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TMI Blog2004 (6) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... h are not decisive or conclusive in this regard. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the Revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition made to the total income. Thus, grounds No. 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds No. 1.1, 1.2 and 1.4. Provision for warranties - The basis of computation of the warranty for the asst. yr. 1990-91 was 1.5 per cent of the total cost of sales. In the asst. yr. 1991-92, which is the year in dispute in the present appeal, the provision has been made @ 1.5 per cent of the cost of sales in respect of goods sold within the country and 5 per cent on export sales. The assessee also wrote back the provision made for the asst. yr. 1990-91, from the estimated liability for asst. yr. 1991-92 and the difference alone is sought to be claimed as a deduction while determining the income for asst. yr. 1991-92. Even for the subsequent assessment year the provision on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging director and payment of his club fees - These payments were approved even by the Department of Electronics, which approved the appointment of foreign technician. The annexure to the approval by the Department of Company Affairs also specifies that housing and club fees will be paid subject to certain limitations. The club fees paid is, therefore, to be allowed as a deduction. As far as house rent paid is concerned, the case of the AO is that it is excessive and unreasonable. The AO has not brought enough material on record to prove this allegation and it was incumbent upon him to do so before making any disallowance. The deduction towards house rent and club fees is, therefore, directed to be allowed while the tax liability of the employee claimed as a deduction cannot be allowed as a deduction. Thus, ground No. 5 is dismissed while ground No. 6 is allowed. In the result, the appeal by the assessee is partly allowed. Disallowance under s. 40A(2)(b) - The AO has made a sweeping statement that the payment made is excessive. There is absolutely no record to justify his calculation. The CIT(A) was, therefore, justified in deleting the addition made by the AO by taking note of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c and claimed deduction of the entire sum of Rs. 77,16,120. According to the assessee, the expenditure on advertisement was revenue in nature and was fully allowable as a deduction in computing the income for the purpose of IT Act. The treatment given by the assessee in its books of accounts was by recognising this as a deferred revenue expenditure since the expenditure would result in benefit to the assessee which may extend beyond the previous year in which the same was incurred. The debit to the P L a/c of only a portion of the expenses commensurate with the benefit that the assessee derives by incurring these expenses during the previous year was only in keeping with sound accounting policies and the same does not operate as an estoppel when claiming deduction of the whole expenditure as a revenue expenditure under the IT Act. The AO however rejected the claim of the assessee by passing a cryptic order which was to the effect that the assessee has admitted that the sum of Rs. 77,16,120 has been capitalised in the balance sheet. Therefore, there is no justification for claiming it as a revenue expenditure. Thus, a sum of Rs. 77,16,120 came to be added to the loss declared by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrendered Rs. 29,51,909 and claimed deduction of Rs. 77,16,120 which is totally unjustified. Looking to the nature of advertisement expenses which were mostly on advertisement in newspaper and magazines as well as preparation of advertisement material like films, blocks, slides, etc., I feel the bifurcation of advertisement expenses, as done by the appellant in the accounts, i.e., showing Rs. 29,51,909 as revenue expenses and Rs. 77,16,120 as deferred revenue expenses was fully justified. Here, I beg to differ from the findings of my predecessor for asst. yr. 1990-91. Though the deferred revenue expenses is not a capital expenditure but it is not an allowable deduction during the year as it does not pertain to this year. It is a prospective expenditure incurred in advance. Such expenditure can be claimed as revenue expenditure in subsequent assessment year only depending upon the year or years to which it pertains. Hence, looking to the facts of the case, the disallowance of Rs. 77,16,120 is confirmed. The appellant is also not allowed any deduction of Rs. 29,51,909 as it has been voluntarily offered for taxation in the computation of income as no claim for its deduction has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason for making the addition by the Revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as deferred revenue expenditure in its books of account and according to the Revenue authorities the said expenditure incurred on advertisement would result in benefits which will accrue to the assessee over a period of time beyond the previous year. So far as the treatment