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COMMISSIONER OF INCOME TAX Vs. M/S VODAFONE ESSAR SOUTH LTD.
November, 22nd 2014
$~1.
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+                  INCOME TAX APPEAL NO. 594/2014
                                         Date of decision: 29th October, 2014
        COMMISSIONER OF INCOME TAX                        ..... Appellant
                           Through Ms. Suruchi Aggarwal, Sr. Standing
                           Counsel.

                           versus

        M/S VODAFONE ESSAR SOUTH LTD.            ..... Respondent
                     Through Mr. Sachit Jolly, Mr. Rahul Sateeja &
                     Ms. Gargi Bhatt, Advocates.

        CORAM:
        HON'BLE MR. JUSTICE SANJIV KHANNA
        HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J. (ORAL):

        This appeal by the Revenue pertaining to Assessment Year 2003-04,

impugns the order dated 7th February, 2014 passed by the Income Tax

Appellate Tribunal (Tribunal, for short) on the following issues:

             "i)      Whether on the fact of the case ITAT could
             have deleted the disallowance of provisions for network
             repair and maintenance and credit verification cost,
             provision of consultancy charges and provision for car
             hiring charges amounting to Rs.28,62,275/- and
             Rs.29,90,064/-?

             ii)     Whether payment towards brand launch
             expenses can be treated as revenue expenditure?"


2.      The first issue relates to two additions made by the Assessing Officer

on account of provisions for network repair and maintenance of


ITA No. 594/2014                                                Page 1 of 23
Rs.28,62,275/- and disallowance of Rs.29,90,064/- on account of credit

verification cost, provision for consultancy charges and provision for car

hiring charges.

3.      The Tribunal in the impugned order on the first aspect has recorded

as under:-

             "13.      We have heard both the counsel and perused
             the records. We find that the authorities below have
             totally erred in treating the provision of expenses not
             allowable. It is only those provisions which are
             contingent liability which are not allowable. In this
             case, no case has been made out that the provision
             made by the assessee for network repair and
             maintenance expenses was only a contingent liability.
             The fact of the matter is that the provision was made
             for the repairs in this regard as the relevant bills were
             not received and payment thereof was not made upto
             the close of the assessment year. Hence, in accordance
             with accrual system of accounting, the provision in this
             regard was created. Hence, the provision for network
             repair and maintenance expenses cannot be said to be a
             provision made for contingent expenses. There is no
             contingency in the expenditure to be incurred in this
             regard. The expenditure has to be incurred though the
             exact amount was not ascertained. In such
             circumstances, in our considered opinion, the said
             disallowance has to be deleted. Accordingly, we set
             aside the orders of the authorities below and decide the
             issue in favor of the assessee."


4.      A reading of the aforesaid paragraph would indicate that the services

had actually been rendered and the assessee had accepted the claim which

was due and payable but relevant bills had not been received till the end of

the Assessment Year. The aforesaid position is the factual finding given by


ITA No. 594/2014                                                Page 2 of 23
the Tribunal.

5.      On the question of disallowance on account of provision for credit

verification cost of Rs.11,41,060/-, provision for consultancy charges of

Rs.8,63,320/- and provision for car hire charges of Rs.9,85,684/-, i.e., total

of Rs.29,90,064/-, the Tribunal has held as under:-

             "20.      We have heard both the counsel and
             perused the records. We find that the issue involved
             is identical to be one dealt with regard to the ground
             no. 2 as above. Now following the same reasoning
             as in ground no. 2 above we hold that the provisions
             made by the assessee cannot be treated as contingent
             liability when nothing has been brought by the
             Revenue on record that expenditure in this regard
             was contingent in nature. The provision was made as
             the payment in this regard could not be made upto
             the close of the year as the bills in this regard were
             received late. Hence, there is no contingency in the
             expenditure to be incurred. Only the exact amount
             has not been ascertained. Hence, following the
             mercantile system of accounting such provision
             cannot be disallowed. Accordingly, we set aside the
             orders of the authorities below and decide the issue in
             favor of the assessee."



6.      In other words, the Tribunal followed the reasoning for deleting

disallowance of Rs.28,62,275/-, holding that the services had actually been

rendered but only relevant bills had not been received. In view of the fact

that the respondent-assessee was following mercantile system of

accountancy, the amount due and payable had accrued and, therefore,

allowable as an expenditure.


ITA No. 594/2014                                                 Page 3 of 23
7.      Learned counsel for the Revenue submitted that the findings

recorded by the Tribunal are bereft of detailed reasoning why the said

additions have been deleted. Facts in detail have not been elucidated. In

order to examine the said contention, we have gone through the assessment

order on the said two aspects and would like to reproduce the findings

recorded by the Assessing Officer for the two additions:-

      "5. It was observed from the details filed that the assessee has provided
      of sum of Rs. 28,62,275/-under the head network repair and
      maintenance. Since, provision for expenses cannot be treated as revenue
      expenditure under the Income Tax Act, 1961 therefore the amount of Rs.
      28,62,275/- is disallowed and added back to the income of the assessee.

