TaxTMI 
TaxTMI 
2014 (11) TMI 11
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.... that assessee has debited various spares amounting to Rs. 2,84,24,466/- under the head fixed assets whereas the same related to purchase of spares. AO opined that from the perusal of the details of fixed assets file by the assessee it is apparent that assessee has debited various spares amounting to Rs. 2,84,24,466/- under the head fixed assets whereas the same are related to purchase of spares. AO told that since, the fixed assets were acquired first time in the current assessment year by the assessee and never used by the assessee in the current year, it should have been shown either as inventory or as consumables. That since it is apparent that assessee has neither used the spares as consumables and nor used the same in the current assessment year, hence, the amount of depreciation charged on the spares amounting to Rs. 1,46,14,147/- was disallowed and added back to the declared income. 4. Before the Ld. CIT(A) assessee submitted that had followed Accounting Standard (AS-2) (valuation of inventory) and AS-10 (accounting for fixed assets). It was submitted that assessee was following by accounting principles and capitalizing the spares with fixed assets and claimed depreciati....
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....t emergency spares which even though ready for use are not as a matter of fact consumed or used during the relevant period, as these are spares specific to a fixed asset and will in all probability be useless once the asset is discarded. In that sense, the concept of passive user which is applied by the aforementioned cases to standby machinery will be applicable to emergency/insurance spares." 6.2 From the above, it is clear that spares which are of capital spares in nature and are specific to a particular item of fixed assets and used irregularly, they should be capitalised separately and depreciated on a systematic basis over a time frame not extending the useful life of the fixed assets to which they related. Furthermore, as per the ratio emanating from the above judgment the expression used for the purpose of business appearing in section 32 of the Act also takes into account emergency spares which even though ready for use are not as a matter of fact are not as a matter of fact consumed or used during the relevant period as these are spares specific to a fixed assets and will in all probability be useless once the asset is discarded. In this situation, the concept of passi....
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....O in restricting the deduction for 'Brand Launch Expenses' to the extent 20% and thereby disallowing an amount of Rs. 84,545 104 on the basis that such expenses are in the nature 'deferred revenue expenditure' allowable over a period of 5 years. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case." 8. Apropos Ground no. 1 - Disallowance of set off of interest expenses. On this issue AO noted that assessee has received interest on loan amounting to Rs. 8100165/- which was set off against interest expenses. AO referred to the decision of the Hon'ble Apex Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT 227 ITR 172. He held that the treatment by the assessee of setting off interest income of pre-operative period against the expenses is not allowed. He held that the interest expenses will form part of preoperative expenses pending c....
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.... 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. 14. Apropos Ground No. 3 - Disallowance out of rent expenses:- On this issue AO noted that during the course of assessment proceedings the assessee was asked to furnish the details of rent paid. However, AO noted that in respect of rent paid amounting to Rs. 4,24,50,057/- the assessee has neither provided addresses nor PAN No. of the persons to whom rent was paid. AO held that in absence of sufficient information the authenticity of the rent paid cannot be verified. Hence, the same was disallowed and added back to the declared income. 15. Upon assessee's appeal CIT(A) affirmed the action of the AO. 16. Against the above order the Assessee is in appeal before us. 17. We have heard both the counsel and perused the recor....
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....he nature of the expenses the same are treated as deferred revenue expenditure and 1/5th 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 amortized in the next four years. 22. Upon assessee's appeal Ld. CIT(A) observed that demarcation between the capital expenditure and revenue expenditure is very thin. Ld. CIT(A) held that although the assessee explained that the expenditure was of this particular year, but the fruits will be received over a period of ensuing years. In this regard, CIT(A) referred to the decision of the Hon'ble Apex Court in the case Madras Industrial Investment Corporation vs. CIT 225 ITR 802. Accordingly, he affirmed the order of the AO. 23. Against the above order the Assessee is in appeal before us. 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 no concept of deferred revenue expenditure in t....
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....ccordingly, 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 aut....
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.... the dominant purpose of the expenditure incurred must be to earn income that there should be nexus between the expenditure incurred and the income sought to be earned; that there is no nexus between the expenses incurred and the income sought to be earned. Ld. CIT(A) also referred to the decision of the Hon'ble Apex Court as above and accordingly, he affirmed the action of the AO. 30. Against the above order the Assessee is in appeal before us. 31. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (Supra) as referred above is not applicable to the facts of this case. He submitted that in the said decision considered by the Hon'ble Apex Court, the matter was of surplus funds. Thus the Ld. Counsel of the assessee's claim is not the case here. Ld. Counsel of the assessee further submitted that assessee only seeks adjustments of interest expenditure incurred from the interest income earned under section 57(iii) of the I.T. Act. 32. Ld. DR on the other hand relied upon the orders of the authorities below. He submitted that the decision of the Hon'ble Apex Court ....
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....d was clearly of revenue nature and would have to be taxed accordingly. The accountants might have taken some other view but accountancy practice was not necessarily good law. This was not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as it liked. The application of the income for payment of interest would not affect its taxability in any way. The company could not claim any relief under section 70 or section 71 since its business had not started and there could not be any computation of business income or loss incurred by the assessee in the relevant accounting years. In such a situation, the expenditure incurred by the assessee for the purpose of setting up its business could not be allowed as deduction, nor could it be adjusted against any other income under any other head. Similarly any income from a non business source could not be set off against the liability to pay interest on funds borrowed for the purpose of purchase of plant and machinery even before commencement of the business of the assessee." 35. Now we find that on the facts of the present case the above exposition is applicable. Here, the....