given by the assessee-company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as deferred revenue expenditure considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below, however, considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that it indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure as its allowability of the same under the provisions of the IT Act. 11. The Hon ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT, has observed as under: There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aintenance including replacement of parts within one year from the date of sale/installation of the computer. The assessee estimated its liability in respect of the warranty for the previous year at a sum of Rs. 42,87,667. For the previous year relevant to asst. yr. 1990-91, the assessee had provided for a sum of Rs. 9,10,094 towards estimated liability on account of warranty. There was no actual expenditure incurred whatsoever in the previous year relevant to asst. yr. 1991-92 in respect of the provision of warranty made in the previous year relevant to asst. yr. 1990-91. The assessee, therefore, wrote back this liability debited in the previous year relevant to asst. yr. 1990-91 and claimed a net warranty liability of only Rs. 33,77,573 (Rs. 42,87,667 - Rs. 9,10,094). The basis for estimating the liability for the previous year relevant to asst. yr. 1990-91 was 1.5 per cent of the total cost of sales and for the previous year relevant to asst. yr. 1991-92 it was 1.5 per cent of the cost of sales in respect of computers sold within the country and 5 per cent of the cost of sales in respect of computers exported. The AO was of the view that this liability of Rs. 33,77,573 was not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) ITO vs. Wanson (India) Ltd. [sic Voltas Ltd. vs. Dy. CIT] (1998) 64 ITD 232 (Bom) (v) Bharat Earth Movers Ltd. vs. CIT (2000) 162 CTR (SC) 325 : (2000) 245 ITR 428 (SC) (vi) CIT vs. Beema Mfrs. (P) Ltd. (2003) 130 Taxman 400 (Mad) 18. The learned Departmental Representative relied on the orders of the Revenue authorities. 19. We have considered the rival submissions. The assessee follows the mercantile system of accounting. It is only the actual liability which accrued or arose during the previous year that can be considered as an expenditure deductible for income-tax purposes. A liability which is dependent on fulfilment of a condition cannot be allowed as a deduction unless the dependent condition is fulfilled during the previous year. In the present case it is noticed that the assessee when it sells its computers manufactured by it, it confers on the purchasers the benefit of a warranty against defects appearing within the particular period. The assessee also undertakes to provide free maintenance including replacement of parts within one year from the date of sale/installation of the computer. It estimated its probable liability on account of free maintenance and replacement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payment under those warranties and, even though it might not be required to do so until the following year, it was definitely committed in the year of sale to that expenditure; and that, accordingly, in computing the profits or gains derived by the taxpayer from its business in the year in which the vehicles were sold, the taxpayer was entitled under s. 104 to deduct from its total income and provision which it had made for the costs of its anticipated liabilities under outstanding warranties in respect of vehicles sold in that year. 21. Keeping in mind the principles laid down by the Hon ble Supreme Court and also by the Hon ble Privy Council, we shall now examine the facts of the present case. The summary of warranty provision made by the assessee for the various assessment years is as follows: Summary of Warranty Provision/Expenses Particulars Assessment year 1990-91 1991-92 1992-93 1993-94 1994-95 Rs. Rs. Rs. Rs. Rs. Actual exp. during the year 16,97,658 33,88,805 40,76,935 Less : Last yr s provision written back 9,10,094 21,15,166 16,72,250 30,04,572 Add : Current year provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, the assessee obtained a certificate from a chartered accountant for payment of royalty wherein the actual royalty payable after taking into account the income was determined at Rs. 44,77,151 and R D cess at Rs. 1,56,700. The AO disallowed claim for deduction of this provision on the ground that the liability is unascertained. On appeal by the assessee, the CIT(A) confirmed the disallowance not on the basis adopted by the AO but on the basis that under the provisions of s. 40(a)(i) of the Act, royalty payment payable outside India shall be allowed as a deduction only if the tax payable thereon is deducted at source or paid under Chapter XVII-B of the Act. The CIT(A) noticed that it was only in November, 1991, falling within the asst. yr. 1992-93 that the assessee had deducted tax on this royalty payment and deposited in the Government treasury. The CIT(A), therefore, held that deduction can be allowed on the basis of actual payment as well as payment of tax at source as provided in s. 40(a)(i) of the Act. 25. