2023 (9) TMI 1154 - AT - Income Tax

Nature of expenses - revenue v/s capital/deferred revenue expenditure - expenses incurred by the assessee consisted of exhibition expenses, foreign local travelling, telephone calls etc. - as per AO these expenses have resulted in building up a benefit of intangible nature that may accrue in future and the above said expenditure is capital in nature - CIT(A) observed that these expenses can at best be treated as pre-commencement expenses made by the company in order to explore the market abroad - HELD THAT - The fact that the assessee has started manufacturing of packaging machines would show that the business of the assessee has been set up and even commenced. It is well settled proposition of law that the revenue expenses incurred after the setting up of the business is allowable as deduction, even if the business has not commenced. Hence, the view taken by the learned CIT(A) that pre-commencement expenses are not allowable as revenue expenditure cannot be sustained. A Perusal of the said expenditure would show that all the expenses have been incurred in the normal course of carrying on business in order to capture the market. Hence, in our view, these expenditures cannot be considered as capital in nature. Further, we are of the view that the Assessing Officer was not justified in holding that these expenditure would create an asset of intangible nature in future and further, the AO has taken this view only on surmises and conjectures without any basis Whether the assessee is entitled to claim expenses fully for income tax purposes, when it has treated the same as deferred revenue expenditure in the books of accounts? - It is well settled proposition of law that the entries made in the books of account are not relevant for the purpose of computing total income. The action of the assessee in treating this expenditure as deferred revenue expenditure in the books of account will not bar the assessee from claiming it as revenue expenditure for the income tax purposes. If the claim of the assessee is allowable in terms of sec. 30 to 37 of the Income tax Act, the same should be allowed. In this case, it is not the case of the AO that the above said expenses are not allowable under any of the provisions of the Act. The tax authorities have also taken a view that the assessee has not shown any sales in the books of account. It is well settled proposition of law that, once the assessee has set up his business, all revenue expenses are allowable as deduction irrespective of the receipt of income. In support of this proposition, the Ld A.R brought to our attention the decision of Hon'ble Supreme Court rendered in the case of CIT Vs. Rajendra Prasad Mody 1978 (10) TMI 133 - SUPREME COURT Accordingly, we reject the view taken by the tax authorities on this proposition. Thus we are of the view that the learned CIT(A) was not justified in confirming the disallowance made by the Assessing Officer. Decided in favour of assessee.

Summary

Issues:
The judgment involves the challenge to the order confirming the addition of Rs. 89.07 lakhs made by the Assessing Officer by treating the expenditure claimed by the assessee as capital in nature for A.Y. 2015-16.

Details of Judgment:

Issue 1: Nature of Expenses
The Assessing Officer disallowed the deduction claimed by the assessee of Rs. 89,07,340/-, treating it as capital expenditure to suppress profits. The expenses included foreign & local travelling, exhibition expenses, and telephone calls. The AO viewed these expenses as resulting in an intangible benefit that may accrue in the future, hence capital in nature. The CIT(A) agreed with this view, considering them as pre-commencement expenses for exploring the market abroad.

Issue 2: Commencement of Business
The assessee argued that it had already set up its business and commenced operations, evident from the manufacturing activities and classification of direct expenses as work in progress. The Tribunal noted that the business of manufacturing packaging machines had commenced, making revenue expenses allowable even if the business had not fully commenced operations.

Issue 3: Treatment of Expenses
The Tribunal analyzed the detailed breakdown of the claimed expenses, which were incurred in the normal course of business to capture the market. It held that these expenditures were revenue expenses and not capital in nature. The AO's view that these expenses would create an intangible asset in the future was deemed baseless.

Issue 4: Treatment in Books vs. Income Tax Purposes
The Tribunal clarified that entries in the books of account do not dictate the treatment for income tax purposes. Citing legal precedents, it held that the assessee could claim expenses fully for income tax purposes even if treated as deferred revenue expenditure in the books. As long as the expenses were allowable under the Income Tax Act provisions, they should be allowed.

Issue 5: Allowance of Expenses
The tax authorities had raised concerns about the absence of sales in the books of account. However, the Tribunal emphasized that once the business was set up, all revenue expenses were allowable deductions, irrespective of income receipts. Citing legal precedent, it rejected the tax authorities' view on this matter.

Conclusion
The Tribunal concluded that the disallowance made by the Assessing Officer was not justified. It set aside the CIT(A)'s order and directed the Assessing Officer to delete the net disallowance of Rs. 66,80,505/-. As a result, the appeal filed by the assessee was allowed.