revenue neutral transaction. We, therefore, affirm the finding
    of the ld. CIT(A) on this issue.
19. Ground No. 2 of Revenue’s appeal relate to the deletion of addition of Rs.71,47,71,224/- on account of provision of surcharge levied but not realized. On this aspect, the case of the assessee is that they have been levying surcharge on bills issued if payment is not within time allowed, but it has been a general practice that most of the rural area consumers of domestic and agriculture category do not make the payment of the original bills and therefore, surcharge remains unpaid. The Government, therefore, was introducing waiver of surcharge from time to time to reduce the debtors because recovery proceedings were not worth the recovered amount. Ld. CIT(A) considered the fact that this has been a recurrent issue decided in favour of the assessee by first and second appellate authorities in respect of assessment year 2006-07 and High Court also held the issue in favour of the assessee.
20. Revenue does not dispute the fact that Hon’ble High Court held the issue in favour of the assessee in the assessment years 2006-07 to 2008-09 vide orders dated 01.10.2014, 02.02.2015 and 06.10.2014 in ITA Nos. 209/2014, 369/2014 and 226/2014 respectively. Since ld. CIT(A) followed the binding precedent of Hon’ble High Court, it cannot be said that the finding of the CIT(A) is either erroneous or perverse. We, therefore, find this ground of appeal of Revenue as devoid of merit and the same is liable to be dismissed. Ground No. 2 of Revenue’s appeal is dismissed.

Appeals for A.Y. 2011-12:

18. In so far as the appeals of the assessee and the Revenue for this assessment year are concerned, ground of assessee’s appeal as well as ground No. 1 & 2 of Revenue’s appeal are covered by our findings (supra). We, therefore, allow the ground of appeal of the assessee and dismiss grounds Nos. 1 & 2 of the Revenue’s appeal.
19. Now, coming to ground No. 3 of Revenue’s appeal, it relates to prior period expense. The assessee credited a net balance of Rs.31,36,65,890/- in the profit and loss account after setting off a prior period expense of Rs.21,210/- from prior period income of Rs.31,36,87,100/- which was due to the arrears of salary of the employees. It is submitted on behalf of assessee that the same accounting treatment for prior period expenses has been given by the assessee quite for a long time and during the assessment year 2010-11, they have claimed the expenses relating to prior period. It is brought to our notice that a similar issue had arisen in earlier years also.
20. Ld. CIT(A) noticed that the gross prior period income of Rs.31,36,87,100/- and prior period expenses of Rs.21,210/- were crystallized during the year and therefore, disclosed by the assessee in the balance sheet and profit and loss account. According to CIT(A), the claim of assessee on account of Pay anomaly of employee crystallized during the year should have been accepted and he, therefore, granted relief to the assessee.
21. On a perusal of the record and the order dated 24.12.2009 for assessment year 2006-07 in assessee’s own case, we hold that the Tribunal also endorsed the view taken by ld. CIT(A) in earlier years that the liability crystallized during the year has to be allowed. We do not find anything improper in the approach of the CIT(A) to allow the expenses in respect of which the liability crystallized during the year. Hence, ground No. 3 of Revenue’s appeal is dismissed.
22. Ground No. 4 of Revenue’s appeal relates to deletion of a sum of Rs.1,38,97,653/- on account of loss due to flood, cyclone and fire. The assessee submitted that they have incurred such expenditure on account of loss of fixed assets spread over 52 divisions throughout Southern part of Haryana and bound to incur due to natural calamities. Such expenses were to be incurred to revive the electricity supply and to get it continued. According to assessee, such expenditure is regular feature of the business and cannot be said to be capital in nature. Ld. Assessing Officer did not accept the contention of the assessee and held that in the absence of any separate figure in respect of repair and maintenance head from the other expenses, the claim of the assessee cannot be allowed. Ld. CIT(A) while following the view taken in assessee’s own case for assessment year 2006-07 allowed this ground.
23. On a perusal of the order for assessment year 2006-07 in assessee’s own case, we find that a co-ordinate Bench of this Tribunal was of the view that the nature of expenditure is the determining factor and not the nomenclature and having regard to the expenditure, this expenditure needs to be considered as Revenue expenditure. Respectfully following the said view taken in assessee’s own case, we dismiss this ground of appeal.
24. The last ground of Revenue’s appeal is in respect of deletion of Rs.4,83,49,05,000/- on account of payment of wheeling & SLDC charges. The facts on this aspect are that on account of wheeling & SLDC charges, assessee made payment of Rs.4,83,49,05,000/- to HVPNL and since such payments do not fall within the purview of provisions of tax deduction at source, assessee did not deduct tax on such payment. Further, according to assessee on this issue, the Tribunal held in the case for the assessment year 2006-07 to 2008-09 that such payments are not liable for deduction of tax u/s. 194J.
25. The assessee placed reliance on the opinion of statutory auditors and also the decision of Tribunal in earlier years.
26. Ld. CIT(A) considered the contentions of the assessee and decided the issue in the light of decision of the Tribunal for assessment year 2006-07 to 2008-09. Revenue does not dispute the fact that this issue has been a recurrent issue for last several years and consistent view has been taken by the Tribunal for assessment year 2008-09 to 2009-10 and as on date, there is no contrary view from the higher forums. We, therefore, while respectfully following the consistent view taken by the Tribunal in assessee’s own case under identical circumstances in earlier years, hold that the CIT(A) is right in deleting the addition and the ground of Revenue’s appeal has no merits and is, accordingly, dismissed.
27. In the result, both the appeals of the assessee are allowed and those of the Revenue are dismissed.

Order pronounced in the open court on 19th February, 2020.