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2023 (6) TMI 204 - AT - Income TaxBusiness expenditure u/s 37(1) - effect of treatment of expenditure by the assessee in its books of accounts - HELD THAT - AO has nowhere denied that expenditure in question has been incurred for the purpose of the business. He has also not denied that those expenses are routine in nature and same would generally be classified as revenue Expenditure as per the provisions of the Act. The business of the assessee has already been set up and assessee has commenced providing digital services to its customers. The revenue from the same as also been recognised in books of accounts and offered for the tax. In such circumstances, the expenses which are incurred for running the business are revenue expenditure for the purpose of income tax irrespective of the treatment of the same by the assessee in its books of accounts. DR could not substantiate as how the expenses incurred for day-to-day business are for upgradation of the asset and of enduring benefit. Though the assessee has treated those expenses in its books of accounts as capital expenditure following the Indian accounting standard, but these expenses, list of which has been reproduced above have been incurred in relation to services provided to existing customers, and therefore same being incurred wholly and exclusively for the purpose of the business, deserve to be allowed in terms of section 37(1) - Decided against revenue.
Issues Involved:
1. Whether the Ld. CIT(A) erred in allowing the appeal of the assessee by treating certain expenditures as revenue in nature. 2. Whether the expenses incurred towards upgradation of assets should be treated as capital in nature and therefore not allowable as expenses under section 37 of the IT Act. 3. Whether the expenses incurred towards the expansion of business with enduring benefit are capital in nature and thus not allowable as expenses under section 37 of the IT Act. Issue-wise Detailed Analysis: 1. Treatment of Expenditures as Revenue in Nature: The Revenue challenged the decision of the Ld. CIT(A) for allowing the appeal of the assessee by treating certain expenditures as revenue in nature. The assessee, engaged in providing telecommunication services, had classified certain operational expenses (salaries, rent, professional fees, etc.) as "expenses capitalized in books-allowable as revenue for tax purposes." These expenses were not debited to the profit and loss account but were accounted for as 'Project Development' expenditure and capital work in progress in the books of accounts. The Assessing Officer (AO) disallowed this treatment, arguing that the same expenditure cannot be treated as capital in the books and revenue for tax purposes. The Ld. CIT(A), however, deleted the disallowance, noting that the expenses did not result in the acquisition or upgradation of assets but were incurred for business operation purposes. 2. Upgradation of Assets: The AO contended that the expenses were towards the upgradation of assets and thus capital in nature. The AO emphasized that the expenses were incurred in connection with tower/fibre network infrastructure facilities that were not yet meeting the Quality of Service (QoS) standards. Therefore, these expenses were treated as capital in the books and should also be treated as capital for income tax purposes. The Ld. CIT(A) disagreed, stating that the expenses were necessary for improving network connectivity and did not result in the creation of new assets. The Ld. CIT(A) highlighted that the expenses were operational in nature, incurred to meet the QoS standards, and were therefore revenue expenses. 3. Expansion of Business with Enduring Benefit: The AO argued that the expenses incurred towards the expansion of business provided an enduring benefit and should be treated as capital in nature. The Ld. CIT(A) examined the nature of the expenses and concluded that they were operational and did not result in the creation of new assets or enduring benefits. The Ld. CIT(A) relied on various judicial precedents, including decisions from the Hon'ble Supreme Court and the Tribunal, to support the view that such expenses should be treated as revenue in nature. The Ld. CIT(A) also noted that similar expenses were allowed in the previous assessment year without disallowance by the AO. Conclusion: The Tribunal upheld the decision of the Ld. CIT(A), dismissing the appeal of the Revenue. The Tribunal found that the AO had not denied the business purpose of the expenses and that they were routine in nature. The Tribunal emphasized that the treatment of expenses in the books of accounts as capital expenditure, following Indian accounting standards, does not affect their classification as revenue expenses for income tax purposes. The Tribunal also noted that identical expenses had been allowed in other cases by the Tribunal and upheld by the Hon'ble Bombay High Court. Consequently, the Tribunal concluded that the expenses were revenue in nature and allowable under section 37(1) of the IT Act. Order: The appeal of the Revenue was dismissed, and the order of the Ld. CIT(A) was upheld. The Tribunal pronounced the order on 01/02/2023.
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