2019 (8) TMI 514 - HC - Income Tax

High Court affirms ITAT ruling for Assessee on revenue expenditure allocation.

Pr. Commissioner of Income Tax Versus Essel Agro Pvt. Ltd.

The High Court upheld the ITAT's decision in favor of the Assessee for the Assessment Year 2006-07. The Court found that the ITAT did not err in allowing ... Deferred revenue expenditure - Revenue expenditure corresponding to the distributors’ commission, distributors’ incentives and outward freight cartage in the year under consideration - according to the Revenue it was required to be spread over on the basis of the ‘matching principle’ - HELD THAT:- Revenue has placed reliance on the observations of the Supreme Court in J. K. Industries Limited v. Union of India [2007 (11) TMI 401 - SUPREME COURT] where it is stated that ‘matching principle’ today forms an important component of accrual basis of accounting. While as a general proposition this may be acceptable, the fact remains that the Assessee claimed the entire expense as revenue expenditure in his accounts for AY 2006-07 and if sought to be altered on the basis of the above principle it would indisputably affect the accounts of the subsequent year. This is significant because in the AY in question, the AO has not rejected the accounts on the basis that it does not present the true and correct picture of the business of the Assessee. Court finds that that view taken by the ITAT is a plausible one and does not give rise to any substantial question of law. The appeal is dismissed in the above terms. Issues:1. Interpretation of the 'matching principle' in revenue expenditure.2. Whether the ITAT erred in allowing the Assessee to book all revenue expenditure in the year under consideration.Analysis:The High Court addressed the appeal by the Revenue against the ITAT order for the Assessment Year 2006-07. The main issue raised was whether the ITAT erred in affirming the CIT (A) order, allowing the Assessee to book all revenue expenditure, including distributors' commission, incentives, and outward freight cartage, in the same year. The Revenue argued that the expenditure should have been spread over based on the 'matching principle.'The Court noted that the ITAT's decision was based on the acceptance of distributors' commission and incentives by the CIT (A), concluding that there was no deferred revenue expenditure related to those items. The Revenue relied on the Supreme Court's stance on the 'matching principle' in J. K. Industries Limited v. Union of India, emphasizing its importance in accrual basis accounting. However, the Assessee had claimed the entire expense as revenue expenditure for the AY 2006-07 without rejection by the AO for misrepresentation.The Court found the ITAT's view reasonable, stating that altering the expenditure based on the 'matching principle' would impact subsequent year accounts. Since the AO did not dispute the accuracy of the Assessee's accounts for the AY in question, the Court dismissed the appeal, concluding that no substantial question of law arose from the ITAT's decision.