      XXXXXXXX

      8. The following amounts shown as provisions under the various
      expenses head cannot be treated as actual revenue expenditure
      therefore the same are being disallowed and added back to the
      declared income of the assessee.


a)      Provision for credit verification cost Rs. 11,41,060/-


b)      Provision for consultancy charges      Rs. 8,63,320/-
c)      Provision for car hire charges   Rs. 9,85,684/-
                                         Rs. 29,90,064/-
                                       (Addition of Rs. 29,90,064/-)"





8.      The Assessing Officer while making the additions of Rs 29,90,064, it

is apparently clear, did not examine the matter meticulously and in depth.

Facts and findings were virtually not elucidated. Perfunctory conclusion

stands recorded.     With regard to expenditure of Rs.28,62,278/-, the

Assessing Officer simply observed that it was a provision and, therefore,

ITA No. 594/2014                                                 Page 4 of 23
cannot be allowed and had to be added back. He did not go into the

question whether or not the services were actually rendered as was claimed

by the assessee and expenditure had been incurred. There is no discussion

on the aspect of service rendered/performed, basis of computation,

incurring of expenses etc. Similarly, with regard to the provision for credit

verification cost, consultancy charges and car hire charges, there is hardly

any reasoning given to add back and disallow the expenses.

9.      The aforesaid additions were confirmed by the Commissioner of

Income Tax (Appeals), who has recorded the following findings:-

             "3.1     The Ld AR stated as below:-

                   The appellant follows mercantile system of
             accounting. The appellant has created provision for
             network and repair expenses for Rs. 28,62,275/-. The
             appellant has incurred expenses as per schedule 16 of
             the balance sheet (Anne. 3 of APB-I). There was no
             such provision in earlier years and this is the first year
             of commencement and hence provision was created was
             created and the same is allowable as per the provision of
             Section 37 of the Act.

             3.2 Examined the rival submissions. Here the appellant
             in fact had not incurred such expenditure it has just
             created a provision. A provision is an appropriation of
             money for non existing liability. In the instant case
             such liability is not quantified. Such provision is
             similar to liability only contingent in nature, not
             deductable and hence the action of the AO is sustained.

             xxxxx

             6.1      The Ld. AR stated as below:-
             The appellant relied on Ground No. 2 as already been
             discussed above.

ITA No. 594/2014                                                 Page 5 of 23
             6.2      Examined the rival submissions. Following my
             own decision as given in para 3 against ground No. 2,
             such additions are hereby sustained."


10.     The first appellate authority has observed that the expenditures

should not be allowed as it had not been incurred but only a provision has

been made. He further held that the provisions were for non-existing

liabilities which had not been quantified. On the other hand, the finding of

the Tribunal is to the contrary. Before us, the Revenue has not filed copy

of the documents or papers, which were filed by the assessee in support of

their contentions and to negate and challenge the findings of the Tribunal

that the amounts claimed as expenses were not provisions in the sense that

no services had been rendered and the expenditure had not been incurred.

The finding of the Tribunal is clearly that relevant bills had not been

received but the services had been rendered and tasks performed. The

expenditure was incurred. In view of the aforesaid position, we are not

inclined to interfere on the first aspect/question raised by the Revenue.

11.     The undisputed position is that the assessee follows mercantile

system of accountancy. The term "expenditure" donates idea of spending,

paying out or away; it is something which is gone irretrievably. (See

Indian Molasses Co. (P) Ltd. v. CIT, (1959) 37 ITR 66). In mercantile

system the term expenditure is not necessarily confined to money actually

paid towards a liability, but would cover a liability accrued or has been

ITA No. 594/2014                                                Page 6 of 23
incurred in praesenti, although the discharge could be at a future date. A

liability accrues or is incurred when it is an ascertained liability and not a

contingent liability, i.e. liability which may or may not accrue and is

uncertain. A liability, which actually exists and is also not disputed by

assessee, but merely not paid, is not a contingent liability when the work or

obligation has been actually performed by the third party to whom the

payment is due. When the assessee accepts performance of the work or

obligation and accepts liability to pay, it partake the character of actual

liability in praesenti and is not dependent upon future happening of an

event, which would result in creation of liability subsequently. In the

former cases, the liability has incurred or accrued, but actual payment

remains unpaid and would be made in the next year(s). Off course, the

assessing officer can examine and go into valuation of the liability and

decide whether it has been satisfactorily and fairly determined.

