Prior period expenses - allowability

This query is : Resolved

narender (Querist)
Follow

05 June 2013 Dear Friends

Kindly Suggest whether Prior Period Expenses are allowed in Income Tax or Not???

I have gone through various Judgments on the said matter and found it complicated ... and need help of experts...

Further i have one more doubt whether section 28-40 of Income Tax Act is applicable to Charitable Organisation or not???

Example :- Suppose a Charitable Organisation makes payment to its consultant or employees without deducting tax at source as required under section 194 & 192 of Income Tax Act

Whether such expenses can be disallowed by Assessing Officer???

Jinesh Bansal

Jinesh Bansal (Expert)
Follow

06 June 2013 Prior period exps (major amount) is not allowed to deductible under income tax act. for this you have to revise the previous income tax,if it is permitted by act.

Section 28-40 is not applicable for a charitable organization.

section 10-13 is applicable.

Message likes : 1 times

narender

narender (Querist)
Follow

06 June 2013 Dear Jinesh Sir

if Section 28-40 is not applicable for a charitable organisation it means prior period expenses will be allowed as the same is disallowed under section 37 only.

it means a section 25 company can claim the deduction of prior period expenses???

Please suggest

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

10 August 2024 ### **Allowability of Prior Period Expenses and Applicability of Sections 28-40 to Charitable Organizations**

#### **1. Allowability of Prior Period Expenses**

**A. **General Allowability under Income Tax Act:**
- **Section 37 of the Income Tax Act, 1961:** Prior period expenses are generally allowable under Section 37, provided they are related to the business and are not capital in nature. Section 37 permits deductions for expenses incurred wholly and exclusively for the purpose of business.
- **Guidance from Case Laws:** The Supreme Court in cases like **CIT vs. Mahalakshmi Textile Mills Ltd.** and **CIT vs. Bangalore Woolen, Cotton & Silk Mills Ltd.** has established that prior period expenses are allowable if the expense is related to the business and the liability is established in the current year, even if the actual payment is for a prior period.

**B. **Tax Treatment of Prior Period Expenses:**
- **Accounting and Reporting:** While accounting for prior period expenses, it is critical to disclose them properly in the financial statements and in the tax return. The expense should be separately disclosed in the Notes to Accounts, and the claim should be made in the income tax return for the year in which the expense is recognized.
- **Disallowance:** If the expense is not incurred for the purpose of business or if it pertains to a capital expenditure, it can be disallowed. However, if it is a legitimate business expense, it should be allowable under Section 37.

#### **2. Applicability of Sections 28-40 to Charitable Organizations**

**A. **Applicability to Charitable Organizations:**
- **Sections 28-40 Overview:** Sections 28 to 40 of the Income Tax Act deal with various aspects of income and deductions for businesses and professions, including provisions related to profits and gains of business or profession, allowances, and deductions.
- **Charitable Organizations:** These sections generally apply to all entities, including charitable organizations, to the extent that they engage in activities generating income. Charitable organizations registered under Section 12A/12AA are exempt from tax under Section 11, but they are still subject to tax provisions on their non-exempt income.

**B. **Section 28-40 Application:**
- **Non-Exempt Income:** Charitable organizations must comply with tax laws related to income from non-exempt sources. Payments to consultants and employees are subject to TDS under Sections 192 and 194 of the Income Tax Act. Failure to deduct TDS does not automatically make the expense disallowable; the organization must follow the tax provisions related to such payments.
- **Deductibility of Expenses:** If a charitable organization fails to deduct TDS as required under Sections 192 and 194, the assessing officer may disallow the expense under Section 40(a)(ia) unless TDS is deducted and paid. This is similar to the treatment of for-profit entities.

**C. **Section 25 Companies and Prior Period Expenses:**
- **Allowability:** Section 25 companies (non-profit organizations) must adhere to tax regulations relevant to their operational nature. Prior period expenses that are valid and related to the business can be claimed, but they must be properly documented and disclosed.
- **Charitable Status Impact:** The charitable status of the organization does not exempt it from compliance with tax laws related to deductions, including prior period expenses.

### **Summary**

1. **Prior Period Expenses:** These are generally allowable under Section 37 of the Income Tax Act if they are business-related and properly documented. They should be disclosed separately in the financial statements and claimed in the tax return for the year in which they are recognized.

2. **Applicability of Sections 28-40 to Charitable Organizations:**
- **General Applicability:** Sections 28-40 apply to charitable organizations, especially concerning non-exempt income.
- **TDS Compliance:** Charitable organizations must comply with TDS provisions under Sections 192 and 194, and failure to do so may result in disallowance of expenses under Section 40(a)(ia).

**Legal Precedents:** For further guidance, refer to case laws and judicial precedents applicable to prior period expenses and compliance for charitable organizations. Consulting with a tax advisor or legal expert can provide specific advice tailored to your situation.

Feel free to reach out if you need more detailed advice on specific cases or situations!