Admissiblity or otherwise of prior period expenses

This query is : Resolved

R MEENAKSHI SUNDARAM (Querist)
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22 November 2013 It has been informed by my friend that his a ssessing officer has disallowed prior period expenses and added to the income since my friend's company is following accrual system of accounting. My friend who is a practising CA has informed that prior period expenses has been allowed as deduction in case of companies he has audited. The incometax act is not very clear about the admissibility or otherwise of prior period of expenses.Pl clarify so that readers can advise their clients to provide expenses properly in the concerned financial year

Nikhil Kaushik

Nikhil Kaushik (Expert)
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22 November 2013 Dear Meenakshi,

Kindly note that there is no particular section disallowing prior period expenses. However, it is always open for the AO to scrutnize a particular expense and verify its genuineness.

In case of prior period expenses, one very important factor is that whether or not the assessee was in position to book the said expense in the earlier year itself.

Two, whether or not such booking of expense has been delayed to reduce the tax liability. this often happens when in earlier year there was less income and in the current year higher taxable income is expected.

Thus the allowance or disallowance of prior period items shall depend on the facts of each case and just because a friend got a favorable judgment shall have no bearing (positive or negative) on the facts of your case.

for favorable judgments you may refer:

Kellogg India Private Limited V. Assistant Commissioner of Income Tax’ – [2012 (12) TMI 664 - ITAT MUMBAI]

It is advisable that prior period expenses should be booked only where is absolutely essential and where it can be established that such expenses could not have been booked in the earlier years.

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