12.     Assessing Officer and Appellate Authority in their orders had

primarily relied upon the terminology or nomenclature of "provision" to

disallow the claim of expenditure of Rs 29,90,064/- and Rs 28,62,275/- and

opine that the provisions made should not be treated as expenditure

incurred. This is not the correct and true test, which is to be applied. A

"provision" can be made in respect of amounts which have become due and

payable in the relevant previous year and therefore could be debited to the

profit and loss account, once they represent ascertained liability. We do not

ITA No. 594/2014                                               Page 7 of 23
find any negative elucidation on the relevant aspects in the orders passed

by Assessing Officer and the C.I.T (Appeals). Albeit, there is elucidation

and finding recorded by tribunal that the services had actually been

performed and liability was accepted by the respondent assessee. The

amounts therefore represented ascertained liabilities. These were shown as

"provisions" as the services were rendered close to the assessment years

and relevant bills had not been received. This would not make the

provisions a contingent liability.

13.     Appropriate would be to refer to the decision of the Supreme Court

in Calcutta Company Ltd. Vs. Commissioner of Income Tax, West

Bengal, (1959) 37 ITR 1, wherein it was held that if liability has been

definitely incurred in form of unconditional contractual liability, it would

not become contingent because payment has to be paid in future. However,

liability should have been fairly and accurately estimated. The following

passage from the said decision is relevant:-

                "Turning now to the facts of the present case, we find that the
        sum of Rs. 24,809 represented the estimated expenditure which had
        to be incurred by the appellant in discharging a liability which it had
        already undertaken under the terms of the deeds of sale of the lands
        in question and was an accrued liability which according to the
        mercantile system of accounting the appellant was entitled to debit in
        its books of account for the accounting year as against the receipts of
        Rs. 43,692-11-9 which represented the sale proceeds of the said
        lands. Even under s. 10(2) of the Income-tax Act, it might possibly
        be urged that the word "expended" was capable of being interpreted
        as "expendable" or "to be expended" at least in a case where a

ITA No. 594/2014                                                Page 8 of 23
        liability to incur the said expenses had been actually incurred by the
        assessee who adopted the mercantile system of accounting and the
        debit of Rs. 24,809 was thus a proper debit in the present case. We
        need not however base our decision on any such consideration. We
        are definitely of opinion that the sum of Rs. 24,809 represented the
        estimated amount which would have to be expended by the appellant
        in the course of carrying on its business and was incidental to the
        same and having regard to the accepted commercial practice and
        trading principles was a deduction which, if there was no specific
        provision for it under section 10(2) of the Act was certainly
        allowable deduction, in arriving at the profits and gains of the
        business of the appellant under section 10(1) of the Act, there being
        no prohibition against it, express or implied in the Act.

        It is to be noted that the appellant had led evidence before the
        Income-tax authorities in regard to this estimated expenditure of Rs.
        24,809 and no exception was taken to the same in regard to the
        quantum, though the permissibility of such a deduction was
        questioned by them relying upon the provisions of s. 10(2) of the
        Act.

        It therefore follows that the conclusion reached by the High Court in
        regard to the disallowance of Rs. 24,809 was wrong and it should
        have answered the referred question in the affirmative."


14.     The aforesaid principles were applied to allow deduction of

"provision" for gratuity, in case of serving employees and to whom the

gratuity was payable only on retirement/termination, subject to condition

that the amount so estimated was sufficiently certain to be capable of being

valued. Gratuity payable in future, it has been held, was an obligation

arising out of the present engagement and the estimated liability was

ascertainable. As a present obligation, it could be allowed as a deduction in

ITA No. 594/2014                                                Page 9 of 23
the profit and loss account. Subsequently, Section 40A(7) of the Act was

enacted to specify and stipulate that provision for gratuity would be

allowed in the profit and loss account when additional conditions stated

therein were also satisfied. [See decision of the Supreme Court in Shree

Sajjan Mills Ltd. v. CIT, (1985) 156 ITR 585 (SC)]

15.     Again in Bharat Earth Movers v. CIT (2000) 245 ITR 428 (SC), it

has been observed:-

        "The law is settled: If a business liability has definitely arisen in the
        accounting year, the deduction should be allowed although the
        liability may have to be quantified and discharged at a future date.
        What should be certain is the incurring of the liability. It should also
        be capable of being estimated with reasonable certainty though the
        actual quantification may not be possible. If these requirements are
        satisfied the liability is not a contingent one. The liability is in
        present though it will be discharged at a future date. It does not make
        any difference if the future date on which the liability shall have to
        be discharged is not certain. ... A few principles were laid down by
        this court, the relevant of which for our purpose are extracted and
        reproduced as under:

