2016 (2) TMI 631 - HC - Income Tax

Expenses allowable as revenue expenditure u/s 37 - assessee has treated the same as deferred revenue expenditure - Held that - The issue is squarely covered by the decision of Supreme Court in case of Taparia Tools Ltd. v. Joint Commissioner of Income tax reported in (2015 (3) TMI 853 - SUPREME COURT ) wherein held the assessee had issued non convertible debentures in which option was given to the subscribers to receive interest periodically over a period of debenture or one time lumpsum payment of lower amount payable immediately. The one time payment of interest was however, shown by the assessee in the books as deferred expenditure to be written off over the entire period of debentures. The assessee however, claimed the entire expenditure under section 36(1)(iii) of the Act during the year under consideration upon which the Revenue objected. The Supreme Court held that under section 36(1) (iii) of the Act any amount paid on account of interest becomes an admissible deduction if the same was paid on the capital borrowed by the assessee and the borrowing was for the purpose of business or profession. While examining the allowability of such deduction, the Assessing Officer is to consider the genuineness of the business borrowing and that the borrowing was for the purpose of business and not an illusionary and colourable transaction. It was further held that the amount would be said to have been paid even if same is not actually paid but incurred on the basis of method of accounting. It was further held and observed that there is no concept of deferred revenue expenditure in the Act except under certain specified sections where amortisation is specifically provided. Normally, the ordinary rule would be that the revenue expenditure incurred in a particular year is to be allowed in that year. If the assessee claims the expenditure in the year when the same was made, the department cannot deny it. - Decided in favour of assessee

Issues:
1. Allowability of expenses as revenue expenditure under section 37.
2. Treatment of deferred revenue expenditure.
3. Disallowance of claimed expenditure by the Assessing Officer.
4. Decision of CIT(Appeals) in favor of the assessee.
5. Tribunal's consideration of accounting treatment and nature of expenditure.
6. Reference to the Supreme Court decision in Taparia Tools Ltd. case.
7. Final judgment dismissing the tax appeal.

Issue 1: Allowability of expenses as revenue expenditure under section 37
The case involved a company engaged in manufacturing air conditioners. The Assessing Officer disputed the company's claim of entire expenditure of Rs. 1.67 crores under section 37 of the Income Tax Act, 1961. The company had debited only a portion of Rs. 32.10 crores in the profit and loss account for the year and deferred the rest to subsequent years. The Assessing Officer rejected the claim, except for the debited amount, stating that the accounting treatment was accurate and in line with accounting principles. However, the company contended that the expenditure was incurred during the relevant year and was of a revenue nature, thus allowable under section 37.

Issue 2: Treatment of deferred revenue expenditure
The company had deferred debiting a significant portion of the expenditure to subsequent years, leading to a dispute with the Assessing Officer. The company claimed the entire expenditure as a deduction under section 37, while the Assessing Officer disagreed, allowing only the debited amount. The company argued that the expenditure was revenue in nature and should be allowed as such, despite the accounting treatment given to it.

Issue 3: Disallowance of claimed expenditure by the Assessing Officer
The Assessing Officer disallowed a major portion of the claimed expenditure by the company, citing the discrepancy between the accounting treatment and the claim made under section 37. The Officer held that the claim, conflicting with the company's accounting treatment, was not valid except for the amount debited in the profit and loss account.

Issue 4: Decision of CIT(Appeals) in favor of the assessee
The CIT(Appeals) allowed the company's appeal and reversed the decision of the Assessing Officer regarding the expenditure claim. This led the Revenue to file an appeal before the Tribunal to contest the CIT(Appeals) decision.

Issue 5: Tribunal's consideration of accounting treatment and nature of expenditure
The Tribunal noted that the Assessing Officer's disallowance was primarily based on the company's accounting treatment of the expenditure. However, the Tribunal held that the accounting entries were not conclusive of the expenditure's nature. It emphasized that if an expenditure was revenue in nature, it should be allowed in the year of expenditure, irrespective of accounting entries.

Issue 6: Reference to the Supreme Court decision in Taparia Tools Ltd. case
The judgment referenced the Supreme Court decision in Taparia Tools Ltd. case, where the Court clarified the treatment of interest payment under section 36(1)(iii) of the Act. The Court emphasized that revenue expenditure incurred in a particular year should generally be allowed in that year, unless specified otherwise in the Act.

Issue 7: Final judgment dismissing the tax appeal
In light of the Supreme Court decision in Taparia Tools Ltd. case, the High Court dismissed the Revenue's appeal, as the expenditure in question was found to be revenue in nature and allowable under section 37. The judgment highlighted that the department could not deny the expenditure claimed by the assessee in the year it was made, as per the ordinary rule of allowing revenue expenditure in the year of its incurrence.

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