INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Allowability - Prior period items, which included sales promotion expenses of earlier years, interest and rental income of earlier years but written off in relevant year -

Assessee-limited company was engaged in business of manufacturing of pharmaceuticals, bulk drugs and various hospital products. It claimed deduction on account of prior period items. It included expenses in relation to sales promotion expenses of prior period, and interest and rental income, which was offered to tax in earlier years and written off in the relevant year. AO disallowed the claim of prior period expenses on allegation that assessee did not file any evidence to justify that said expenses were crystallised in the year under consideration. Thus, according to AO, expenses incurred in earlier year, did not pertain/relate to the relevant year. Held: In instant case all expenses claimed by assessee under the head prior period expenses did not represent prior period expenses. As such interest income and rental income represented 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, represented bad debts. Assessee could not be allowed deduction for these items as prior period expenses but the same could be claimed as bad debts under the provisions of section 36(1)(vii). However, it was not clear that assessee had not claimed such interest as bad debt along with the bad debts of the debtors. Thus, in the absence of sufficient documentary evidence by the assessee even in the set-aside proceedings, findings of lower authorities were not disturbed. Regarding issue of reversal of the rental income, assessee had justified its claim based on the documentary evidence that it reversed the entry in respect of accounts of the rental income which was offered to tax. Accordingly, conditions as specified under section 36(1)(vii) were truly satisfied and addition in that regard was ordered to be deleted. Regarding issue of advance given to sales representative, though it was not a prior period expenses/adjustment, but represented the loss which incurred in the course of the business. Once assessee had written of any loss in the books of accounts which was incurred in the course of the business, such loss was eligible for deduction.

REFERRED : Pr. CIT v. Adani Enterprises Ltd. [Tax Appeal No. 566 of 2016, dt. 20-7-2016] and Cadila Pharmaceuticals Ltd. v. Addl. CIT [ITA Nos.1146 & 1518/Ahd/2011, dt. 11-7-2014]

FAVOUR : Partly in assessee's favour

A.Y. :

SUBSCRIBE FOR FULL CONTENT