                   (i) For an assessee maintaining his accounts on the mercantile
                   system, liability already accrued, though to be discharged at a
                   future date, would be a proper deduction while working out
                   the profits and gains of his business, regard being had to the
                   accepted principles of commercial practice and accountancy. It
                   is not as if such deduction is permissible only in the case of
                   amounts actually expended or paid ;
                   (ii) Just as receipts, though not actual receipts but accrued due
                   are brought in for income-tax assessment, so also liabilities
                   accrued due would be taken into account while working out
                   the profits and gains of the business;
                   (iii) A condition subsequent, the fulfilment of which may

ITA No. 594/2014                                                     Page 10 of 23
                   result in the reduction or even extinction of the liability, would
                   not have the effect of converting that liability into a contingent
                   liability ;
                   (iv) A trader computing his taxable profits for a particular year
                   may properly deduct not only the payments actually made to
                   his employees but also the present value of any payments in
                   respect of their services in that year to be made in a
                   subsequent year if it can be satisfactorily estimated."


16.     The second issue raised by the Revenue relates to "brand launch

expenses".         The finding of the Assessing Officer to disallow the said

expenses of Rs.8,45,45,104/- is to be found in one paragraph only, i.e.,

paragraph 10, which reads:-

             "10. It is further observed from the perusal of
             computation of income that assessee has claimed an
             amount of Rs. 10,56,81,379/- as brand launch expenses
             as revenue expenditure. Keeping in view the nature of
             expenses the same are treated as deferred revenue
             expenditure and t s" of the same amounting to Rs.
             2,11,36,275/- is allowed in the current year and the
             balance of Rs. 8,45,45,104/- can be amortised in the next
             four years.
                                      (Addition of Rs. 8,45,45,104/-)"

17.     There is no other discussion or elucidation in the assessment order

passed by the for making the said substantial addition. It is noticeable that

the Assessing Officer himself had held that the expenses were of revenue

nature but he had treated them as deferred revenue expenditure by allowing

1/5th i.e. Rs.2,11,36,275/- in the current year and the balance amount of

Rs.8,45,45,104/- was directed to be amortised in the next four years.

18.     The Commissioner of Income Tax (Appeals) has held as under:-
ITA No. 594/2014                                                      Page 11 of 23
             "8.2 Examined the rival submissions. The accounting
             approach in this regard made by the appellant is a
             colourable mode to circumvent the provisions of the law.
             The doctrine of colourable legislation is based on the
             maxim that what cannot be done directly, cannot also be
             done indirectly. The short question whether such
             accounting treatment to circumvent the provision of the
             law can be treated as permissible accounting approach
             from IT point of view. The underline idea is that,
             although apparently the present accounting practice has
             been made which purports to Act within the limits of
             accounting principle in substance, in reality on the other
             hand it has transgressed the limits on its power as
             conferred by IT law by taking resort to such a pretence
             or disguise. The decision of Hon'ble Supreme Court in
             the case of Tuticorin Alkali Chemicals and Fertilizers
             Ltd.:-

                   "It is true that this Court has very often
                   referred    to    accounting    practice    for
                   ascertainment of profit made by a company or
                   value of the assets of a company. But when the
                   question IS whether a receipt of money is
                   taxable or not or whether certain deductions
                   from the receipt are permissible in law or not,
                   the question is to be decided according to the
                   principles of law and not in accordance with
                   accountancy practice. Accounting practice
                   cannot override Sec.56 or any other provision
                   of the Act. As pointed out by Lord Russel in
                   the case of B.S.C. Footwear Ltd (1970) 77 ITR
                   857, the Income tax Law does not march step
                   by step in the footprints of accountancy
                   profession".

             8.3 The appellant is not entitled for the provision and
             that is why it has resorted to colourable device to
             represent the same so that it can circumvent the
             provisions of the Act as invoked by the Ld AG. The
             essence of the matter is that the appellant has tried to do
             something which it cannot accomplish directly within the
             scope of the IT law. Regarding the question of taxability
             as per the principle of law vis-a-vis accountancy practice

ITA No. 594/2014                                                     Page 12 of 23
             has been already discussed in earlier paragraphs
             Tuticorin Alkali Chemicals (Supra). There is no dispute
             about the aforesaid principle of law laid down by the
             Hon'ble Supreme Court accounting practice for
             ascertainment of profits adopted by a company cannot
             override the specific provisions contained in the IT Act
             relating to taxability of any income. The appellant has
             claimed the entire brand registration expenses as revenue
             expenditure and debited the same in the accounts for the
             relevant period.

