Rolex Hosiery Pvt. Ltd., New Delhi vs Assessee

This appeal by the assessee is directed against the order passed by

the CIT(A) on 18.12.2012 in relation to the assessment year 2009-10. ITA No.1474/Del/2012

2. The only issue raised in this appeal is against the upholding of

addition to the extent of Rs.9,84,053/- made by the AO on account of

prior period expenses debited to the Profit & Loss Account.

3. Briefly stated, the facts of the case are that the assessee claimed

deduction for prior period expenses amounting to Rs.14,84,170/-. In the

absence of any details furnished during the course of assessment

proceedings, the AO made addition for the equal sum. During the

course of first appellate proceedings, the assessee furnished certain

details claiming the deductibility of such expenses in the year under

consideration. The ld. CIT(A) sent such details to the AO for remand

report. On consideration of the entire material including the remand

report and the rejoinder of the assessee, the ld. CIT(A) allowed

deduction for a sum of Rs.5,00,116/-, the liability in respect of which

was incurred during the year. However, the remaining expenses

amounting to Rs.9,84,053/- were not allowed. The assessee is aggrieved

against the sustenance of addition to this extent.

2 ITA No.1474/Del/2012

4. We have heard the rival submissions and perused the relevant

material on record. It is observed from the impugned order itself that the

ld. CIT(A) admitted that: "the expenses of Rs.9,84,053/- as per the

vouchers relate to the period before the relevant previous year, but, were

settled during the previous year.' This fact is also borne out from the

remand report dated 22.11.2012, a copy of which is available at pages

633 onwards of the paper book. The AO in the last para of the second

page of the remand report admitted that: "the expenses were crystallized

and settled during the previous year 2008-09 only." Thus it is apparent

that both the authorities have made and sustained the addition by

knowing fully well that though the expenses related to earlier year but

the liability got crystallized in this year by means of settlement of

dispute.

5. Under the mercantile system of accounting, an expenditure becomes

deductible when liability is incurred. In so far as a contractual liability

is concerned, it is said to be incurred and crystallized when the claim is

finally settled. The Hon'ble Supreme Court in the case of CIT vs.

3 ITA No.1474/Del/2012

Swadeshi Cotton and Flour Mills Pvt. Ltd. (1964) 53 ITR 134 (SC) has

held that under the mercantile system of accounting the claim of profit

bonus for earlier year settled by an award in a later year is deductible in

such later year when the liability arose in the year in which the claim

was finally settled by way of award.

6. Coming back to the facts of the instant case, we find it as an

admitted position that the claims qua the above sum were finally settled

in the year in question. In that view of the matter, we see no reason to

sustain any disallowance in respect of this liability. Overturning the

impugned order, we direct to allow deduction for a sum of Rs.9,84,053/-

7. In the result, the appeal is allowed.

The order pronounced in the open court on 13.03.2015.

Sd/- Sd/- [H.S. SIDHU] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated, 13th March, 2015. dk

4 ITA No.1474/Del/2012

Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT (A) 5. DR, ITAT

AR, ITAT, NEW DELHI.

5