TMI Blog2020 (12) TMI 1181X X X X Extracts X X X X X X X X Extracts X X X X ..... . On perusal of the financial statements prepared under the companies Act for 11 months, the assessee has shown prior period adjustments - where the assessee has adopted a different period under the companies Act than the previous year defined under the Income Tax Act, it is to file separate financial statements under the Income Tax Act. But we note that the assessee has not filed such financial statements prepared under the Income Tax Act. Thus in the absence of sufficient documentary evidence by the assessee even in the set-aside proceedings, we are not inclined to disturb the finding of the authorities below. Reversal of the rental income - Assessee has justified its claim based on the documentary evidence that it has reversed the entry in respect of accounts of the rental income which was offered to tax. Accordingly, we find that the conditions as specified under section 36(1)(vii) of the Act have been duly satisfied. Accordingly, we reverse the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Advance given to the sales representative - Though it is not a prior period expenses/adjustment, but represent the loss which has been incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese expenses were considered as pertaining to the year under consideration. 3.2. The assessee regarding the amount of interest on the debtors submitted that it was recorded as income on 30th April 2005 which was reversed as on 31st March 2006. But under the Companies Act, the immediate financial year was of 13 months i.e. up to 30 April 2005. Therefore the same was treated as prior period items though the same is falling within the previous year as defined under section 3 of the Income Tax Act. The assessee made the similar submissions regarding the reversal of the rent of ₹ 2.50 lakhs which was claimed as deduction under the adjustment of prior period items. 4. However the AO disregarded the contention of the assessee by observing as under: i. There was no evidence filed by the assessee to justify that these expenses were crystallised in the year under consideration. Thus the expenses incurred in the earlier year do not pertain/relate to the year under consideration and thus the matching principles of the income and expenses do not get satisfied. ii. There was no bills, vouchers filed by the assessee in support of prior period expenses. iii. The contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05) was for a period of 13 months beginning from April 20004 till April 2005. But under the Income Tax Act, the month of April 2005 is part and parcel of the year under consideration. Therefore the book entry made in the month of April 2005 for recording the rental income cannot be considered as a prior period expenses as it was written off in the month of March 2006. The assessee regarding the sales promotion expenses written of being non recoverable amounting to ₹ 35,927.00 claimed that it represents the advance given to the sales representative in the earlier year who left the company without settling the same. Therefore these expenses have been crystallised in the year under consideration and thus it was claimed as deduction. In addition to the above, the assessee also submitted that the AO has not doubted on the genuineness of the expenses and merely disallowed the same considering them as prior period expenses. Accordingly the assessee further contended that there is no change in the rate of income tax of the earlier and current year and therefore, it is entitled for the deduction of such prior period expenses in the year under consideration. 6. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prior period expenses under 3 categories amounting to ₹ 23,27,520/- as discussed above. 10.1. Prior period expenses arise in the current period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. In other words these are the expenses which have been incurred in the earlier years but the same were not claimed as deduction in those years to which they pertains. As such these are the expenses which have been incurred in the earlier year but claimed as deduction in the current year. However, in the present case all the expenses claimed by the assessee under the head prior period expenses do not represent the expenses. As such the 2 items namely interest income of ₹ 20,41,593/- and rental income of ₹ 2.5 lakh represent the income which was offered to tax in the earlier years and written off in the year under consideration as claimed by the assessee which in our considered view represent the bad debts. Accordingly we are of the view that the assessee cannot be allowed deduction for these items as prior period expenses. But the same can be claimed as bad debts under the provisions of section 36(1)(vii) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of sufficient documentary evidence by the assessee even in the set-aside proceedings, we are not inclined to disturb the finding of the authorities below. 10.5. We also note that the ITAT in its order dated 11th July 2014 has directed to the learned CIT(A) to decide the issue afresh after verifying the claim of the assessee that the book entry was reversed. Thus, in the set-aside proceedings the scope of the issue as discussed above was limited to the extent of verification whether the assessee has reversed entry in the books of accounts or not. Indeed the onus lies upon the assessee to file sufficient and necessary documents to justify that the entry was reversed in the books of accounts. However, we note that the assessee has not filed any ledger account of the parties showing the reversal of the entries in the books of accounts. 10.6. It is also pertinent to note that the case law referred by the learned AR for the assessee of the Hon'ble Gujarat High Court in the case of CIT versus Adani Enterprises Ltd. in the tax appeal No. 566 of 2016 relates to the prior period expenses. But the issue on hand relates to the bad debts as discussed above. Accordingly we are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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