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2021 (3) TMI 219 - AT - Income TaxNature of expenditure - deduction claimed by the assessee towards prepaid expenses disallowed - expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are in the nature of revenue expenditure, which does not give any enduring benefit to the assessee - AO made addition of expenditure only on the sole basis of method of accounting followed by assessee in the books of account - assessee has changed its method of accounting - HELD THAT - The assessee is entitled to change its method of accounting as long as said change in method of accounting is bonafide. Section 145 of the Act, nowhere provides if assessee follows one method of accounting for many years, it cannot change the same in subsequent year. The assessee can very well change method of accounting to give better treatment to various income and expenses in books of account to give true and correct income, but such change should be disclosed in notes to account and effects on taxable income for the year on account of change of method of accounting. In this case, the assessee has changed its method of accounting to give better treatment to prepaid expenses shown in the financial statement upto assessment year 2015-16 and such change is supported by the decision of the Hon'ble Supreme Court in TAPARIA TOOLS LIMITED 2015 (3) TMI 853 - SUPREME COURT where it was categorically held that once an expenditure is incurred and made payment and claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assessee, irrespective of treatment given in books of account . The Hon'ble Supreme Court in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd. 1971 (8) TMI 10 - SUPREME COURT held that entries in books of account are not determinative and or conclusive and the matter is to be examined on the touchstone of provisions contained in the Income Tax Act. In the present case, entire expenditure has been incurred at the beginning of the sanctioning of term loan and also qualifies to be revenue expenditure. Therefore, in our considered view the decision of TAPARIA TOOLS LIMITED 2015 (3) TMI 853 - SUPREME COURT is squarely applicable to the facts of present case and hence, we are of the considered view that learned CIT(A) was right on allowing deduction towards various expenses as revenue expenditure. Whether expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are revenue expenditure or capital expenditure, which gives enduring benefit to the assessee? - n this case, if you see nature of expenditure incurred by the assessee there is no doubt of whatsoever that said expenditure are purely revenue expenditure, which does not give any enduring benefit or resulting in creation of asset either tangible or intangible . Therefore, these expenses are essentially revenue expenses and needs to be allowed when such expenditure has been incurred, but only requirement is whether said expenditure is incurred for the purpose of business or not. In this case, it is not a case of Assessing Officer that those expenditure are not revenue in nature and further, those expenditure are not incurred for the purpose of business of the assessee. Therefore, we are of the considered view that once Assessing Officer come to the conclusion that expenditure incurred by assessee are revenue in nature and further the same are incurred wholly and exclusively for the purpose of business, then the same needs to be allowed in the year of incurrence, irrespective of length of period for which finance is sanctioned. The learned CIT(A) after considering relevant facts has rightly held that expenditure incurred by the assessee are revenue in nature which does not give any enduring benefit to the assessee or resulting in creation of asset as tangible or intangible which needs to be allowed as deduction, when such expenditure has been incurred. - Decided against revenue.
Issues Involved:
1. Deletion of addition on account of prepaid expenses. 2. Applicability of the Supreme Court decision in Taparia Tools Ltd. v. JCIT. 3. Justification for changing the method of accounting for prepaid expenses. 4. Classification of expenses as revenue or capital in nature. Detailed Analysis: 1. Deletion of Addition on Account of Prepaid Expenses: The Revenue argued that the CIT(A) erred in deleting the addition of ?43,99,74,573/- on account of prepaid expenses, asserting that different treatment in the books of account should not allow the assessee to claim the entire expenditure as a deduction in the year of incurrence. The CIT(A) held that the treatment of expenses in the books is irrelevant for claiming deductions under the Income Tax Act if the expenses are allowable as per the Act. The CIT(A) noted that the Assessing Officer (AO) did not dispute that the expenses were revenue in nature but disallowed them due to the change in the method of accounting. 2. Applicability of the Supreme Court Decision in Taparia Tools Ltd. v. JCIT: The CIT(A) relied on the Supreme Court decision in Taparia Tools Ltd. v. JCIT, where it was held that once an expenditure is incurred and paid, it should be allowed as a deduction irrespective of its treatment in the books of account. The Revenue contended that the facts of Taparia Tools Ltd. were distinguishable as it involved debenture interest, whereas in the present case, the income from loans was not received during the financial year itself. However, the CIT(A) found that the principle from Taparia Tools Ltd. applied, as the expenses were revenue in nature and incurred for business purposes. 3. Justification for Changing the Method of Accounting for Prepaid Expenses: The assessee had consistently treated certain expenses as prepaid and amortized them over the loan period up to AY 2015-16. For AY 2016-17, the assessee changed its method and claimed the entire expenses as deductible in the year of payment, citing the Supreme Court decision in Taparia Tools Ltd. The CIT(A) observed that the change in the method of claiming expenses is justified if it aligns with the provisions of the Act and is consistently followed in subsequent years. The CIT(A) emphasized that the different treatment in the books should not bar the deduction if the expenses are revenue in nature. 4. Classification of Expenses as Revenue or Capital in Nature: The CIT(A) and ITAT both concluded that the expenses in question, such as stamp charges, loan processing fees, marketing fees, sourcing expenses, and share issue expenses, were revenue in nature. They did not result in the creation of an asset or provide enduring benefits. Therefore, these expenses should be allowed as deductions in the year they were incurred. The AO's argument that these expenses should be amortized over the loan period was rejected, as the expenses were already incurred and paid, making them deductible under the Act. Conclusion: The ITAT upheld the CIT(A)'s decision, affirming that the expenses were revenue in nature and deductible in the year of incurrence. The ITAT also agreed that the change in the method of accounting was justified and supported by the Supreme Court's decision in Taparia Tools Ltd. The appeal filed by the Revenue was dismissed, and the CIT(A)'s order to allow the deduction of prepaid expenses was upheld.
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