The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) upheld the deletion of the disallowance of prior period expenditure and held that expenditure is allowable in the year in which the corresponding liability crystallises, even if the underlying transaction relates to an earlier period. A Bench comprising Judicial Member Amit Shukla and Accountant Member Arun Khodpia dismissed the Revenue’s appeal and granted relief to Maharashtra State Electricity Distribution Company Ltd. (MSEDCL).

The dispute pertained to the disallowance of Rs 96.23 crore claimed by MSEDCL as prior period expenditure for AY 2013-14. During assessment proceedings, the Assessing Officer observed that the assessee had debited prior period expenses of Rs 132.66 crore. After excluding certain amounts already disallowed by the assessee in its computation, the Assessing Officer disallowed the balance expenditure on the ground that it related to earlier years and therefore could not be claimed as a deduction in the year under consideration.

Before the appellate authorities, MSEDCL explained that although the transactions originated in earlier periods, the corresponding liabilities crystallised only during the relevant previous year. It is submitted that as one of the largest electricity distribution utilities in the country, servicing nearly 3.50 crore consumers across Maharashtra through a vast decentralised network, various invoices, reconciliations, billing adjustments and approvals were often completed after the close of the financial year.

The Commissioner (Appeals) accepted the explanation and deleted the addition by following the Tribunal’s decision in the assessee’s own case for the preceding assessment year. “Under the mercantile system of accounting, the decisive test is not the period to which a transaction may relate but the point of time when the liability becomes certain, enforceable and capable of reasonable quantification.”

The Tribunal observed that the Assessing Officer had not disputed the genuineness of the expenditure or established that the liabilities had actually crystallised in earlier years. It noted that merely describing an item as “prior period expenditure” does not automatically justify its disallowance if the liability becomes ascertainable during the relevant year.

“The expenditure in question does not represent an attempt to claim an old liability in a subsequent year; rather it represents the financial consequence of discrepancies which became known and determinable only upon completion of the reconciliation exercise.”

The Tribunal further observed that the Revenue had accepted prior-period income arising from the same reconciliation process while denying the deduction of the corresponding expenditure. It held that the principle of crystallisation cannot be selectively applied only for taxing income and ignored while considering expenditure.

Relying on its earlier decision in the assessee’s own case, as well as judicial precedents including Mahanagar Gas Ltd., Nagri Mills Co. Ltd. and Excel Industries Ltd., the Tribunal held that the liabilities had crystallised during the relevant year and the expenditure was therefore allowable. Thus, it upheld the order of the Commissioner (Appeals), deleting the disallowance of Rs 96.23 crore and dismissing the Revenue’s appeal.

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