2021 (9) TMI 1256 - AT - Income Tax

Disallowance of deferred revenue expenditure and pre-operative expenses - expenditure incurred on opening and publicity of branches was treated as deferred revenue expenditure and pre-operative expenses in books of accounts - HELD THAT - AO has extracted the details of proportionate deferred revenue expenses and pre-operative expenses claimed by the assessee during the year under consideration. As rightly pointed out by Ld. D.R. those expenses are in the nature of revenue expenses only. It is an admitted fact that these expenses have been incurred in an earlier year in connection of opening of branches in Mumbai and Gurgaon. In the books of account the assessee chose to treat these expenses as deferred revenue expenses pre-operative expenses and was claiming proportionate amount every year. The assessee has chosen to claim proportionate amount under Income tax Act also while computing total income. Under the Income tax Act the total income is computed in accordance with the provisions of the Act. The issue relating to allowability of deferred revenue expenses has been examined by the Ahmedabad special bench in the case of ACIT vs. Ashima Syntex Ltd. 2006 (3) TMI 188 - ITAT AHMEDABAD-B In the instant case nature of expenses claimed by the assessee under deferred revenue expenses/pre-operative expenses did not result in creation of any capital asset nor they could be clearly and unambiguously identified over specified future time periods. Admitted the expenses have been incurred in the past year in connection of opening of branches and they are in the nature of revenue expenses. The claim made by the assessee during the year under consideration is part of those expenses which was claimed as amortisation of those expenses over certain years. The principles laid down by the Special bench supra there is no concept of deferred revenue expenses under the Income tax Act and hence the revenue expenses incurred in an earlier year cannot be allowed as deduction during the year under consideration. The various case laws relied upon by Ld. A.R. have been rendered in a different context Principle of Consistency - As rightly submitted by Ld. D.R. the returns of income filed for earlier years have been processed u/s. 143(1) of the Act and hence there was no scrutiny of similar claims made in the earlier years by the AO. Hence the principle of consistency will not apply to this claim.- Decided against assessee.

Summary

Issues:
Challenge to disallowance of deferred revenue expenditure and pre-operative expenses.

Analysis:
The assessee appealed against the order confirming the disallowance of deferred revenue expenditure and pre-operative expenses for the assessment year 2012-13. The expenses were related to opening branches in Mumbai and Gurgaon and were treated as deferred revenue expenditure and pre-operative expenses in the books. The AO disallowed the claim of ?1,22,18,625, stating that the provisions of Sec. 35D of the Act were not applicable. The Ld. CIT(A) upheld the disallowance.

The Ld. A.R. argued for the allowance of the claim based on the Principle of Consistency and cited the decision in the case of JCIT vs. Modi Olivetti Ltd. He also referenced the recognition of deferred revenue expenditure by the Hon'ble Supreme Court. On the other hand, the Ld. D.R. contended that the expenses were revenue expenses, not capital expenditure, and were incurred in earlier years, making them not allowable for the current year. The principle of consistency was deemed inapplicable due to lack of scrutiny in prior years.

The tribunal examined the nature of the expenses and found them to be revenue expenses without creating any capital asset or identifiable over future periods. The Ahmedabad special bench's principles were cited, emphasizing the need for proper analysis before allowing deferred revenue expenditure. The claim was denied, as it did not align with the Act's provisions and lacked the necessary criteria for allowance. The argument for consistency was rejected due to the absence of scrutiny in prior years.

Ultimately, the tribunal upheld the order of the Ld. CIT(A) and dismissed the appeal, concluding that the claim for deferred revenue expenditure and pre-operative expenses was not meritorious under the Income Tax Act.