             8.4 In the instant case the appellant has spent Rs.
             10,56,81,379/as brand launch expenses and claimed the
             same as revenue expenditure. The essential question of
             law in the present case is whether payment towards
             brand launch expenses can be treated as revenue
             expenditure. A four judge bench of the Supreme Court in
             Assam Bengal Cement Company Ltd V CIT AIR 1955
             Supreme Court 89 indicated that the line of demarcation
             between capital expenditure and revenue expenditure is
             very thin. Several English decisions were referred to and
             the Court approved the opinion of the Full Bench of
             Lahore High Court in Benarsidas Jaggannath, In re (15
             ITR 185). The Court clearly observed in that case :-

                   "Such expenditure can be looked at either
                   from the point of view of what is acquired or
                   from the point of view of what is the source
                   from which the expenditure is incurred. If the
                   expenditure is made for acquiring or bringing
                   into existence an asset or advantage for
                   enduring benefit of the business, it is properly
                   attributable to capital and is of the nature of
                   capital expenditure. If on the other hand it is
                   made not for the purpose of bringing into
                   existence any such asset or advantage but for
                   running the business or working it with a
                   view to produce the profits, it is a revenue
                   expenditure. If any such asset or advantage
                   for the enduring nature of the business is thus
                   acquired or brought into existence it would be
                   immaterial whether the source of the payment
                   was the capital or the income of the concern

ITA No. 594/2014                                                  Page 13 of 23
                   or whether the payment was made once and
                   for all or was made periodically. The aim and
                   object of the expenditure would determine
                   the character of the expenditure whether it is
                   a capital expenditure or a revenue
                   expenditure. The source or the manner of
                   payment would then be of no consequence."

             8.5 The Ld. AO has discussed at length and established
             that this is such expenditure which has got an enduring
             benefit. Irrespective of the fact the frequency of payment
             of the said amount, the appellant would derive a benefit
             which would spread over not only for the period of
             expenditure but on subsequent years to come. The facts
             and circumstances of the present case justifies that the
             appellant although incurred the expenditure in a
             particular year but the fruits of such benefit would
             continue to be received over a period of ensuing years. In
             fact allowing the entire expenditure in one year would
             give a much distorted picture of profit of a particular
             year. Reliance is placed on Madras Industrial Investment
             Corporation Ltd v CIT (Supreme Court), Hindustan
             Aluminum Corporation Ltd v CIT (1983) 144 ITR 474
             (Cal). The facts and circumstances of the case justifies
             that the appellant should have debited only 1/5th of the
             amount of expenditure in the P&L alc for the year under
             consideration and the balance should have been spread
             over for the four succeeding years with a view to avoid
             presentation of distorted picture of the profit. Such
             spreading over of the said expenditure over a period of 5
             years would have been in accordance with the expected
             accounting practice which is in no way contrary to any
             specific provisions contained in the IT Act. At the same
             time such spreading over of expenditure resulting in
             enduring benefit is in conformity with the aforesaid
             principle as laid down by the Hon'ble Supreme Court in
             the case of Madras Industrial Investment Corporation
             (Supra).

             8.6 On a similar issue Ld ITAT, Ahmedabad in case of
             ACIT v Amtrex Appliance Ltd 9 TTJ 339 has held such
             expenses should be spread over a period 5 years. That
             such expenditure should be spread over 5 years has

ITA No. 594/2014                                                 Page 14 of 23
             already been discussed in my earlier paragraphs and the
             argument that it is desirable for spreading over for
             successive years need not be rehearsed once again. In
             view of the aforesaid facts and discussion and also in
             view of the judgement of various Courts including the
             Apex Court. I am of the opinion that 1/5th of the
             expenditure i.e. Rs. 2,11,36,275/- should be allowed for
             the period under consideration and the balance of Rs.
             8,45,45,104/- should be disallowed and appellant could
             spread the same for the four successive years subject to
             other provisions of the Act. Hence addition to the extent
             of Rs. 8,45,45,104/- is sustained."


19.     The first appellate authority has referred to the distinction between

capital and revenue expenditure but did not disturb the final finding of the

Assessing Officer that the expense was revenue in nature. Therefore, the

discussion distinguishing capital and revenue expenditure was superfluous

and inconsequential. When an expenditure is revenue in nature and not

capital, then provisions of Section 37(1) of the Income Tax Act, 1961 (Act,

for short) would come into play and the expenditure which qualifies and

meets the requirements of the said Section has to be allowed as a

deduction. It is in these circumstances that the Tribunal has allowed the

appeal of the assessee, observing as under:-




             "24.     We have heard both the counsel and
             perused the records. Ld. Counsel of the
             assessee submitted that the AO has himself
             treated the same expenditure as deferred
             revenue expenditure. AO had allowed 20%
             during the year and rest is to be spread over in
             the succeeding 4 years. Ld. Counsel of the
             assessee in this regard submitted that there is

