$~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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