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TMI Blog2021 (3) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... income for the year on account of change of method of accounting. In this case, the assessee has changed its method of accounting to give better treatment to prepaid expenses shown in the financial statement upto assessment year 2015-16 and such change is supported by the decision of the Hon'ble Supreme Court in TAPARIA TOOLS LIMITED [ 2015 (3) TMI 853 - SUPREME COURT] where it was categorically held that once an expenditure is incurred and made payment and claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assessee, irrespective of treatment given in books of account . The Hon'ble Supreme Court in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd. [ 1971 (8) TMI 10 - SUPREME COURT] held that entries in books of account are not determinative and or conclusive and the matter is to be examined on the touchstone of provisions contained in the Income Tax Act. In the present case, entire expenditure has been incurred at the beginning of the sanctioning of term loan and also qualifies to be revenue expenditure. Therefore, in our considered view the decision of TAPARIA TOOLS LIMITED [ 2015 (3) TMI 853 - SUPREME COU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Appeals) is contrary to the Law and facts of the case. 1. CIT(A) erred in deleting the addition on account of prepaid expenses of ₹ 43,99,74,573/- by holding that different treatment given in the books of account could not be a factor to deprive assessee from claiming entire expenditure as a deduction in the year of incurrence itself. 1.2. CIT(A) erred in relying the decision of Hon ble Supreme Court decision in the case of Taparia Tours Ltd. v. JCIT,(2015) 372 ITR 605(SC) which pertains to issue of debentures. 1.3 CIT(A) ought to have appreciated the fact that when the debentures were issued, the income from them was realized in the same year of issuance, thus the entire interest payment claimed as deduction is allowable. Whereas in the instant case, the income from the loans was not received during the financial year itself. Hence, this case is factually distinguishable from the case of Taparia Tools Ltd. v. JCIT(2015) 372 ITR 605(SC). 1.4. CIT(A) omitted to consider the fact that loans advanced which results in enduring benefit in the form of interest income to the assessee. Thus, the expenses incurred should be proportionately amortized acro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r are as under:- The submission of assessee was considered. The assessee has not claimed the said prepaid expenses of ₹ 43,99,74,573/-. In the original return and subsequently claimed the prepaid expenses in the revised return. The pre-paid expenses pertains to stamp charges , processing fees or term loans, marketing fees, sourcing expenses, C.V. business, sourcing expenses Lap, share issue expenses and other expenses etc. the assessee has incurred these expenses while lending long term finance. . The assessee has followed the principle of matching concept for the prepaid expenses till AY 205-16. The assessee has amortized these pre expensesto the years equivalent to the repayment period term loan in the books of accounts and accordingly claimed the amortized portion of expenditure pertains to the particular financial year in return of income . This method was followed by the assessee consistently up to A.Y 2015-16. In the A.Y 2016-17 also assessee has amortized the said expenses in books of account and there is no change in the method of accounting of repaid expenses. The same the method of accounting for prepaid expenses adopted by the assessee while filing the origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been produced at para 4.1.1 on pages 3 to 8 of learned CIT(A) order. The sum and substance of arguments of the assessee before learned CIT(A) are that entries in books of account is not a relevant criteria to consider allowablity or otherwise of expenditure under the Income Tax Act, and what is relevant is whether expenditure is revenue in nature or capital in nature, which gives enduring benefit to the assessee. Unless the Assessing Officer makes a point that expenditure incurred is not allowable under the Act, then he cannot disallow claim of the assessee on the ground that assessee has changed its method of accounting to give differential treatment to the expenditure for impugned assessment year. The assessee has also taken support from decision of the Hon ble Supreme Court in the case of M/s. Taparia Tools Ltd. Vs JCIT (2015) 372 ITR 605 and argued that once an expenditure is incurred and made payment, the same needs to be allowed irrespective of treatment given in books of account. 5. The learned CIT(A) after considering relevant submissions of the assessee and also by following the decision of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenses Lap, share issue expenses and other expenses etc., incurred while lending the long term Finance. The assessee company, in its books of account has been classifying these expenses as prepaid expenses and claiming proportionately over the period of the loans. This is the practice of the assessee consistently followed up to financial year 2014-15 (A.Y.2015-16) in fact in the financial year 2015-16 relevant to the present AY 2016- I7 the asessee has followed the same method in its books of account and also filed its return of income . However, it was only in its revised return of A.Y.2016-17 the assessee for the first time, changed its stand and claimed the entire amount of such prepaid expenses as revenue expenditure and claimed as a deduction accordingly. The contentions of the assessee for changing its method of claiming the expenses are that though these expenses are classified as pre-paid expenses in its books, they are essentially revenue expenses in its nature and hence allowable as expenditure in the year of incurrence of expenditure itself, especially in view of the latest decision of the Apex Court in the case of Taparia Tools Ltd. vs. JCIT [2015] 372 ITR 605 rende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o referred as deferred revenue expenses in accountancy meaning thereby that the expenses can be attributable for the period of transaction. However, under the provisions of IT Act either deferred revenue expenditure or prepaid expenses are not given any special treatment. Hence, one has to see whether these expenses are capital or revenue in nature; and whether these expenses are incurred for the business purposes. Therefore, any expenditure, which is revenue in nature and has