Income Tax Update

Once prior period income is held to be taxable, prior period expenditure is also allowed to be set off and assessee is not obliged in law to indicate any direct or indirect nexus between such income and expenditure.

Facts of the case:

1. The assessee had shown Rs. 3,39,534.- being net period income i.e. prior period income of Rs. 46,50,648/- minus the prior period expenses of Rs. 43,11,114/- in its return of income for the year under consideration .
2. The Assessing Officer took the view that during the year under consideration the “prior period income” was taxable, but the “prior period expenses” were not allowable. The Assessing Officer was of view that the treatment of the income would not be the same as of expense. The expenditure was disallowable as not pertaining to the current year and the income should be included in total income on the principle of taxability on accrual or receipt basis. Since a different set of rules applied to them, they cannot be netted.
3. The CIT(A), in the appeal preferred by the assessee, also confirmed the addition on the basis that the prior period expenses should be adjusted against the prior period income in the absence of any correlation or nexus.

Held by High Court of Gujarat:

Income of the assessee is being assessed at entity level. Once the assessee has been offering income of prior period as an entity, then its prior period expenditure shall also be allowed. Further, it cannot be disallowed simply by observing that it is not ascertainable whether this expenditure was incurred for earning particular receipts offered under the prior period income. If an assessee is offering prior period income, then the expenditure which was incurred under different heads ought to be set off against that income.

Conclusion:

If the prior period income is offered to tax by the assessee, then assessee can also claim the deductions related to prior period expenses. Further, there is no legal obligation to demonstrate any relation between prior period income and expenditure to claim the business expenditure.

Source: [2019] 112 taxmann.com 91 (Gujarat)

Principal Commissioner of Income-tax v. Dishman Pharmaceuticals & Chemicals Ltd., R/Tax Appeal No.192 Of 2019, High Court of Gujrat