Saturday, 3 December 2016

Whether disallowance of prior period expenditure is jutified, when same was accepted and allowed for previous years in case of other assessee's - NO:HC

THE ISSUE IS - Whether disallowance of prior period expenditure is jutified, when the same was accepted and allowed for previous years in case of other assessee's. NO IS THE VERDICT.
Facts of the case:

The assessee, dealt in real estate sector paid Rs. 2.20 crores as earnest money for purchase of land and it had borrowed substantial amount for payment of consideration from bank at interest. The assessee paid the interestr to bank in AY 1991-92 and 1992-93. In addition, for the first year i.e. 1991-1992 the assessee claimed certain expenses as legal and other incidental charges. In AY 1991-1992 and as well as in the subsequent year 1992-1993. For AY 1991-1992 and 1992-1993 the assessment was framed and the recognition i.e. self-disallowance was accepted. In AY 1993-1994 the assessee reported that the transaction had fallen through and was rescinded. It consequently returned the earnest money and also re-paid the bank. It also received back its earnest money together with interest of over Rs. 91 lakhs. As against this, the assessee sought to set off the total interest expenditure as "prior period" expenses. This was disallowed by the AO, who held that since the expenditure was not incurred during the relevant assessment year in question the claim of prior period expenditure could not be allowed.
On appeal, the HC held that,
+ the fact that other group company cases i.e. Kum Kum Cultivation involved a similar and identical exercise where ultimately the disallowance was set aside by the ITAT, the adoption of the same course of action in this case cannot be said to have been erroneous. Furthermore, in the eventuality of the transaction itself maturing the likelihood of the assessee being permitted to capitalize or include the interest component as part of the cost of land has not been disputed. If such is correct course of action, the reverse situation whereby the transaction does not mature, should also attract a similar treatment that the interest paid but not shown as deductible expenditure for the previous period should be permitted as prior period expenditure.

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