actually been incurred for the business during the year, the same needs to be allowed as deduction, while computing the income of the year. 4,1.6 For this purpose, reliance is placed on the decision of the Hon ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT. [2015) 372 ITR 605 (SC) where the Court held that once an expenditure is incurred and made the payments and the claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assessee, irrespective of the treatment given in books of account. similarly a sales tax Iiability determined by sales tax authorities to be payable on sales made by assessee during relevant accounting year is to be allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sales tax amount which it was liable under law to pay during relevant assessment year Held Yes. 4.1.7 In the present case also, the entire expenditure has been incurred at the beginning of the sanctioning of the long term finance and also qualifies to be revenue expenses. Therefore, the above decision of lie Supreme Court of Taparia Tools Ltd - v. JCIT, [2015) 372 ITR 605 SC] is squarely applicable to the facts of the present case also. Therefore the same needs to be allowed as a deduction, irrespective of the treatment given in the books. Therefore, the classification of the expenses, as prepaid expenses in the books of the assessee, cannot be a bar for claiming these expenses as deduction in its totality while computing the taxable income of the year. 4.1.8 The next aspect to be examined is regarding the justification for changing the method of claiming the deduction. The assessee has been consistently practicing and following the above method of claiming the above prepaid expenses over the period of loan period all along and upto financial year 2014-15 (AY 2015-16) . It was only while filing revised return of A,.Y 2016-17, the assessee for first time changed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR further submitted that learned CIT(A) has erred in relying on the decision of Hon ble Supreme Court in the case of Taparia Tools Ltd. v. JCIT,(supra) without understanding the facts of those cases that the Hon'ble Supreme Court has rendered the decision in the context of issue of debentures and interest payment on said debentures. The learned DR further submitted that whenever debentures were issued income from them was utilized in the same year of issue and thus, entire interest payment claimed as deduction is allowable. In this case, assessee has recognized interest income over the period of loan and consequently, expenses incurred in connection with said loans needs to be amortized over the period of loan. The learned CIT(A) without appreciating these facts has deleted the additions made by the Assessing Officer . 7. The learned AR for the assessee, on the other hand, strongly supporting the order of learned CIT(A) submitted that learned CIT(A) has apprised the facts in right perspective of law and allowed deduction towards expenditure by holding that expenditure are in the nature of revenue and same are incurred wholly and exclusively for the purpose of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r thoughtful consideration to the facts and various reasons given by the Assessing Officer to disallow deduction claimed by the assessee towards prepaid expenses and find that expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are in the nature of revenue expenditure, which does not give any enduring benefit to the assessee. In fact, the Assessing Officer has categorically admitted that expenditure incurred in connection with business was revenue in nature and are deductible under the Act, but he has disallowed the expenditure only on the sole basis of method of accounting followed by assessee in the books of account. According to the Assessing Officer, the assessee has followed matching concept principles of accounting to account those expenditure and accordingly, amortized the expenditure over the period of loans and further excess expenditure has been treated as prepaid expenses in books of account upto assessment year 2015-16 . Further, for the first time from the assessment year 2016-17, the assessee has changed its method of accounting to account those expenditure and claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to deliberately reduce the tax burden. In our considered view, the assessee is entitled to change its method of accounting as long as said change in method of accounting is bonafide. Section 145 of the Act, nowhere provides if assessee follows one method of accounting for many years, it cannot change the same in subsequent year. The assessee can very well change method of accounting to give better treatment to various income and expenses in books of account to give true and correct income, but such change should be disclosed in notes to account and effects on taxable income for the year on account of change of method of accounting. In this case, the assessee has changed its method of accounting to give better treatment to prepaid expenses shown in the financial statement upto assessment year 2015-16 and such change is supported by the decision of the Hon'ble Supreme Court, where it was categorically held that once an expenditure is incurred and made payment and claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assesse, irrespective of treatment given in books of account . The Hon'ble Supreme Court in the case of M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le system was fully justified in claiming deduction of sales tax amount which it was liable under law to pay during relevant assessment year Held Yes. 11. In the present case, entire expenditure has been incurred at the beginning of the sanctioning of term loan and also qualifies to be revenue expenditure. Therefore, in our considered view the decision of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) is squarely applicable to the facts of present case and hence, we are of the considered view that learned CIT(A) was right on allowing deduction towards various expenses as revenue expenditure. 12. Having said so, let us examine the issue in another perspective of whether expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are revenue expenditure or capital expenditure, which gives enduring benefit to the assessee . If you see nature of expenditure incurred by the assesse, all expenses are in the nature of revenue expenditure . In fact, the Assessing Officer never disputed the fact that those expenditure are in the nature of revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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