AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (11) TMI 804
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..... 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 expendit....
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.... 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....
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.... 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 conf....
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....in 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 liability to incur the said expenses had been actually incurred by th....
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....itely 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 re....
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....xim 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....
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....or 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 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 th....
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....e 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 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, L....
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....e 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 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....
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....ssee 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 24. What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in ....
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....penditure 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....