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TMI Blog2015 (8) TMI 914X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure - CIT(A) allowed assessee claim - Held that:- Assessing Officer disallowed the expenditure on the grounds that the expenditure has not been claimed under section 35A. It is pertinent to note are ephemeral and transitory in nature in as much as they are a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customer. The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989 (3) TMI 5 - SUPREME Court] has itself observed that the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions ; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs to be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature', was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the order of the Commissioner of Income-tax (Appeals) in the earlier year (i.e., 2006-07), we are of the opinion that the Commissioner of Income-tax (Appeals) has rightly held that the FCCB and debenture issues under section 35D are to be allowed. The relevant portion is the Commissioner of Income-tax (Appeals)'s order in the assessment year 2006-07 is reproduced hereunder : The facts are that the appellant incurred an expenditure of ₹ 10,49,79,022 on the debenture and FCCB issue. In the computation of income, the appellant claimed 1/5th of this as allowable expenditure under section 35D. By giving the following reasons, the Assessing Officer disallowed the same : 6 The assessee-company has incurred expenditure of ₹ 10,49,79,022 on account of expenditure on debenture and FCCB issue. The assessee-company in its computation of income has claimed as under : 1/5th of miscellaneous expenses allowable under section 35D not debited to profit and loss 2005-06. During the course of scrutiny, the assessee was asked to substantiate its claim. The assessee-company vide letter dated December 15, 2008 submitted on December 22, 2008 has stated as under : During ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are premium account. Being deferred revenue expenditure, the claim was made under section 35D of the Act and one fifth of the expenditure was claimed. The following written submissions were given by the appellant: 'The Assessing Officer in page 3 of the order has stated that 2.85 per cent. of the aggregate principal amount of FCCB bonds and such fee shall be deducted from the subscription monies of the bonds . The gross proceeds of the issue was ₹ 242 crores and the net pro ceeds was ₹ 234 crores, difference ₹ 7.91 crores was paid towards issue expenses. The Assessing Officer further states that the net receipt for FCCB bonds is net of commission/brokerage paid and since this expenditure is already claimed by the assessee, section 35D is not applicable. This is an incorrect conclusion, the company has accounted for the gross proceeds of ₹ 242 crores under the head FCCB bonds account, issue expenditure of ₹ 7.91 crores was reduced it from the securities premium account as it is permitted under section 78 of the Companies Act in the reserves and surplus side of the balance-sheet and not by way of debit in the profit and loss account. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 35D read with section 37 i.e., both under sections 35D and 37. I agree with the argument of the appellant that the language used in section 35D is so plain and unambiguous that the only condition laid down in that section is that the issue should be offered for public subscription and the mode of placement is immaterial. Thus, the only issue for consideration is whether QIB can be called 'public' or not. After a careful and comprehensive consideration of the relevant provisions of the Company Law, Securities Contract (Regulation) Rules, SEBI Guidelines/Instructions, I am of the considered opinion that QIBs constitute 'public' and accordingly, the subscription made by the amount to public subscription. In this view of the matter and also considering the facts with regard to the utility of funds raised through QIB issue, I hold that the issue expenditure, to the extent attributable to the funds utilised for extension of the appellant's undertakings, is eligible for deduction under section 35D. So far as the remaining funds, utilised for modernisation and working capital requirements of the appellant's business are concerned, I have considered bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of section 35D read with section 37 of the Income-tax Act which is eligible to be charted to profit and loss account. Accordingly as per the provisions of section 35D of the Income- tax Act, one-fifth of the QIB issue expenditure i.e., ₹ 207 lakhs was written off. Qualified Institutional Buyers (QIBs) are a class of investors as a part of the large investor community and the companies sought for QIB issues because the funds can be raised within a short span. This is an extremely important investment for larger investors and since the buyers are only a class of investors, the issue of shares to QIB have been considered as public issue. The expenses in connection with public issue of shares or debentures of the company are allowable. Reliance is placed on CIT v. Shree Synthetics Ltd. [1986] 162 ITR 819 (MP). Hence on the merits of the issue, the QIB expenditure can be treated as revenue expenditure and eligible for deduction under section 35D of the Income-tax Act is confirmed. Hence on merits of the issue as well as the fact that the same issue has been allowed in the earlier years and the Department cannot came upon in appeals in the subsequent years would be the reason to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant financial year. Hence, an amount of ₹ 45.20 lakhs is disallowed, not being a revenue expenditure. 