2009 (7) TMI 1292 - AT - Income Tax

Tribunal Upholds CIT Decision on Deferred Revenue Expenditure

The Tribunal upheld the decisions of the CIT (Appeals) for both assessment years, allowing the full deferred revenue expenditure claimed by the assessee. ... - ISSUES PRESENTED AND CONSIDERED 1. Whether expenditure shown as 'deferred revenue expenses' in the assessee's books but claimed as revenue expenditure in the computation/return is allowable in full in the year in which incurred under section 37(1), notwithstanding the books' policy of writing off such expenditure over six years. 2. Whether entries in the books of account (treatment as deferred revenue expenditure and spreading over six years) are determinative of tax treatment or can be departed from for tax purposes. 3. Whether the Assessing Officer was justified in restricting allowance to 1/6th of the claimed expenditure on the basis that the accounting policy spreads benefit over six years, thereby treating the balance as not allowable in the year of expenditure. 4. Whether reliance on an earlier Tribunal decision upholding pro rata allowance on similar facts is applicable or distinguishable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of expenditure shown as deferred revenue expenses but claimed as revenue expenditure Legal framework: Section 37(1) permits deduction of expenditure incurred wholly and exclusively for purposes of the business. There is no statutory category of 'deferred revenue expenditure' in the Income-tax Act; tax allowability depends on the nature of the expenditure (revenue v. capital) and statutory provisions, not on nomenclature in accounts. Precedent treatment: The Court relied on established Supreme Court authorities holding that accounting entries are not decisive for tax allowability and that revenue expenditure, even if its benefits extend beyond the year, is generally allowable wholly in the year of incurrence. Decisions relied upon include those recognizing that revenue expenses cannot be spread over years merely because of book treatment. Interpretation and reasoning: The Tribunal examined the nature of the expenditures (travel, freight, consumables, salaries, wages, QS 9000-related costs) and found them essentially revenue in character incurred for development of samples, which form part of the ongoing process of conducting the business. The fact that such expenses may yield benefit in subsequent years does not convert them into capital expenditure nor justify denial of full deduction in the year incurred. The absence of any statutory provision permitting the tax authority to allow only part of a revenue expense in the year of incurrence was emphasized. Ratio vs. Obiter: Ratio - Revenue expenditures incurred wholly and exclusively for business are allowable under section 37(1) in the year incurred even if the assessee's accounting policy spreads the write-off over several years. Obiter - Observations on analogy with advertising and sample expenses as non-capital in nature further reinforce the ratio but primarily support factual classification. Conclusions: The full amounts classified as deferred revenue expenses in the books but shown as revenue expenditure for tax purposes are allowable in full in the year of incurrence under section 37(1). Issue 2 - Determinative value of book entries and the permissible divergence between books and tax return Legal framework: Tax law looks to the legal and economic substance of transactions and to statutory tests for allowability; accounting entries are prima facie evidence but not conclusive. Judicial authority confirms that treatment in books cannot override statutory provisions governing deduction. Precedent treatment: The Tribunal cited High Court decisions and Supreme Court authority establishing that entries in books do not conclusively determine tax treatment and that expenses classified as deferred in accounts may nonetheless be deductible as revenue expenditure for tax purposes. Interpretation and reasoning: The Tribunal observed that the Assessing Officer did not dispute the revenue nature of the expenses but relied on the accounting policy to limit deduction. The Tribunal held this approach legally untenable: an assessee cannot adopt one accounting treatment for commercial reporting and thereby fetter statutory tax consequences; nor can the AO impose the accounting spread as the tax rule. Ratio vs. Obiter: Ratio - Accounting treatment alone cannot convert a revenue expense into a non-deductible or partly deductible item for tax purposes. Obiter - Discussion emphasizing that benefits extending beyond the year do not by themselves render expenditure capital in nature. Conclusions: Book entries showing deferred revenue treatment are not decisive and do not prevent full deduction of revenue expenditures in the year incurred where facts support revenue character. Issue 3 - Validity of Assessing Officer's pro rata (1/6th) allowance based on the assessee's accounting policy Legal framework: Allowance of expenditure is governed by tax principles; an AO may examine claims for genuineness and character but cannot mechanically apply the assessee's accounting amortization as the rule of tax allowance absent statutory basis. Precedent treatment: The Tribunal considered an earlier Tribunal decision relied upon by Revenue that allowed pro rata treatment on its facts, but found such decision factually distinguishable and not laying down a general rule. The Tribunal also referenced decisions allowing full deduction where expenses, though having benefits beyond the year, remain revenue in nature. Interpretation and reasoning: The Assessing Officer's rationale that sample-development expenses confer multi-year benefit and therefore should be allowed only to the extent of one-sixth was rejected. The Tribunal held that even if a revenue expenditure has enduring benefit, it remains deductible in the year incurred unless it attains capital character. The pro rata approach was treated as fact-specific and inapplicable where the expenditure was ongoing, recurrent, and necessary for ordinary business operations. Ratio vs. Obiter: Ratio - An AO is not justified in restricting deduction to the prorated amount corresponding to an assessee's accounting amortization where the expenditure is revenue in nature. Obiter - Remarks distinguishing the cited pro rata decision as based on heavy repairs and specific accounting treatment. Conclusions: The Assessing Officer's restriction to 1/6th was not legally sustainable; the full claimed revenue expenditure must be allowed. Issue 4 - Applicability of precedents permitting Tribunal to allow claims not made in the return Legal framework: The Tribunal's power to admit and allow claims depends on statutory appellate jurisdiction; prior High Court authority affirmed that where an expenditure is revenue in nature it can be allowed even if not claimed in the return, subject to jurisdictional limits and facts. Precedent treatment: The Tribunal relied on an earlier High Court decision in the appellant's own case which permitted allowance of expenditure not claimed in the return because it was revenue in nature. That decision was used to support the proposition that the Tribunal/CIT(A) can allow such items when they are found to be allowable under the Act. Interpretation and reasoning: The Tribunal observed that in a prior assessment year similar treatment had been accorded and sustained by the High Court; thus, allowing revenue expenditure not claimed in the return is consistent with established jurisprudence where the expenditure qualifies under section 37(1). Ratio vs. Obiter: Ratio - Where an unclaimed item is shown to be allowable revenue expenditure, appellate authorities may allow it notwithstanding absence of claim in the return, subject to jurisdictional rules. Obiter - Procedural nuances concerning scope of power under specific statutory sections were noted but not exhaustively analyzed. Conclusions: Allowance of the unclaimed revenue expenditure was proper in light of its character and relevant judicial authority; the Tribunal upheld such allowance on the facts. Overall Conclusion The Court confirmed the appellate authority's orders allowing the full amounts as revenue expenditure in both assessment years. The appeals by Revenue were dismissed: accounting treatment as deferred revenue expenditure and an internal policy of spreading write-off over six years do not prevent full deduction under section 37(1) when factual analysis shows the expenses were incurred wholly and exclusively for business and are revenue in nature. The pro rata restriction imposed by the Assessing Officer was legally unsustainable and factually inapposite in the circumstances.