ALLOWABILITY OF PRIOR PERIOD EXPENSES

[Mr. M. GOVINDARAJAN]

The expenditure incurred by a company will be allowed by the Income Tax Authorities if the expenditure is pertaining to the respective financial year.  If the expenses involved in prior period to the financial year and the same is paid in the current financial year the allowability of such expenditure would rise to the disputes between the assessee and the income tax authorities.

In ‘Kellogg India Private Limited V. Assistant Commissioner of Income Tax’ – [2012 (12) TMI 664 - ITAT MUMBAI] the appellant company is engaged in business of manufacturing, packaging and marketing of ready to eat cereal products and other convenient food.  It has a very popular brand named ‘Kellogg’ which is well known globally.  The Assessing Officer disallowed the two items – one travelling expenses incurred by the employees of the appellant company in prior period and claimed the same in the disputed financial year and the other is the advertisement expenses in the prior period.

Aggrieved against the order of the Assessing Officer, the appellant company filed appeal before the Commissioner of Income Tax (Appeals). In the appeal the appellant contended that the expenditure incurred is on account of travelling by its employees once they submit their bills to the company.  The appellate authority confirmed the order of the lower authority that the assessee has failed to prove that the liability in respect of prior period expenditure crystallized during the year.  Against this order the appellant company filed the present appeal before the Tribunal.

The appellant contended that the travelling bills are reimbursed to the employees when they submitted their bills. These are very petty expenses though incurred in the earlier years, but bills have been submitted in the current financial year. The details of these expenses have been placed in the appeal.  The overall aggregate payments which were meant for earlier years are only a sum of Rs.63,895/-.  The Department contended that the basic principle is that the expenditure should pertain to the disputed financial year and admittedly, these expenditure relate to prior period and, therefore, it has been correctly disallowed by the Assessing officer and confirmed by the Commissioner (Appeals).

The Tribunal heard the contentions of both parties. The Tribunal held that these are the expenditure incurred by the employees of the appellant on account of travel which are of very petty sums.  Once the employees have submitted their bills to the appellant, the same has to be reimbursed. The appellant company as and when the bills were submitted payments have been made and have been claimed as business expenditure.  The Tribunal further held that neither the Assessing Officer nor the appellate authority has disputed the genuineness of the expenditure. The appellant company has a substantial turnover.   Such reimbursement of expenditure cannot be disallowed simply on the ground that travelling by the employees have been undertaken in the earlier years and bills are submitted by them in the current financial years.   Since these expenses are directly related to the business the same has to be allowed.  The Tribunal set aside the order of the original authority confirmed by the first appellate authority.

The second issue is that the Assessing officer disallowed the expenditure to the tune of Rs.1,19,30,783 on account of expenses paid to advertising agency, i.e, Hindustan Thomson Associates. The reason for this disallowance is that the services have been rendered in earlier years and therefore the same cannot be allowed in the current financial year even if the bills have been raised by the parties in the current financial year.

Before the Commissioner (Appeals) the appellant company submitted the entire details of advertisement expenditure and contended that the bills have been raised in the current financial year and therefore the payments which have been made in pursuance of such bills are to be allowed in the current financial year.  The Commissioner (Appeals), while confirming the findings of the lower authority, held that the expenditure is related to the earlier years and since the assessee is following the mercantile system of accounting, the same is disallowed in this year. taxmanagementindia.com

The appellant company filed appeal before the Tribunal against the order of Commissioner (Appeals).  The appellant company submitted that most of the details pertained to the current assessment year only and in some of the cases bills were related to the previous financial year. Even if the bills are of the previous year, the bills were submitted in the current financial year on which the payment has been made. The appellant further contended that there is no tax advantage to the appellant company if it is taxed either in the earlier year or in the current financial year. The Department contended that the expenditure should pertain to the year in which the claim has been made and the assessee is following the mercantile system of accounting has to show the expenditure on accrual basis.

The Tribunal found that the bills pertaining to the previous financial year are submitted to the appellant company in the present financial year and the same are paid by the appellant company and some bills are pertaining to the current financial year.   The said aspects have not been considered by both the authorities below. Therefore the tribunal set aside the order and remands the case back to the original authority to decide the case afresh after giving reasonable opportunity to the appellant company.