2004 (11) TMI 285 - AT - Income Tax

Business Expenditure - derives income from liaisoning work - Whether the treatment of the expenditure as deferred revenue expenditure in the books of account affects its deductibility - HELD THAT - As a matter of fact the very purpose of categorising certain expenditure differently under the head deferred revenue expenditure for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same therefore deserves a different treatment in terms of preparation of the annual accounts to determine inter alia the profit of a particular period/year as the benefit thereof accrues aver a period exceeding the accounting year in which the same is incurred. It is thus clear that when any expenditure is treated as a deferred revenue expenditure it presupposes that the concerned expenditure creating benefit in the revenue field is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field the same is required to be treated distinctly from capital expenditure. It is thus clear that the AO misconstrued the term deferred revenue expenditure as capital expenditure an the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure and its allowability of the same under the provisions of the IT Act. From the perusal of the observations of the apex Court in the case of Empire Jute Co. Ltd. vs. CIT 1980 (5) TMI 1 - SUPREME COURT it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital field or revenue field so as to decide the exact nature of the said expenditure and allowability of the same under the IT Act. As regards the relevance of accounting method followed by the assessee we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the IT Act. In any case as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd vs. CIT 1971 (8) TMI 10 - SUPREME COURT the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entries made in the books of account which are not decisive or conclusive in this regard. The expenditure in question was incurred towards launching of a new product and was revenue in nature. The action of the AO in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We are therefore of the view that the said decision will not be of any assistance to the case pleaded by the Revenue. Thus we are of the view that the order of CIT(A) is just and proper and does not call for any interference. Accordingly the appeal of the Revenue is dismissed. In the result the appeal by the Revenue is dismissed.

Summary

Issues Involved:
1. Whether the expenditure of Rs. 47,71,110 should be treated as revenue or capital expenditure.
2. Whether the treatment of the expenditure as 'deferred revenue expenditure' in the books of account affects its deductibility.

Issue 1: Treatment of Expenditure as Revenue or Capital
The Revenue appealed against the CIT(A)'s order treating the expenditure of Rs. 47,71,110 as revenue in nature and deleting the disallowance made by the AO, who treated it as capital expenditure. The assessee, a pharmaceutical company, incurred this expenditure on marketing its products and treated it as deferred revenue expenditure in its books, claiming only 1/10th of the expenses as a deduction in the P&L account. However, in the computation of income, the assessee claimed the entire amount as deductible. The AO argued that the expenditure provided benefits over several years and should be capitalized. The CIT(A) disagreed, stating that the nature of the business required aggressive marketing, and such expenses were necessary and of a revenue nature. The CIT(A) emphasized that the test of enduring benefit is not conclusive and that the expenses facilitated the assessee's trading operations without affecting the fixed capital.

Issue 2: Impact of Deferred Revenue Expenditure Treatment in Books
The AO's disallowance was partly based on the treatment of the expenditure as 'deferred revenue expenditure' in the assessee's books. The CIT(A) and the Tribunal held that entries in the books are not determinative of the nature of the expenses. The Tribunal referenced the Supreme Court's decision in Empire Jute Co. Ltd. vs. CIT, which stated that the test of enduring benefit is not conclusive and that the nature of the advantage in a commercial sense is what matters. The Tribunal also noted that 'deferred revenue expenditure' does not imply capital expenditure but rather revenue expenditure with benefits extending beyond the accounting year. The Tribunal concluded that the AO misconstrued the term and that the expenditure was indeed revenue in nature.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the expenditure was of a revenue nature and fully allowable as claimed by the assessee. The appeal by the Revenue was dismissed.