ITA No. 594/2014                                                Page 15 of 23
             no concept of deferred revenue expenditure in
             taxation laws and expenditure has either to be
             capitalised or revenue. He has submitted that in
             this case the AO has not made out the case that
             the expenditure involved is capital in nature.
             Ld. Counsel of the assessee submitted that
             brand launch expenses incurred in the pre-
             operative period has been added to the pre-
             operative expenses. He further submitted that
             the Hon'ble Apex Court decision in the case of
             Madras Industrial Investment Corporation vs.
             CIT. (Supra) is not applicable on the facts of
             the case. In this regard, Ld. Counsel of the
             assessee referred to decision of this tribunal in
             ACIT vs. Global Healthline P Ltd. passed in
             ITA NO. 3319/Del/2012 vide order dated
             7.9.2012. In this case, the tribunal has held as
             under:-

             "6.We have heard the rival contentions and perused
             the records. We find that the case law
             relied_upon by the Assessing Officer in the
             case of Madras Industrial Corporation Ltd,
             vs.CIT,225 ITR 802 is not applicableon the facts of
             the present case. In the aforesaid case the said
             Corporation issued debentures in December, 1966
             at a discount. The total discount on the issue of 1.5
             crores amounted to 3,00,000/- for the assessment
             year 1968-69. The company wrote off 12,500/- out
             of the total discount of 3,00,000/-being the
             proportionate amount of discount for the
             period of six months ending 30.6.1967 taking
             into account the period of 12 years which
             was a period of redemption and discount for
             3,00,000/- over the period of 12 years. In these
             circumstances,the expenditure was held to be
             deferred revenue expenditure. Hence, we agree
             with                      the                     Ld.
             Commissioner of Income Tax (A) that the Hon'ble
             Apex Court's decision in the case of Madras
             Industrial Corporation Ltd. vs. CIT. (Supra) does
             not help the case of the Revenue. In our considered
             opinion, there is no concept of 'deferred revenue

ITA No. 594/2014                                                 Page 16 of 23
             expenditure' in the Income Tax Act. The
             expenditure is either 'revenue' in nature or 'capital'.
             If the expenditure is of revenue nature and is
             incurred wholly or exclusively for the purpose of
             business and has been incurred during the year, the
             same is allowable expenses subject to condition
             laid down in Section 30 to Section 37 of the Act.
             Accordingly, we hold that the impugned expenditure
             was allowable as Revenue expenditure and hence,
             we do not find illegality in the order of the Ld.
             Commissioner of Income Tax (A). Accordingly, we
             uphold the same."

             25.      We have carefully considered the
             submissions. We find that the assessee in this
             regard has incurred expenditure which are in
             the nature of brand launch expenses. We note
             that the said expenditure incurred upto the
             pre operative period has been capitalised and
             expenditure incurred after the operation has
             started have been debited to revenue. AO in
             this regard, has allowed 20% thereof by
             treating the same as deferred revenue
             expenditure. We agree with the contention of
             the assessee's counsel that there is no
             concept of deferred revenue expenditure in
             taxation laws. In the matter of taxation,
             expenditure is either to be capitalized or is
             revenue in nature. In      this     case    the
             expenditure involved is revenue in nature and
             has been incurred wholly and exclusively for
             the purpose of business. The amount has
             actually been incurred by the assessee as such
             the same is allowable in the entirely. The case
             law of the Hon'ble Apex Court by the Ld.
             CIT(A) was in a different context and hence is
             not applicable, as has been brought out in the
             tribunal order as above. In the background of
             the aforesaid discussion and precedent, we set
             aside the orders of the authorities below and
             decide the issue in favor of the assessee."

20.     The aforesaid reasoning of the Tribunal is in consonance and as per

ITA No. 594/2014                                                   Page 17 of 23
the ratio in Commissioner of Income Tax, Delhi-IV versus Industrial

Finance Corporation of India Limited, (2009) 185 Taxman 296 (Delhi)

wherein it has been held:-


             "22.      The judgments on which reliance is placed
             by the learned Counsel for the Revenue would be of
             no avail in the instant case. The learned Counsel for
             the Revenue had strongly argued that matching
             concept is to be applied, as per which part of the
             expenditure had to be deferred and claimed in the
             subsequent years and, therefore, approach of the AO
             was correct. However, this argument overlooks that
             even in Madras Industrial Investment Corporation
             (supra), on which the reliance was placed by Ms.
             Bansal, the general principle stated was that ordinarily
             revenue expenditure incurred wholly and exclusively
             for the purpose of business can be allowed in the year
             in which it is incurred. Some exceptional cases can
             justify spreading the expenditure and claiming it over
             a period of ensuing years. It is important to note that
             in that judgment, it was the assessee who wanted
             spreading the expenditure over a period of time as was
             justifying such spread. It was a case of issuing
             debentures at discount; whereas the assessee had
             actually incurred the liability to pay the discount in the
             year of issue of debentures itself. The Court found that
             the assessee could still be allowed to spread the said
             expenditure over the entire period of five years, at the
             end of which the debentures were to be redeemed. By
             raising the money collected under the said debentures,
             the assessee could utilize the said amount and secure
             the benefit over number of years. This is discernible
             from the following passage in that judgment on which
             reliance was placed by the learned Counsel for the
             Revenue herself:

