9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2022 (5) TMI 934 - AT - Income TaxNature of expenditure - Expenditure on prepayment for leased line - whether one-time prepayment for leased line of enduring benefit for a term of three years, can be treated as revenue in nature or deferred revenue or qualifies for depreciation u/s. 32 being a capital in nature? - HELD THAT - As held by the Hon'ble Supreme Court, in the case of Kedarnath Jute Manufacturing Co. Ltd. Vs CIT 1971 (8) TMI 10 - SUPREME COURT the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entries made in the books of account, which are not decisive or conclusive in this regard. Expenditure in the nature of subscription of lease line on onetime payment for three year is of revenue in nature and allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field, au contraire, the expenditure was incurred to facilitate the assessee's operations and no fixed tangible asset vis- -vis intangible assets is created by this expenditure. We may also add here that in the Income Tax laws, there is no concept of deferred revenue expenditure, therefore once the assessee claims the deduction for whole amount of such expenditure, even in the year in which it is incurred, and expenditure if fulfils the test laid down u/s. 37 of the Act, it has to be allowed. The only in exceptional cases, the nature mentioned in Madras Industrial Corporation 1997 (4) TMI 5 - SUPREME COURT the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so. Ergo, we hold that both the tax authorities below erred in disallowing the revenue expenditure incurred by the appellant, and is hereby overturned the same for the aforestated reasons. - Decided in favour of assessee.
Issues Involved:
1. Whether the onetime prepayment for leased line of enduring benefit for a term of three years can be treated as revenue in nature, deferred revenue, or qualifies for depreciation under Section 32 of the Income-tax Act, 1961. Comprehensive Issue-wise Detailed Analysis: Issue 1: Nature of Expenditure - Revenue vs. Capital Arguments and Findings: - The appellant company incurred a one-time expenditure of Rs. 14,51,649/- on implementing MPLS/VPN and lease line connectivity for three years. The appellant treated this expenditure as revenue and debited the full amount to the Profit and Loss Account for AY 2010-11. - The Assessing Officer (AO) disallowed Rs. 13,30,678/- attributable to the unexpired period of 33 months, treating it as deferred revenue expenditure. - The Commissioner of Income Tax (Appeals) [CIT(A)] concluded the expenditure as capital in nature, allowing depreciation under Section 32 at 25% per annum, as it was deemed an intangible asset. Legal Precedents and Analysis: - The Tribunal referred to the principles laid down by the Hon'ble Supreme Court in "Empire Jute Company Ltd. Vs CIT" (124 ITR 1) and "CIT Vs Madras Auto Service (P) Ltd" (233 ITR 468). The key test is whether the expenditure brings an advantage of enduring benefit in the capital field or merely facilitates the assessee’s trading operations. - The Tribunal observed that the expenditure incurred by the appellant did not bring into existence any tangible or intangible asset of a permanent nature. Instead, it facilitated the appellant’s business operations, making it a revenue expenditure. - The Tribunal emphasized that the nature of the advantage in a commercial sense is crucial. If the advantage is in the revenue field, the expenditure should be regarded as revenue, even if it endures for an indefinite future. Conclusion: - The Tribunal concluded that the expenditure on MPLS/VPN and lease line connectivity is of a revenue nature, as it facilitated the appellant's business operations without creating any permanent asset. Therefore, it is allowable fully in the year it was incurred. Issue 2: Applicability of Section 37(1) of the Income-tax Act Arguments and Findings: - Section 37(1) allows any expenditure laid out wholly and exclusively for business purposes, provided it is not capital expenditure or personal expenses. - The Tribunal noted that the expenditure satisfied all positive tests under Section 37(1) and did not fall under any negative tests, such as being capital expenditure or personal expenses. Legal Precedents and Analysis: - The Tribunal cited the Hon'ble Delhi High Court's decision in "CIT Vs Saw pipes Limited" (300 ITR 35), where similar expenditure was treated as revenue. - The Tribunal reiterated that the method of accounting followed by the assessee is not decisive for determining the allowability of expenditure under the Income-tax Act, as held by the Hon'ble Supreme Court in "Kedarnath Jute Manufacturing Co. Ltd. Vs CIT" (82 ITR 363). Conclusion: - The Tribunal held that the entire expenditure of Rs. 14,51,649/- incurred on MPLS/VPN and lease line connectivity qualifies for deduction under Section 37(1) of the Act. The disallowance by the AO and CIT(A) was overturned. Final Judgment: - The appeal of the assessee is allowed. The expenditure on MPLS/VPN and lease line connectivity is treated as revenue in nature and fully deductible in the year incurred. The orders of the lower tax authorities are overturned. Order Pronounced: - The order was pronounced in open court on April 20, 2022.
|
