2006 (12) TMI 175 - AT - Income Tax

Expenditures are in relation to advertisement, publicity, trade shows, etc - Capital Or Revenue Expenditure - enduring benefit - HELD THAT - There is no concept of deferred revenue expenditure known to the IT Act. The expenditure is either revenue expenditure or capital expenditure. The allowability of the same is to be looked into as per provisions of ss. 28 to 44 of the IT Act. The expenditures were treated as deferred revenue expenditure by the AO and 1/5th of such expenditure were allowed. At first instance, it can be said that having satisfied himself that the expenditures are genuine and allowable as such, the AO allowed 1/5th of the same. Since the expenditures are in relation to advertisement, publicity, trade shows, etc., it can be held that the same are revenue in nature. Such expenditures do not bring any capital asset into existence. Thus, the same were rightly treated as revenue expenditures by learned CIT(A). It is also true that the CIT(A) is competent to examine the allowability or otherwise of such expenditure. When the details were called for, the assessee has submitted that the sum out of such expenses was never claimed as expenses as the same were claimed in earlier years. The provision made in this regard for earlier year is now reversed. Thus, there is no question of any disallowance of such expenditure. We accordingly delete the disallowance. In our opinion, the claim of assessee could not have been dismissed holding the same as prior period expenditure . Any liability though relating to earlier year depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the year, cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the previous year, The expenses are contractual in nature and not statutory payments. Thus, the same will be allowed as liability in the year in which such liability crystallizes. Thus, the expenditures which were earlier in dispute and in view of the fact that the dispute is settled during the year under consideration, the same are allowable in such year. We accordingly delete the disallowance. Disallowance on foreign exchange fluctuation loss - HELD THAT - The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT 1978 (9) TMI 1 - SUPREME COURT held that where profit or loss arises to assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. Admittedly, in the present case, the foreign currency loan was taken for working capital requirement. The decision of Hon'ble Supreme Court will, therefore, squarely apply. The liability on the date of balance sheet has to be reckoned in the accounts on the basis of fluctuation in the rate of exchange during the year and not merely when the loan is repaid, particularly when the assessee is following mercantile system of accounting. The Special Bench of the Tribunal held that such loss cannot be called as notional or contingent loss. We also find that the loss was allowed while deciding the appeal of assessee for asst. yr. 2001-02. The decision of Special Bench of the Tribunal as well as that rendered in the case of Maruti Udyog Ltd. squarely applies. Thus, the loss of Rs. 87,52,111 is allowable as claimed. Disallowance u/s 43B - customs duty paid during the year and included in the closing stock valuation - HELD THAT - We find that similar issue has been decided in favour of the assessee by the earlier decision of the Tribunal for AY 1996-97 and 1997-98. Hon'ble Supreme Court in the case of Berger Paints India Ltd. 2004 (2) TMI 4 - SUPREME COURT held that the entire amount of customs duty paid by assessee in a particular accounting year is allowable u/s 43B as a deduction in respect of that year irrespective of the amount of customs duty included in the valuation of assessee's closing stock at the end of accounting year as relating thereto. While so holding, Hon'ble Supreme Court approved the decision of the Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. 1994 (1) TMI 245 - ITAT DELHI . We accordingly dismiss this ground. In the result, the appeal of assessee is allowed and that of Revenue is dismissed.

Summary

Issues Involved:

1. Deferred Revenue Expenditure on Advertisement and Publicity
2. Disallowance of Foreign Exchange Fluctuation Loss
3. Disallowance under Section 43B for Customs Duty Paid
4. Disallowance of Advertisement and Publicity Expenses

Issue-wise Detailed Analysis:

1. Deferred Revenue Expenditure on Advertisement and Publicity:

The assessee company, engaged in the business of developing, manufacturing, selling, and servicing computer systems and software, incurred an expenditure of Rs. 55,64,715/- on advertisement and publicity, trade shows, and other sales promotion items. The Assessing Officer (AO) categorized these expenses as deferred revenue expenditure, allowing only 1/5th of the total claim, arguing that the expenses impart an enduring benefit. The learned CIT(A) held the expenses as revenue expenditure, contingent upon the genuineness of the claim. However, disallowances were made for expenses pertaining to earlier years, unproduced vouchers, and a hotel bill intended to be charged to a client account.

The Tribunal observed that there is no concept of deferred revenue expenditure in the Income Tax Act; an expenditure is either revenue or capital. Since the expenses related to advertisement, publicity, and trade shows do not bring any capital asset into existence, they should be treated as revenue expenditure. The Tribunal deleted the disallowance of Rs. 10,83,605/- as these expenses were claimed in earlier years, and Rs. 3,33,840/- as the liability crystallized during the year. The Tribunal also deleted the disallowance of Rs. 44,569/- and Rs. 50,635/- due to lack of proper confrontation and justification by the CIT(A).

2. Disallowance of Foreign Exchange Fluctuation Loss:

The assessee claimed a foreign exchange fluctuation loss of Rs. 87,52,111/- related to a working capital loan from Silicon Graphics Inc., USA. The AO held that the loss could only be allowed when the loan is repaid, deeming it hypothetical. The Tribunal, referencing the Supreme Court's decision in Sutlej Cotton Mills Ltd. vs. CIT and the Special Bench's decision in Oil & Natural Gas Corpn. Ltd. vs. Dy. CIT, held that the loss is allowable as business revenue loss since the foreign currency loan was taken for working capital requirements and the liability must be accounted for based on exchange rate fluctuations during the year.

3. Disallowance under Section 43B for Customs Duty Paid:

The AO disallowed Rs. 8,50,78,263/- under Section 43B, arguing that customs duty paid during the year and included in the closing stock valuation cannot be allowed as it was not payable during the year. The CIT(A) allowed the claim based on earlier years' decisions and the Special Bench's ruling in Indian Communication Network (P) Ltd. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in Berger Paints India Ltd. vs. CIT, which allows the entire customs duty paid in a year as a deduction under Section 43B, irrespective of its inclusion in the closing stock valuation.

4. Disallowance of Advertisement and Publicity Expenses:

The AO treated the entire expenditure of Rs. 55,64,715/- on advertisement and publicity as deferred revenue expenditure, allowing only 1/5th of the claim. The Tribunal, consistent with its earlier findings, held that such expenses are revenue in nature and cannot be partially disallowed as deferred revenue expenditure. Consequently, the Tribunal allowed the full amount as revenue expenditure.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the disallowances related to deferred revenue expenditure on advertisement and publicity, foreign exchange fluctuation loss, and customs duty paid under Section 43B. The Tribunal dismissed the appeal of the Revenue, upholding the CIT(A)'s decisions favoring the assessee.