Revenue expenditure after business setup remains deductible, and book treatment as deferred revenue does not override tax allowability.

Travelling, exhibition, marketing and telephone expenses incurred after a manufacturing business was set up were held to be revenue expenditure because they were incurred in the ordinary course to develop the market and did not create any capital asset. Their treatment as deferred revenue expenditure in the books did not control income-tax computation, so otherwise allowable expenditure could not be denied merely on account of accounting entries. The disallowance was unsustainable and had to be deleted.

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Issues: (i) Whether the expenditure on travelling, exhibition, marketing and telephone charges was capital in nature or allowable as revenue expenditure. (ii) Whether the treatment of the expenditure as deferred revenue expenditure in the books of account prevented its deduction for income-tax purposes.

Issue (i): Whether the expenditure on travelling, exhibition, marketing and telephone charges was capital in nature or allowable as revenue expenditure.

Analysis: The assessee had already set up and commenced its business of manufacturing packaging machines. The expenses were incurred in the normal course of business to explore and capture the market and did not bring into existence any capital asset. The view that such expenditure created an intangible asset in future was found to be based on conjecture. Expenses incurred after setting up of business remain allowable as revenue expenditure even if sales have not yet commenced.

Conclusion: The expenditure was held to be revenue in nature and not capital in nature, in favour of the assessee.

Issue (ii): Whether the treatment of the expenditure as deferred revenue expenditure in the books of account prevented its deduction for income-tax purposes.

Analysis: The entries in the books of account were held not to govern the computation of total income. If an expenditure is otherwise allowable under the Act, its deduction cannot be denied merely because it was amortised in the accounts. The absence of sales did not alter this position once the business had been set up.

Conclusion: The book treatment did not bar deduction of the expenditure, in favour of the assessee.

Final Conclusion: The disallowance was unsustainable and was directed to be deleted, resulting in allowance of the appeal.

Ratio Decidendi: Revenue expenditure incurred after a business is set up is allowable even before sales commence, and its deductibility under the Income-tax Act is not controlled by the accounting treatment in the books.

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