2019 (1) TMI 1197 - AT - Income Tax

Change in method of accounting - selling CPE to the subscriber - company shifted its policy from selling CPE to the subscriber to leasing this equipment to the customer on payment of refundable security and a lease rent for five years - assessee compensated this fall in prices and debited the same in its Profit and loss account as related to excess/short amount received from the consignees on account of scheme conversion - AO treated this as a non- Revenue expenditure, whereas the first appellate authority has directed the Assessing Officer to allow the same as business loss - CIT(A) accordingly directed the Assessing Officer to allow 1/5th expenditure and balance amount would be allowed for the next four financial years - Held that - We are of the considered opinion that once the CIT(A) has accepted that distributor s commission and distributor s incentive are revenue expenditure, there is nothing like deferred revenue expenditure. Moreover, the distributor s commission and incentive paid by the assessee will not be recovered if the lessee i.e. the customer cancels the lease after one year. Therefore, any commission/incentive paid by the assessee has to be charged to the profit and loss account as revenue expenditure in the year of incurring the same. We, accordingly, modify the findings of the CIT(A) and direct the Assessing Officer to allow distributor s commission and distributor s incentive as revenue expenditure. Allowability of freight and cartage outward - nature of expenditure - holding it as capital loss/capital expenditure or revenue expenditure - Held that - AO has misunderstood the facts of the issue. He was carried away by the capitalisation of freight inward expenses and accordingly, treated freight and cartage outward as capital expenditure. At this stage, we would like to make it clear that freight inward is paid when the goods are unloaded and transferred to the godown. Such expenditure is definitely part of the goods so unloaded and the same needs to be capitalised. Freight outward, on the other hand, is expenditure incurred when the goods are loaded to transport to the destination of the customer. Such expenditure is directly related to the sales and have to be allowed as Revenue expenditure. Disallowance of handling charges - nature of expenditure - revenue v/s capital expenditure - Held that - Facts on record show that these expenses have been incurred for dispatching set top boxes to various destinations during the course of normal business activity of the assessee. In our considered opinion, such expenditure has not resulted in any acquisition of any capital asset by the assessee. On the contrary, such expenditure has been incurred for despatch of trading stock of the assessee. We, accordingly, direct the Assessing Officer to delete the impugned addition.

Summary

Issues:
1. Treatment of excess/short amount received from consignees on account of scheme conversion.
2. Allowance of distributor's commission and incentive as revenue expenditure.
3. Classification of freight and cartage outward as capital expenditure.
4. Disallowance of handling charges as capital expenditure.
5. Deletion of penalty due to removal of foundation in assessment.

Analysis:
1. The case involved an appeal by the Revenue and cross objection by the assessee against the order of the CIT(A) regarding the treatment of excess/short amount received from consignees due to a change in the method of accounting. The Revenue treated it as non-revenue expenditure, but the CIT(A) directed it to be allowed as a business loss. The ITAT upheld the CIT(A)'s decision, stating that any loss incurred by the assessee in respect of trading goods should be allowed as a business loss, especially since the change in policy was accepted by the Assessing Officer and no malafide intention was proven.

2. Another issue revolved around the allowance of distributor's commission and incentive as revenue expenditure. The Assessing Officer wanted to capitalize these expenses, but the CIT(A) directed that a portion of these expenses should be allowed annually since the set top boxes were leased for five years. The ITAT modified the decision, stating that the commission and incentive paid should be charged to the profit and loss account as revenue expenditure in the year of incurring, as there was no guarantee of recovery if the lease was canceled.

3. The classification of freight and cartage outward as capital expenditure was also disputed. The Assessing Officer mistakenly treated it as capital expenditure, but the ITAT clarified that freight outward expenses are directly related to sales and should be allowed as revenue expenditure, unlike freight inward expenses which are part of the goods unloaded and need to be capitalized.

4. The next issue involved the disallowance of handling charges as capital expenditure. The ITAT found that these expenses were incurred for dispatching trading stock and did not result in the acquisition of any capital asset. Therefore, the Assessing Officer was directed to delete the addition of handling charges as capital expenditure.

5. Finally, the deletion of penalty was ordered due to the removal of the foundation in the assessment, following the principle of "Sublato Fundamento Cadit Opus," meaning that if the foundation is removed, the superstructure falls. As the foundation (assessment) was removed, the penalty was directed to be deleted.

In conclusion, the ITAT dismissed the Revenue's appeal, allowed the cross objection of the assessee, and deleted the penalty, providing a detailed analysis and clarification on each issue raised in the case.