2011 (9) TMI 476 - HC - Income Tax

Deferred revenue expenditure - Total Interest paid amounting to Rs. 6, 23, 73, 947 a sum of Rs. 1, 06, 68, 247 was booked to profit and loss account as revenue expenditure adopting the formula of 26 days 150 days - AO called for documentary evidence in support of his claim - In view of Madras Industrial Investment Corporation (1997 - TMI - 5591 - SUPREME Court) deduction to be claimed in the year when revenue expense are incurred. - Expenses cannot be Deferred to the advantage of assessee.

Summary

Issues Involved:
1. Disallowance of claim of deferred revenue expenditure.
2. Whether the entire expenditure should be allowed in the assessment year 2003-04.

Issue-wise Detailed Analysis:

1. Disallowance of claim of deferred revenue expenditure:

The appellant, a public limited company engaged in producing sugar, molasses, and bagasse, filed its return of income for the assessment year 2003-04 declaring a total loss. The Assessing Officer (AO) made a disallowance of Rs. 1,08,43,872/- for deferred revenue expenditure. The AO noted that the appellant had paid a total interest of Rs. 6,23,73,947/- on loans but only booked Rs. 1,06,68,247/- as revenue expenditure, transferring the balance to deferred revenue expenditure. The AO disallowed the claim due to lack of documentary evidence.

The appellant argued that the deferred revenue expenditure included interest on term loans and working capital, which was amortized over five years. The CIT(A) allowed the claim, but the ITAT reversed this decision, stating that there is no concept of deferred revenue expenditure in the Income-tax Act. The ITAT emphasized that the expenditure must be claimed in the year it is incurred, and allowing deferred claims would open floodgates for litigation.

The High Court agreed with the ITAT, stating that the appellant's approach to amortize the expenditure over five years was misconceived. The Court noted that the appellant followed the mercantile system of accounting and had no enduring benefit justifying the deferred expenditure. The Court also dismissed the relevance of the Supreme Court judgment in Madras Industrial Investment Corporation Ltd. and the Delhi High Court judgment in CIT v. Industrial Finance Corporation of India Ltd., as they did not apply to the appellant's situation.

2. Whether the entire expenditure should be allowed in the assessment year 2003-04:

During the appeal, the appellant argued that if the deferred revenue expenditure claim was disallowed, the entire interest expenditure of Rs. 6,23,73,947/- should be allowed in the assessment year 2003-04. The Revenue contended that this claim was not made in the original or revised return and should not be entertained.

The High Court acknowledged the technical correctness of the Revenue's argument but noted that disallowing the claim would unjustly deny the appellant the expenditure incurred in the assessment year 2003-04. Therefore, the Court permitted the appellant to raise the claim before the Assessing Officer in accordance with the law.

Conclusion:

The High Court upheld the ITAT's decision to disallow the deferred revenue expenditure claim, emphasizing that such expenditure must be claimed in the year it is incurred. However, the Court allowed the appellant to approach the Assessing Officer to claim the entire interest expenditure in the assessment year 2003-04. The appeals were disposed of accordingly.