2014 (11) TMI 804 - HC - Income Tax

Provisions for network repair and maintenance and credit verification cost, provision of consultancy charges and provision for car hiring charges disallowed Held that - The assessee follows mercantile system of accountancy - The term expenditure donates idea of spending, paying out or away, it is something which is gone irretrievably - In mercantile system the term expenditure is not necessarily confined to money actually paid towards a liability, but would cover a liability accrued or has been incurred in praesenti, although the discharge could be at a future date - a liability accrues or is incurred when it is an ascertained liability and not a contingent liability, i.e. liability which may or may not accrue and is uncertain - A liability, which actually exists and is also not disputed by assessee, but merely not paid, is not a contingent liability when the work or obligation has been actually performed by the third party to whom the payment is due. When the assessee accepts performance of the work or obligation and accepts liability to pay, it partake the character of actual liability in praesenti and is not dependent upon future happening of an event, which would result in creation of liability subsequently. In the former cases, the liability has incurred or accrued, but actual payment remains unpaid and would be made in the next year(s) - a provision can be made in respect of amounts which have become due and payable in the relevant previous year and therefore could be debited to the profit and loss account, once they represent ascertained liability in Calcutta Company Ltd. Vs. Commissioner of Income Tax, West Bengal 1959 (5) TMI 3 - SUPREME Court , wherein it was held that if liability has been definitely incurred in form of unconditional contractual liability, it would not become contingent because payment has to be paid in future. These principles were applied to allow deduction of provision for gratuity, in case of serving employees and to whom the gratuity was payable only on retirement/termination, subject to condition that the amount so estimated was sufficiently certain to be capable of being valued - Gratuity payable in future was an obligation arising out of the present engagement and the estimated liability was ascertainable - as a present obligation, it could be allowed as a deduction in the profit and loss account Decided against revenue. Brand launch expenses revenue expenses or not Held that - The Tribunal was rightly of the view that the assessee in this regard has incurred expenditure which are in the nature of brand launch expenses the expenditure incurred upto the pre-operative period has been capitalised and expenditure incurred after the operation has started have been debited to revenue - there is no concept of deferred revenue expenditure in taxation laws - In the matter of taxation, expenditure is either to be capitalized or is revenue in nature - the expenditure involved is revenue in nature and has been incurred wholly and exclusively for the purpose of business - The amount has actually been incurred by the assessee as such the same is allowable in the entirely the same has been held in Commissioner of Income Tax, Delhi-IV versus Industrial Finance Corporation of India Limited 2009 (9) TMI 877 - DELHI HIGH COURT the order of the Tribunal is upheld Decided against revenue.

Summary

Issues Involved:
1. Deletion of disallowance of provisions for network repair and maintenance, credit verification cost, consultancy charges, and car hiring charges.
2. Treatment of payment towards brand launch expenses as revenue expenditure.

Detailed Analysis:

1. Deletion of Disallowance of Provisions for Network Repair and Maintenance, Credit Verification Cost, Consultancy Charges, and Car Hiring Charges:

The Tribunal's decision to delete the disallowance of Rs. 28,62,275/- for network repair and maintenance and Rs. 29,90,064/- for credit verification cost, consultancy charges, and car hiring charges was based on the factual finding that the services had actually been rendered, and the relevant bills were not received until the close of the assessment year. The Tribunal emphasized that under the mercantile system of accounting, the provision for these expenses was created as the exact amount was not ascertained but the liability was not contingent. The Tribunal concluded that these were ascertained liabilities and not contingent, thus allowable as expenditures.

The Revenue's contention that the Tribunal's findings lacked detailed reasoning was examined, but it was found that the Assessing Officer did not meticulously examine the matter. The Tribunal's finding that the services had been rendered and the liability was accepted by the assessee was upheld. The court held that the term "expenditure" in the mercantile system includes liabilities that have accrued, even if the payment is made in the future. The Tribunal's decision was consistent with the principle that a provision can be made for amounts due and payable in the relevant year if they represent ascertained liabilities.

2. Treatment of Payment Towards Brand Launch Expenses as Revenue Expenditure:

The Assessing Officer had treated the brand launch expenses of Rs. 8,45,45,104/- as deferred revenue expenditure, allowing only 1/5th of the amount in the current year and amortizing the balance over the next four years. The Commissioner of Income Tax (Appeals) upheld this treatment, arguing that the expenditure had an enduring benefit and should be spread over several years to avoid a distorted picture of profits.

The Tribunal, however, held that there is no concept of "deferred revenue expenditure" in taxation laws. The expenditure is either capital or revenue. Since the Assessing Officer did not argue that the expenditure was capital in nature, and it was incurred wholly and exclusively for the purpose of business, it should be allowed in its entirety in the year it was incurred. The Tribunal's decision was in line with the principle that revenue expenditure incurred in a particular year should be allowed in that year unless the assessee itself opts to spread it over ensuing years.

The Tribunal's reasoning was supported by the Delhi High Court's decision in Commissioner of Income Tax, Delhi-IV versus Industrial Finance Corporation of India Limited, which stated that revenue expenditure should be allowed in the year it is incurred unless the assessee justifies spreading it over future years. The court also referred to multiple precedents, including the Supreme Court's decision in Madras Industrial Investment Corporation vs. CIT, which allowed spreading of expenditure only in exceptional cases like issuing debentures at a discount.

Conclusion:

The High Court dismissed the Revenue's appeal, upholding the Tribunal's decision to allow the provisions for network repair and maintenance, credit verification cost, consultancy charges, and car hiring charges as expenditures, and to treat the brand launch expenses as revenue expenditure in the year they were incurred. The court emphasized that the Income Tax Act does not recognize the concept of deferred revenue expenditure and that expenditures should be allowed in the year they are incurred if they are of a revenue nature.