8.1. The Commissioner of Income-tax (Appeals) held as follows : During appeal proceedings, the appellant contended that it had paid ₹ 9.08 crores for content rights to M/s. Asian Age Holdings. This amount was taken to the balance sheet and the company adopted an accounting policy to write off its expenditure over a period of 10 years. In view of the above, the said expenditure was being written off every year. It was stated that the amount could be taken has deferred revenue expenditure and allowed or it could be capitalised as an intangible asset so as to allow amortisation at 25 per cent. The following are the important portions of the arguments of the appellant : 'The company adopted an accounting policy to write off this expenditure over a period of 10 years i.e., 120 months, keeping in view the utility of such brand right and editorial content which amounted to ₹ 45,20,000 and formed part of the miscellaneous expenditure written off which was debited to profit and loss account.' The Assessing Officer disallowed the expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d revenue expenditure, in view of the fact that it cannot be classified as an intangible asset under section 35A and the benefits of this expense are available over a period of many years. 5.2.1 In order to understand whether the accounting treatment given by the appellant is correct or not, one has to understand what exactly is the meaning of deferred revenue expenditure. 5.2.2 Deferred revenue expenditure is essentially an accounting concept denoting expenditure, for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons (quantum, period of expected future benefit, considerations of impact on the bottom line, etc.,) and also on the 'presumption' that the same will result in benefits over a subsequent period or periods is spread out and written off over a period of time. Deferred revenue expenditure can comprise diverse components of expenditure and manifest itself in the accounts in a wide variety of ways. For instance in recent years, the rising demand consequent upon the increased purchasing power in the hands of the consumers has led, the business and industrial world to incur major expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate to the context. Thus while, for the purpose of the issue under consideration, the test of the enduring benefit fails at the initial stage itself, and even if the said test were to be explicitly applied it cannot be said that the said expenditure is of a capital nature. Further, no capital assets come into being as a result of the same and consequently the same cannot be classified as a capital expenditure. The expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Income-tax Act 1961, what is material is the classification between the capital and revenue and the same does not recognise of any concept of deferred revenue expenditure. 5.2.5 In the case of Bajaj Sevashram Ltd. v. Deputy CIT [2006] 280 ITR 480 (Raj), the hon'ble Rajasthan High Court held that expenditure incurred for advertisement during a year can be debited in parts over several years. The assessee's policy of spreading over the expenses for a number of years was in order. 5.2.6 Coming to this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.2. With respect to Asian age brand rights and editorial contends rights, we find that the Commissioner of Income-tax (Appeals) has allowed the Asian age brand rights and editorial contents rights in the assessment year 2006-07 and the department did not file appeal accepting the order of Commissioner of Income-tax (Appeals). Hence, we confirm the order of Commissioner of Income-tax (Appeals) where at paragraph 4.2 of the Commissioner of Income-tax (Appeals) has held as follows : 4.2 I have gone through the detailed submissions of the appellant and the appeal records for the assessment years 2006-07 to 2009-10. After a careful consideration of the same, I am of the opinion that there is merit in the argument of the appellant. As contended by the appellant, the disallowance under dispute was made for the first time for the assessment year 2006-07. On appeal by the assessee, the disallowance was deleted by my predecessor, vide his order in I. T. A. No.0007/Addl. CIT-16/CIT(A)-V/2011-12 dated May 18, 2011, after a detailed discussion of the basis of disallowance and the factual and legal position on the issues under consideration. As the ground for disallowance for the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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