                   "The Tribunal, however, held that since the
                   entire liability to pay the discount had been
                   incurred in the accounting year in question, the
                   assessee was entitled to deduct the entire

ITA No. 594/2014                                                      Page 18 of 23
                   amount of Rs. 3,00,000 in that accounting
                   year. This conclusion does not appear to be
                   justified looking to the nature of the liability. It
                   is true that the liability has been incurred in the
                   accounting year. But the liability is a
                   continuing liability which stretches over a
                   period of 12 years. It is, therefore, a liability
                   spread over a period of 12 years. Ordinarily,
                   revenue expenditure which is incurred wholly
                   and exclusively for the purpose of business
                   must be allowed in its entirely in the year in
                   which it is incurred. It cannot be spread over a
                   number of years even if the assessee has
                   written it off in his books over a period of
                   years. However, the facts may justify an
                   assessee who has incurred expenditure in a
                   particular year to spread and claim it over a
                   period of ensuing years. In fact, allowing the
                   entire expenditure in one year might give a
                   very distorted picture of the profits of a
                   particular year. Thus in the case of Hindustan
                   Aluminium Corporation Ltd. v. Commissioner
                   of Income Tax, Calcutta-I : (1983) 144 ITR
                   474, the Calcutta High Court upheld the claim
                   of the assessee to spread out a lump sum
                   payment to secure technical assistance and
                   training over a number of years and allowed a
                   proportionate deduction in the accounting year
                   in question.

                   Issuing debentures at a discount is another
                   such instance where, although the assessee has
                   incurred the liability to pay the discount in the
                   year of issue of debentures, the payment is to
                   secure a benefit over a number of years. There
                   is a continuing benefit to the business of the
                   company over the entire period. The liability
                   should, therefore, be spread over the period of
                   the debentures."

             23.        XXXXX



ITA No. 594/2014                                                          Page 19 of 23
             24. What follows from the above is that normally the
             ordinary rule is to be applied, namely, revenue
             expenditure incurred in a particular year is to be
             allowed in that year. Thus, if the assessee claims that
             expenditure in that year, the Income Tax department
             cannot deny the same. However, in those cases where
             the assessee himself wants to spread the expenditure
             over a period of ensuing years, it can be allowed only
             if the principle of matching concept is satisfied, which
             upto now has been restricted to the cases of
             debentures."


21.     Similarly, this Court in ITA No. 597/2014, Commissioner of Income

Tax-III versus M/s Spice Distribution Limited has held as under:-

             "4.      The Tribunal has rightly noticed and referred to
             the decision of the Delhi High Court in Commissioner of
             Income Tax Vs. Pepsico India Cold Drink Ltd. in ITA
             No. 319/2010, decided on 30.03.2011 wherein, the
             judgment of the Supreme Court in Madras Industrial
             Investment Corporation Vs. Commissioner of Income
             Tax, 225 ITR 802 (SC) was examined and it was
             observed that the assessee is entitled to claim deferred
             revenue expenditure but the Assessing Officer cannot
             treat the revenue expenditure as deferred revenue
             expenditure. The reason is that the Act itself does not
             have any concept of deferred revenue expenditure. Even
             otherwise, there are a number of decisions that the
             advertisement expenditure normally is and should be
             treated as revenue in nature because advertisements do
             not have long lasting effect and once the advertisements
             stop, the effect thereof on the general public and
             customer diminishes and vanishes soon thereafter.
             Advertisements do not leave a long lasting and
             permanent effect in the sense that the product or service
             has to be repeatedly advertised. Even otherwise
             advertisement expense is a day to day expense incurred
             for running the business and improving sales. It is
             noticeable that every year, the respondent-assessee has
             been      incurring    substantial    expenditure      on
             advertisements. The Assessing Officer, in the assessment

ITA No. 594/2014                                                  Page 20 of 23
             order, had referred to the fact that similar additions were
             also made in the Assessment Year 2008-09. Keeping in
             view the nature and character of the respondent-
             assessee's business, very year expenditure has to be
             incurred to make and keep public informed, aware and
             remain in limelight. This requires continuous and
             repeated publicity and advertisements to remain in public
             eye, to do business by attracting customers. It is an
             expenditure of trading nature. The aforesaid aspect has
             been highlighted by the Delhi High Court in
             Commissioner of Income Tax Vs. Salora International
             Ltd., [2009] 308 ITR 199 (Delhi) and Commissioner of
             Income Tax Vs. Casio India Ltd., [2011] 335 ITR 196."


