2016 (4) TMI 459 - AT - Income Tax

Disallowance of sales promotion expenses - Held that - The Assessing Officer himself has allowed part of the expenditure and had directed to allow the balance in the succeeding years. In the absence of concept of Deferred Revenue Expenditure being recognized by the Income Tax Act we find no merit in the order of Assessing Officer in this regard. Accordingly we uphold the order of CIT(A) in allowing the claim of assessee in entirety. The perusal of order passed by the CIT(A) relating to assessment year 2001- 02 reflects that the CIT(A) had observed that the Income Tax Act recognized any expenditure either as capital or revenue expenditure and the concept of Deferred Revenue Expenditure was not supported by provisions of the Income Tax Act he nce the total expenditure was allowed in the hands of assessee in assessment year 2001- 02. The CIT(A) while deciding the present appeal relating to assessment year 2002-03 has followed the said decision. We find no error in the aforesaid observations of CIT(A) and upholding the order of CIT(A) we dismiss the ground of appeal relating to sales promotion expenses raised by Revenue in the appeals relating to assessment years 2002-03 2003-04 and 2004-05 before us.- Decided in favour of assessee Disallowance for power and fuel expenses - Held that - On one hand the residential colony comprises first the residential accommodation provided to the employees and it is the case of assessee before us that in case any expenditure is incurred vis- -vis residential quarters of the employees the same is recovered from them. Even in case the same is not recovered from them does not merit the disallowance made in the hands of assessee. Further part of power and fuel expenses were incurred on providing lights to the residential colony and also to the common facilities provided by the assessee to its employees which was the obligation of the assessee company and hence expenditure incurred towards discharge of said obligation is business expenditure of the assessee company and is duly allowable in the hands of assessee. Further the expenditure relatable to residential quarters is no doubt to be recovered from the employees or is to be included as perk in the hands of employees of the assessee company but merely because no such exercise was carried on does not merit the disallowance of expenditure in the hands of assessee. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of 'Sales Promotion Expenses' as revenue expenditure.
2. Disallowance of power and fuel expenses related to the residential colony.

Detailed Analysis:

1. Treatment of 'Sales Promotion Expenses' as Revenue Expenditure:
The primary issue in this case was whether the 'Sales Promotion Expenses' should be treated as revenue expenditure or capital expenditure. The assessee, a government company engaged in manufacturing life-saving antibiotics, claimed sales promotion expenses of Rs. 1,40,19,000/-. The assessee had treated these expenses as Deferred Revenue Expenditure in its books, spreading them over five years. However, in the computation of income, the entire amount was claimed as revenue expenditure. The Assessing Officer (AO) allowed only 1/5th of the expenditure, treating the balance as deferred to subsequent years.

The CIT(A) allowed the entire claim, aligning with the decision for the assessment year 2001-02, where the concept of Deferred Revenue Expenditure was not recognized under the Income Tax Act. The Tribunal upheld the CIT(A)'s decision, emphasizing that the nature of expenditure was revenue, and the Income Tax Act does not recognize Deferred Revenue Expenditure. The Tribunal cited precedents from the Delhi High Court (CIT Vs. Citi Financial Consumer Fin. Ltd. and CIT Vs. Salora International Ltd.) to support its decision.

2. Disallowance of Power and Fuel Expenses Related to the Residential Colony:
The second issue involved the disallowance of power and fuel expenses amounting to Rs. 73.29 lakhs, which were part of the total power expenses of Rs. 28.41 crores. The AO disallowed these expenses, arguing they were not directly related to the business and were not taxed as perquisites in the hands of employees.

The CIT(A) reversed the AO's decision, stating that non-inclusion of perquisites in employees' income could not justify disallowance in the company's hands. The expenses were considered a subsidy to employees and therefore allowable. The Tribunal upheld the CIT(A)'s decision, noting that the residential colony's power facilities were an obligation of the assessee company. Even if the expenses were not recovered from employees, they were still business expenditures and allowable. The Tribunal dismissed the Revenue's appeal on this ground, affirming that the expenses were necessary for providing common facilities and lighting in the residential colony.

Conclusion:
The Tribunal dismissed all appeals by the Revenue, upholding the CIT(A)'s decisions on both issues. The sales promotion expenses were allowed in full as revenue expenditure, and the power and fuel expenses related to the residential colony were deemed allowable business expenditures. The Tribunal emphasized the non-recognition of Deferred Revenue Expenditure under the Income Tax Act and the obligation of the company to provide facilities to its employees.