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. We have heard the rival submissions. The facts as they emanate from the records are that in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antification had taken place at later point of time and this was not the event by which the liability became ascertained. As already observed by us, while making the provision the assessee had also made book entries in respect of tax deductible. The condition under s. 40(a)(i) was either deducting tax at the time of payment or making actual payment. If one of the conditions is fulfilled then the deduction is allowable. This Tribunal in the case of Minda HUF Ltd. vs. Asstt. CIT in ITA No. 4753/Del/2002 had an occasion to deal with a similar case and held as follows: From a bare reading of sub-cl. (i), we are of the view that any payment of royalty for technical service which is payable outside India, shall not be deductible in computing the income chargeable under the head profits and gains of business and profession unless tax on such sum has been paid or deducted under Chapter XVII-B in the relevant previous year. It has also been clarified in the proviso that the deduction of such royalty amount shall be allowed in computing the income of the previous year in which such tax has been paid or deducted. The legislature has used the conjunction as 'or' which means if any one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strial license. Under the provisions of s. 10(6)(viia) of the Act, as it stood during the asst. yr. 1991-92, any remuneration paid to a foreign technician will not form part of his total income, if the employer pays the tax payable on his income chargeable under the head salaries. The assessee has also obtained approval of the Government of India, Department of Electronics, for employment of foreign technicians inIndia. We may clarify at this stage that the approval by the Government of India has nothing to do with one of the issues that arises for our consideration in this ground of appeal. A copy of approval of the Central Government is placed at pp. 38 to 44 of the assessee s paper book. The approval contemplates payment of tax on the salary payable to Dr. L. Sella besides provision of accommodation and club fees. 31. The AO was of the view that a sum of Rs. 2,62,394 which represents income-tax paid on remuneration paid to Dr. L. Sella by the assessee was not to be allowed as a deduction since it was liability of the managing director. He further observed that rent for the premises in occupation of managing director was paid at Rs. 18,000 per month which in his opinion was exces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration paid to the managing director. As observed by the Hon ble Supreme Court in the case of Malayalam Plantations, the fact that it was paid under an agreement will not make the payment an expenditure in connection with the business of the assessee. 35. As far as payment of rent for accommodation of managing director and payment of his club fees is concerned, we find that the CIT(A) has relied on p. 2 of the letter dt. 29th Jan., 1990, of approval by the Department of Company Affairs, wherein perquisites have been restricted upto a maximum of Rs. 45,000 per annum. We notice from the copy of the said approval filed that these clauses have been struck off by x mark, meaning thereby that those clauses were not applicable to the case of the assessee. These payments were approved even by the Department of Electronics, which approved the appointment of foreign technician. The annexure to the approval by the Department of Company Affairs also specifies that housing and club fees will be paid subject to certain limitations. The club fees paid is, therefore, to be allowed as a deduction. As far as house rent paid is concerned, the case of the AO is that it is excessive and unreasonable. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this addition. Before the CIT(A), the assessee submitted that the assessee had furnished quantitative details of raw material purchased and had also explained that the price charged by the collaborator was reasonable having regard to the business needs of the assessee. The assessee also brought to the notice of the CIT(A) that the customs authorities had in fact taken a stand that the raw material purchased by the assessee were under-invoiced. The Asstt. Collector of Customs, however, held that the value determined by the assessee was correct value. It was argued before the CIT(A) that the AO had not brought anything on record to show as to how the price paid by the assessee was excessive or unreasonable having regard to the business needs of the assessee. It was submitted that in the absence of finding regarding the fair market value of the goods the AO was not competent to disallow any payment on the ground that it was excessive. The CIT(A) while deleting the addition agreed with the submissions made by the assessee. 41. Aggrieved by the order of the CIT(A), the Revenue is in appeal before us. We have considered the rival submissions. We do not wish to interfere in the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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