2005 (9) TMI 31 - HC - Income Tax

1. Whether while considering allowance of revenue expenditure incurred for advertisement during any assessment year can be spread over by an assessee on principle of deferred revenue expenses on the ground that the benefit of such expense would flow for subsequent years also? 2. Whether AO having accepted the principle of spreading over of expenses incurred in one assessment year by treating the same to be deferred revenue expense for earlier years and did not allow the deduction of full amount of expense was right in refusing to allow the deduction of unadjusted expense during the assessment year in question on the ground that the principle of spreading over of allowable revenue expenditure is not permissible in law? - Tribunal ought to have given appropriate direction when it was deciding the appeals not for the assessment years 1993-94 and 1994-95 only but was also hearing the appeals of later assessment years together and in not doing so, it has resulted in an apparent error of application of the principle enumerated by it. Therefore, we allow this appeal and direct the Tribunal to pass necessary orders

Summary

Issues:
1. Allowance of revenue expenditure for advertisement spread over multiple years.
2. Discrepancy in allowing deduction of deferred revenue expenses.
3. Tribunal's inconsistency in spreading over expenses for deduction.
4. Failure to provide appropriate direction for deduction in subsequent years.

Issue 1 - Allowance of revenue expenditure for advertisement spread over multiple years:
The appeal in question revolves around the allowance of revenue expenditure incurred for advertisement to be spread over by an assessee on the principle of deferred revenue expenses, considering the benefit flowing for subsequent years. The assessee claimed deduction under section 37(1) for expenses on advertisement through audio-visual media, where the expenses were spread over a period due to the continuous benefit derived from the advertisement. The Assessing Officer initially accepted the claim for certain assessment years but later refused to allow the deduction on a deferred value basis for subsequent years. The Tribunal, however, acknowledged the principle of spreading over expenses for a prolonged benefit period and allowed the full expenses incurred up to a certain assessment year.

Issue 2 - Discrepancy in allowing deduction of deferred revenue expenses:
The Assessing Officer and the Commissioner of Income-tax (Appeals) disagreed with the assessee's claim for deferred revenue expenditure, arguing that there is no provision for categorizing such expenses under section 37. The Tribunal, on the other hand, recognized the benefit derived by the assessee over an extended period and allowed the spreading over of expenses for deduction. However, the Tribunal's decision led to incongruity as it extended the spreading over period to three years, contrary to the assessee's claim of two years, resulting in a discrepancy in the deduction allowed for subsequent assessment years.

Issue 3 - Tribunal's inconsistency in spreading over expenses for deduction:
The Tribunal's decision to spread over the advertisement expenses for a different period than claimed by the assessee created inconsistency in the deduction allowed for subsequent years. The Tribunal's failure to provide appropriate direction for deduction in subsequent years after extending the spreading over period to three years for a particular assessment year led to confusion and an apparent error in the application of its own principle.

Issue 4 - Failure to provide appropriate direction for deduction in subsequent years:
The Tribunal's failure to give necessary orders for deduction in subsequent years after extending the spreading over period to three years for a specific assessment year resulted in incongruity and an error in the application of its findings. The High Court allowed the appeal and directed the Tribunal to pass necessary orders to give legitimate consequential effect to its own findings, emphasizing the need for consistency and appropriate direction in allowing deductions for deferred revenue expenses over multiple years.

In conclusion, the judgment highlights the importance of consistent application of principles in allowing deductions for deferred revenue expenses and the need for appropriate direction by the Tribunal to avoid discrepancies and errors in the deduction process for subsequent assessment years.