2016 (2) TMI 353 - HC - Income Tax

Disallowance of deferred revenue expenditure - expenditure not debited to the profit and loss account - Held that - The one time payment of interest was however, shown by the assessee in the books as deferred expenditure to be written off over the entire period of debentures. The assessee however, claimed the entire expenditure under section 36(1)(iii) of the Act during the year under consideration upon which the Revenue objected. The Supreme Court held that under section 36(1) (iii) of the Act any amount paid on account of interest becomes an admissible deduction if the same was paid on the capital borrowed by the assessee and the borrowing was for the purpose of business or profession. While examining the allowability of such deduction, the Assessing Officer is to consider the genuineness of the business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. It was further held that the amount would be said to have been paid even if same is not actually paid but incurred on the basis of method of accounting. It was further held and observed that there is no concept of deferred revenue expenditure in the Act except under certain specified sections where amortisation is specifically provided. Normally, the ordinary rule would be that the revenue expenditure incurred in a particular year is to be allowed in that year. If the assessee claims the expenditure in the year when the same was made, the department cannot deny it. The decision of Supreme Court in case of Madras Industrial Investment Corporation Ltd v. CIT reported in (1997 (4) TMI 5 - SUPREME Court ), where the assessee had claimed spread over of the expenditure which was allowed was noticed and explained. - Decided against revenue

Summary

Issues:
1. Allowance of deferred revenue expenditure claimed by the assessee.
2. Conflict between accounting treatment and claim of expenditure.
3. Nature of expenditure - revenue or capital.
4. Applicability of Supreme Court decision in Taparia Tools Ltd. case.

Analysis:

1. The primary issue in this case was the allowance of deferred revenue expenditure claimed by the assessee. The Assessing Officer disputed the claim made by the assessee for the entire expenditure of &8377; 1.67 crores under section 37 of the Income Tax Act, 1961. The assessee had debited only a portion of this amount in the profit and loss account and deferred the rest to subsequent years. The Assessing Officer rejected the claim, except for the amount debited in the profit and loss account.

2. The CIT(Appeals) allowed the appeal of the assessee, reversing the decision of the Assessing Officer. The Tribunal upheld this decision, noting that the accounting treatment given by the assessee to the expenditure was in line with accounting principles. The Tribunal emphasized that the nature of the expenditure as revenue or capital should be determined independently of the accounting entries made by the assessee.

3. The Tribunal clarified that since the expenditure was not in the nature of capital expenditure, it should be treated as revenue expenditure and allowed during the year of expenditure. The Tribunal cited the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Incometax to emphasize that accounting entries alone cannot determine the nature of expenditure.

4. The High Court referred to the Supreme Court decision in Taparia Tools Ltd. v. Joint Commissioner of Incometax, where it was held that revenue expenditure incurred in a particular year should be allowed in that year. The Court emphasized that there is no concept of deferred revenue expenditure in the Income Tax Act, except where amortization is specifically provided. The Court further clarified that if the assessee claims the expenditure in the year it was made, the department cannot deny it.

5. In conclusion, the High Court dismissed the tax appeal, stating that the question was answered against the Revenue based on the Supreme Court decision in the Taparia Tools Ltd. case. The judgment reaffirmed the principle that revenue expenditure should be allowed in the year it is incurred, regardless of accounting treatment, unless specified otherwise in the Act.