Business expenditure : Deduction u/s.37 of Income-tax Act, 1961 : A.Y. 2003-04 : Agreement executed in August 2002 with retrospective effect from January 1, 2002 : Disallowances of expenses of January to March 2002 on ground that it crystallised in preced

Reported :

23. Business expenditure :
Deduction u/s.37 of Income-tax Act, 1961 : A.Y. 2003-04 : Agreement executed in
August 2002 with retrospective effect from January 1, 2002 : Disallowances of
expenses of January to March 2002 on ground that it crystallised in preceding
year : Liability under agreement arises and accrues when agreement executed :
Addition cannot be sustained.

[CIT v. Exxon Mobil
Lubricants P. Ltd., 328 ITR 17 (Del.)]

In August 2002, the assessee
had executed an agreement with M/s. Exxon Mobil Asia Pacific Pte. Ltd. with
retrospective effect from January 2002. The expenditure under the said agreement
for the period January to March 2002 was also claimed as deduction in the A.Y.
2003-04. The Assessing Officer disallowed the claim, holding that the
expenditure pertained to the preceding year resulting in the addition of the
equal amount. The Tribunal deleted the addition.

On appeal by the Revenue,
the Delhi High Court upheld the decision of the Tribunal and held as under :

“(i) The liability of the
assessee under the agreement had arisen and accrued in August 2002, when the
agreement was executed and, therefore, the liability of the assessee to pay
for the period January 2002 to March 2002 arose and crystallised in August
2002.

(ii) The Commissioner
(Appeals) had observed that the assessee had shown prior period expense
against which the prior period income was shown and the net amount had been
shown as expenditure in the profit and loss account. If the assessee had shown
the prior period income and the Assessing Officer had not excluded it while
working out the current years taxable income, then there was no reason on the
part of the Assessing Officer to disallow only one part of the prior period
adjustments, i.e., the prior period expenditure.

(iii) The addition made by
the Assessing Officer could not be sustained.”