22.     Referring to the said legal position, this Court recently, in CIT Vs.

SBI Cards & Payment Services Private Limited, ITA No. 603/2014

decided on 29.09.2014, observed :-

                          "16. ... Section 145 postulates that accounts should give true
                   and fair picture of the financial position or the income of the
                   assessee. It is further noticeable that the Act i.e. the Income Tax
                   Act, 1961 only refers to capital or revenue expenditure. There is no
                   provision in the Act which postulates or refers to deferred revenue
                   expenditure. Deferred revenue expenditure is, therefore, not as such
                   recognised in the Act. The Act to this extent is at variance and does
                   not accept deferred revenue expenditure as a plausible and
                   acceptable method. Accounting principles or standards have to be
                   applied and adopted and they must disclose fair and true financial
                   position and the income, but they cannot be contrary to the
                   provisions or the mandate of the Act. The Act would then override
                   the accountancy principles. There are several provisions in the Act
                   like Section 43B which provide for different treatment than
                   required under the provisions of the Companies Act or the
                   accounting principles or standards. Reference can be made to
                   Kedarnath Jute Mfg. Co. Ltd. Versus CIT, (1971) 82 ITR 363
                   where it was held,
                          "... We are wholly unable to appreciate the suggestion that if an
                          assessee under some misapprehension or mistake fails to make an
                          entry in the books of account and although under the law, a

ITA No. 594/2014                                                           Page 21 of 23
                          deduction must be allowed by the Income Tax Officer, the
                          assessee will lose the right of claiming or will be debarred from
                          being allowed that deduction. Whether the assessee is entitled to
                          a particular deduction or not will depend on the provision of law
                          relating thereto and not on the view which the assessee might
                          take of his rights nor can the existence or absence of entries in the
                          books of account be decisive or conclusive in the matter. ..."

                   In Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT, (1997) 227 ITR
                   172 at page 184, it was observed,
                                 "It is true that this Court has very often referred to
                                 accounting practice for ascertainment of profit made by a
                                 company or value of the assets of a company. But when
                                 the question is whether a receipt of money is taxable or
                                 not or whether certain deductions from that receipt are
                                 permissible in law or not, the question has to be decided
                                 according to the principles of law and not in accordance
                                 with accountancy practice. Accounting practice cannot
                                 override Section 56 or any other provision of the Act. As
                                 was pointed out by Lord Russell in the case of B.S.C.
                                 Footwear Ltd. [(1970) 77 ITR 857, 860], the Income Tax
                                 law does not march step by step in the footprints of the
                                 accountancy profession."

                   It was held by the Bombay High Court in Commissioner of Income-Tax
                   versus Bhor Industries Limited (2003) 264 ITR 180,
                                  "... If (sic, It) is well settled that, ordinarily, revenue
                                  expenditure, which is incurred wholly and exclusively for
                                  the purposes of business, must be allowed in its entirety in
                                  the year in which it is incurred and it cannot be spread
                                  over a number of years even though the assessee has
                                  written it off in its books over a period of years. It is only
                                  in cases of special type of assets that the spread over is
                                  warranted. ..."

                   Judgment of the Supreme Court in Madras Industrial Investment
                   Corp. (supra) was considered and distinguished in CIT vs. Panacea
                   Biotech Ltd., ITA No. 22 & 24/2012 and CIT vs. Citi Financial
                   Consumer Fin Ltd. (2011) 335 ITR 29 (Del.), holding that the
                   assessees claim to spread over the expenditure over a period of
                   time is tenable provided it is justified as in the case of issue of
                   bonds at a discount. However, the same principle would not apply
                   if the assessee treats the same as revenue expenditure and in fact

ITA No. 594/2014                                                               Page 22 of 23
                   per Section 37(1) of the Act, the expenditure is revenue in nature
                   and has been incurred or has accrued. This right to claim deferred
                   revenue expenditure is given to the assessee and not to the revenue.
                   In the facts of the present case, as already noticed, the expenditure
                   as per the Commissioner of Income Tax (Appeals) should be partly
                   spread over two years, instead of the year in which it was incurred.
                   But it is accepted and admitted that the expenditure in question was
                   revenue in nature. It had accrued and was paid. Nothing and no acts
                   had to be performed and undertaken in future. It is not shown how
                   and why, if the said expenditure was allowed in the current year, it
                   would not reflect true and correct financial position or income of
                   the assessee in the current assessment year."

23.     In view of the aforesaid discussion, we do not find any merit in the

present appeal and the same is dismissed.




                                               SANJIV KHANNA, J.



                                               V. KAMESWAR RAO, J.
        OCTOBER 29, 2014
        VKR/NA




ITA No. 594/2014                                                        Page 23 of 23

 
 
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