Assessee was a builder/developer who had undertaken projects eligible for deduction under section 80-IB(10) as well as other projects (non-eligible projects). Separate sets of books were maintained for both types of projects. No revenue was earned from section 80-IB eligible projects. Liability of VAT pertaining to period 2006 to 2010 arose during relevant Assessment Year on account of a decision of Supreme Court; holding that VAT was payable by builders too. This amount of VAT (even though attributable to section 80IB projects) was claimed as  expenditure in non-eligible projects’ P&L account.  AO disallowed the said expenditure holding the same to be prior period expenses. CIT(A) upheld the said disallowance.

Held that it was on account of a decision of the Supreme Court rendered during the relevant Assessment Year; the Assessee was liable to pay VAT pertaining to preceding years. Since, such amount of VAT was not claimed as deduction during the respective preceding years; it was allowable during the relevant Assessment Year. However, merely because there was no revenue from section 80IB eligible projects, Assessee cannot claim VAT pertaining to section 80IB eligible projects in the P&L account of non-eligible projects. Thus, VAT paid and claimed as deduction in P&L account of non-eligible project was disallowed but was permitted to be added in the value of Work in progress of section 80IB eligible project. (AY. 2014-15)