FOR PRIOR PERIOD ITEMS REVENUE SHOULD NOT INDULGE INTO LITIGATION AND CONSIDER GROUND REALITIES AND WORK OBJECTIVELY AND WITH RESULT ORIENTATION IN MIND.

[CA DEV KUMAR KOTHARI]

Prior period expenses:

Prior period expenses means expenses which pertains to any period prior to commencement of accounting period for which accounts are prepared. Such expenses are usually of immediately preceding accounting period and sometimes can be of a period many year prior to current period. For example, in case of accounts for financial year  from 01.04.2018 to 31.03.2019 , if any expenses are pertaining to a period before 01.04.2019 which is debited in P & L account such expenses shall be called prior period expenses.

Prior period income:

Similarly there are found some items being income relating to prior period in some accounts.

Why prior period expenses or income (Items Pertaining to prior periods (IPP):

In many of accounts we find that there are some prior period expenses or incomes. These are collectively called IPP (items pertaining to previous periods). IPP can occur due to several reasons, some of important reasons are:

1. Accounts are to be prepared on conservative basis. Although reasonable estimates are permissible, however, in some situations reasonable estimates are deferred to a proper time when more accuracy can be achieved.
2. Accounts are finalized in a limited period of time and some bills, claims are not received or these are not settled due to disputes or differences. Therefore, expenses of previous year were not accounted for and debited in earlier year and are debited when claims are received or settled.
3. In respect of some of incomes due to disputes if there is any contingency, the income is not accounted for and the same is accounted for on settlement and/ or when there is reasonable certainty.
4. An IPP was not considered as accrued (with reasonable certainty) in earlier year. It can be called unascertained or contingent income or expenditure.

Many IPP are accrued during the year when accounted for:

We find that many of IPP are accounted for in current year, because the same was not accounted for due to some known or un-known reasons or contingencies. If an expenditure is accounted for where there is uncertainty, it will not be allowed by the AO. If an uncertain income is accounted for it will go against conservative and prudence rules. 

An IPP is accounted for, means that the same was not accounted for in earlier year and has been accounted for in current year due to some reasons and such accounting is well recognized.

In case of companies, even if an IPP has accrued during the year, auditors insist that it should be placed as an IPP.

Author suggests that in case of IPP the informative note should also be given that the same accrued or settled during the year.

IPP is a periodic matter and make no difference for revenue over a period of time:

IPP is a matter concerning periods of more than one year. An expenditure which is allowable was not claimed in year to which it relates due to some reason, is accounted for and claimed in current year. There is only difference of year. For the revenue, in overall context of volume of revenue such IPP hardly have any impact on revenue.  

Generally difference is of one year. And totality of IPP for incomes and expenses can, over a period of time is likely to neutralize impact.

IPP are not significant or material amounts:

In context of most of accounts of companies and other assesses total IPP are not significant – these may be minuscule.

For such miniscule items and that too which have no impact over two accounting periods there should not be disputes.

There should not be dispute by revenue:

There should not be dispute by revenue for insignificant amount and particularly for IPP.

However, revenue authorities are in habit of raising disputes even for small sums. If an income relating to prior period is disclosed, tax authorities can take steps for reassessment of income of prior year to which the income relates. When assesse has disclosed the income in current year, due to some reasons, it should be accepted.

When any IPP being expenses are debited, tax authorities try to disallow the same in normal computation and also in computation of book profit. Tax authorities also ignore that the expenditure was not claimed and allowed in earlier year and that the amount is very small. If an expenditure of earlier year is claimed, means that assesse had disclosed higher income in earlier year and  might have paid higher tax.     

Search with prior period items on this website:

On search with prior period items , in Income Tax  section  author found results pages  1 to 20  and  6247 Records. All these are related with disputes about  IPP.

Results for Supreme Court shows 142 records. For High Courts 1701 records and for Tribunal 4350 records are found. Some records for AAR and other authorities.

This shows that disputes are raised and pursued on items which are insignificant in amount and have only impact of taxability or allow ability in current year or some earlier year.

Once it is found that expenses are not claimed twice there should not be dispute. If an expenditure is disallowed in current year due to relating to earlier year, then it should be allowed in earlier year. This only creates complications without any meaningful gain for the revenue in overall context.