2007 (8) TMI 251 - HC - Income Tax

Generators mfg. - payment made by assessee as an advance to the suppliers for manufacturing tools and dies, is non-refundable these expenses provide price advantage, as these are only in revenue field, they are held revenue expenditure - explanation of assessee that holiday incentive scheme is for increase the sale of generators & it cannot be said to be contingent expenditure, is acceptable - nothing to indicate that the assessee was adopting this device for avoiding tax deduction allowed

Summary

Issues:
1. Whether the payment made by the assessee as an advance to suppliers for manufacturing tools and dies is a revenue expenditure?
2. Whether the deduction for provision made by the assessee for expenditure on foreign trips under a holiday incentive scheme is allowable as a business liability?

Analysis:
Issue 1:
The assessee, a company manufacturing portable generator sets, made an advance payment to suppliers for tools and dies. The Assessing Officer disallowed the deduction of the tooling advance, treating it as a revenue expenditure. The Commissioner of Income-tax (Appeals) upheld the decision. However, the Tribunal allowed the deduction, stating that the advance facilitated trading operations and the tools and dies remained with the manufacturer. The High Court noted that the expenditure was consistently treated as revenue in previous years. Referring to legal precedents, the court emphasized that the ownership of the asset is crucial in determining capital or revenue expenditure. Since the tools and dies remained with the manufacturer, the expenditure was held to be revenue in nature. The court ruled in favor of the assessee, affirming the Tribunal's decision.

Issue 2:
Regarding the provision made by the assessee for a holiday incentive scheme, the Assessing Officer disallowed the deduction, considering it a contingent liability. The Commissioner of Income-tax (Appeals) agreed, citing the variance between the provision and actual expenditure. However, the Tribunal found the scheme to be an integral part of sales and not contingent. The Tribunal directed the deduction for the actual liability incurred in the subsequent year. The High Court observed that the provision was reasonably certain and consistent with the assessee's accounting practices. Relying on precedent, the court held that the claim for the deduction should be allowed. Consequently, the court ruled in favor of the assessee, upholding the Tribunal's decision. The appeal was dismissed with no order as to costs.