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2005 (7) TMI 538 - AT - Income TaxRevision - Challenged the Order passed by CIT u/s 263 - Claim u/s 37(1) - deferred revenue expenditure - method of accounting - HELD THAT - It is not the case of the revenue that method of accounting adopted by the assessee is not permissible under the law. If the assessee is permitted under Companies Act to maintain its accounts and to claim the entire expenses as deferred revenue expenses and part of it is debited to the P L account the revenue cannot disallow the claim of the assessee that he has treated it to be deferred revenue expenses of the P L Account if the expenses allowable u/s 37(1) of the Income-tax Act. For the purpose of Income-tax Act we have to examine the nature of the expenses. If the nature of the expenses are allowable as incurred for business purposes it should be allowed in toto irrespective of the fact that it was claimed to be deferred revenue expenditure for the purpose of the Companies Act or to show higher book profit to its shareholders. Since the Assessing Officer has applied his mind while dealing with the issues and duly considered the explanations of the assessee we do not agree with the findings of the CIT that the assessment order is erroneous and prejudicial to the interests of the revenue. We therefore hold that CIT acceded his jurisdiction u/s 263 of the Income-tax Act. We therefore quash his order. In result appeal of the assessee is allowed.
Issues:
1. Allowability of deferred revenue expenditure under section 37(1) of the Income-tax Act. 2. Jurisdiction of CIT under section 263 to set aside assessment order. Issue 1: Allowability of Deferred Revenue Expenditure: The appeal concerned the allowability of deferred revenue expenditure amounting to Rs. 90,82,297 under section 37(1) of the Income-tax Act. The CIT had set aside the assessment order passed by the JCIT, questioning the claim of deferred revenue expenses by the assessee. The CIT observed that commission and incentives, constituting a portion of the claimed amount, are usually paid post-sales and not in advance. The CIT issued a show-cause notice under section 263, prompting the assessee to provide details and explanations. The assessee justified the expenses, stating they were necessary for marketing and sales purposes. The Assessing Officer allowed the claim after verifying the details, explanations, and documentary evidence submitted by the assessee. The assessee contended that the expenses were genuine and allowable, citing various judgments supporting their position. Issue 2: Jurisdiction of CIT under Section 263: The Tribunal analyzed the actions of the Assessing Officer and the CIT in detail. It was noted that the assessee had provided detailed explanations and justifications for the deferred revenue expenses during the assessment proceedings. The Assessing Officer, after due consideration, allowed the claim under section 37(1) of the Act. The CIT, however, disagreed and set aside the assessment order, directing a fresh assessment. The Tribunal emphasized that the method of accounting adopted by the assessee, though for the purpose of the Companies Act, did not render the expenses non-allowable under the Income-tax Act if they were genuinely incurred for business purposes. The Tribunal held that the Assessing Officer had appropriately applied his mind, considered the explanations provided by the assessee, and allowed the claim based on the nature of the expenses. Consequently, the Tribunal concluded that the CIT had exceeded his jurisdiction under section 263 and quashed his order, thereby allowing the appeal of the assessee. This judgment delves into the intricacies of deferred revenue expenditure, the assessment process, and the jurisdiction of the CIT under section 263 of the Income-tax Act. It highlights the importance of substantiating expenses, the role of the Assessing Officer in verifying claims, and the need for a thorough examination of the nature of expenses to determine their allowability. The Tribunal's decision underscores the significance of due diligence in assessing tax matters and the limitations on the CIT's power to revise orders based on mere disagreement without substantive grounds.
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