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2013 (8) TMI 562 - HC - Income TaxDisallowance of Advertisement expenditure enduring benefit - Held that - Neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses of Rs.77,16,120/-. There is no dispute that such expenses is allowable expenditure. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited Rs.29,51,909/- in the profit and loss account cannot be made a ground to disallow the advertisement expenses of Rs.77,16,120/- when indisputably in the computation of income, the assessee has claimed the entire sum of Rs.77,16,120/- after adding back Rs.29,51,909/- to the profit as per profit and loss account. - Decided in favor of assessee. Reliance is placed upon the Apex court judgment in the case of Empire Jute Co. Ltd. Vs. CIT 1980 (5) TMI 1 - SUPREME Court - 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 filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act. Disallowance for provision of warranties - One year warranty is offered on each computer manufactured and sold by it to purchasers and in terms thereof the assessee provide free maintenance including replacement of parts within one year from the date of sale / installation of computers Held that - Provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act Applying the decisions in the cases Bharat Earth Movers Ltd. Vs. CIT 2000 (8) TMI 4 - SUPREME Court ; Rotork Controls India Private Limited Vs. Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA , it was held that provision for warranty is allowed as expenditure Decided against the Revenue. Disallowance of provision of royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961 - Section 40(a)(i) of the Act provides that royalty payable out side India shall not be deducted in computing the income chargeable under the head of profits and gains of business or profession on which tax has not been paid or deducted under Chapter XIII B Held that - Liability to pay royalty had accrued and was not contingent has held by the assessing officer, while making the provision the assessee had also made book entries in respect of tax deductible. Thus, out of two conditions as mentioned in Section 40(a)(i), namely, tax has not been paid or deducted , one condition, namely, not deducted do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied - Provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-Section (1) of Section 200, then the royalty shall not be deducted in computing the income chargeable under the head Profits and gains of business of profession . Thus, subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available under Section 40(a)(i) as it existed during the relevant assessment year i.e. Assessment Year 1991-92 - Assessee has deducted the tax during the previous year relevant to the assessment year in question i.e. A.Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied - Royalty as claimed by the Assessee-Respondent was unascertained liability, has been found to be incorrect Expenditure under the head provision for royalty allowed Decided against the Revenue.
Issues Involved:
1. Disallowance of advertisement expenses. 2. Disallowance of provisions for warranties. 3. Disallowance of provisions for royalty. 4. Disallowance of entertainment expenses. Detailed Analysis: Issue 1: Disallowance of Advertisement Expenses The Tribunal deleted the disallowance of Rs. 77,16,120/- under the head advertisement expenses, which the Assessing Officer (AO) had treated as capital expenditure. The Tribunal referenced the Supreme Court's judgment in Empire Jute Co. Ltd. vs. CIT, which held that the test of enduring benefit is not conclusive for treating expenditure as capital. The Tribunal noted that the advertisement expenses facilitated the assessee's trading operations and were thus revenue in nature. The AO's disallowance was based on the treatment of the expenditure as deferred revenue in the books, but the Tribunal emphasized that accounting entries are not decisive under tax law. The High Court upheld the Tribunal's decision, finding no error in the Tribunal's interpretation and application of the law. Issue 2: Disallowance of Provisions for Warranties The AO disallowed Rs. 33,77,573/- as unascertained and contingent. The Tribunal, applying the Supreme Court's principles from Bharat Earth Movers Ltd. vs. CIT and Rotork Controls India Pvt. Ltd. vs. CIT, held that the provision for warranty was a present obligation arising from past events, reasonably estimated, and thus deductible. The High Court agreed, noting that the liability was not contingent but present, to be discharged in the future, and upheld the Tribunal's decision. Issue 3: Disallowance of Provisions for Royalty The AO disallowed Rs. 49,37,042/- on the grounds that it was an unascertained liability. The Tribunal found that the liability to pay royalty had accrued and was not contingent. The tax deductible on this payment was duly shown and deposited within the time specified under Chapter XVII-B of the Act. The High Court noted that the provision of Section 40(a)(i) was satisfied as the tax was deducted, and thus, the royalty payment was allowable. The High Court upheld the Tribunal's decision, finding no error in the interpretation of the law. Issue 4: Disallowance of Entertainment Expenses The AO disallowed Rs. 82,352/- under Section 37(2A) of the Act. The Tribunal followed its earlier decision in the assessee's case for the Assessment Year 1990-91, where 30% of entertainment expenses were treated as employee participation. The High Court found that the department had accepted the Tribunal's decision for the preceding year and had not shown any material difference in facts for the current year. Thus, the High Court upheld the Tribunal's decision. Conclusion All questions were answered in favor of the assessee and against the revenue. The appeal was dismissed with no order as to costs.
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