THE issues before the Bench are - Whether the advertisement expenses,
which were considered by the Revenue as revenue expenditure, were rightly
disallowed merely because in the books of account the same were considered by
the assessee as deferred revenue expenditure; Whether the provision made by the
assessee for warranty for after-sales services is to be considered as contingent
liability and not allowable as expenditure and Whether when at the relevant time
as per law assessee has deducted tax at source but paid the same in subsequent
year, no disallowance can be made as out of two conditions as mentioned in
section 40(a)(i) ‘the tax has not been paid’ or ‘deducted’ one condition ‘not
deducted’ do not exist. And the verdict goes
against the Revenue.
against the Revenue.
Facts of the case
A) Assessee is engaged in the business of manufacturing of Mini Computers / Micro Processor. It claimed expenses towards advertisements. In the books of account the expenses were deferred for three years. However in the computation of income full amount was claimed as revenue expenditure. AO rejected the claim on the ground that that since the assessee has admittedly capatalized amount in the balance sheet and therefore there was no justification for claiming it as a revenue expenditure. CIT (A) confirmed the order of AO. ITAT allowed the claim of assessee following the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. wherein it was held that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure. Allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account.
B) Assessee estimated the liability in respect of the warranty on each computer manufactured and sold by it at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. AO disallowed the entire amount on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. CIT (A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. ITAT allowed the appeal observing that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain.
C) AO disallowed and added back royalty as unascertained liability. The CIT (A) upheld the addition made by AO. ITAT observed that assessee had made a provision for royalty payable and R & D cess. The tax was deductible on this payment was duly shown as deduction in the books of account. At the time of making payment, tax deductible on this payment was duly deposited to the credit of the Central Government. ITAT came to the conclusion that as per provisions of section 40(a)(i) the tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the AO. The quantification had taken place at a later point of time. Revenue contended that provision of Section 40(a)(i) of the Act had not been complied with by the assessee.
After hearing both the parties, the High Court held that,
A) ++ neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited in the profit and loss account cannot be made a ground to disallow the advertisement expenses. Tribunal has observed that so far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. The assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. There is nothing to indicate that the concerned expenditure has to be of capital nature. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. The authorities below misconstrued the term "deferred expenditure" as capital expenditure. Revenue failed to point out any error of fact or law in the impugned order of the ITAT. AO and CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. Thus there is no error in the order of ITAT in setting aside the addition made by AO;
B) ++ in the case of Bharat Earth Movers Ltd Vs. CIT and Rotork Controls India Pvt Ltd, the Supreme Court held that a provision is a liability which can be measured only by using a substantial degree of estimation. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Provision for warranty is rightly made by the appellantenterprise because it has incurred a present obligation as a result of past events. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Following the principles of law laid down by Hon’ble Supreme Court, the order of ITAT is confirmed;
C) ++ out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. Proviso to section 40(a)(i) provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. Subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available u/s 40(a)(i) as it existed during the relevant assessment year. Since the assessee has deducted the tax during the previous year relevant to the assessment year in question, the conditionality of section 40(a)(i) stands satisfied. Thus there is no error in the order of ITAT.
A) Assessee is engaged in the business of manufacturing of Mini Computers / Micro Processor. It claimed expenses towards advertisements. In the books of account the expenses were deferred for three years. However in the computation of income full amount was claimed as revenue expenditure. AO rejected the claim on the ground that that since the assessee has admittedly capatalized amount in the balance sheet and therefore there was no justification for claiming it as a revenue expenditure. CIT (A) confirmed the order of AO. ITAT allowed the claim of assessee following the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. wherein it was held that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure. Allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entires made in the books of account.
B) Assessee estimated the liability in respect of the warranty on each computer manufactured and sold by it at 1.5% of the cost of sales in respect of computers sold within the country and 5% of the cost of sales in respect of computers exported. AO disallowed the entire amount on the ground that it is inadmissible being unascertained, unincurred and contingent in nature. CIT (A) observed that the provision for warranties is a contractual liability which will crystalise only if a complaint is received from the customer. If no complaint is received from the customer, no expenditure is to be incurred. ITAT allowed the appeal observing that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day and the estimation by the assessee on its liability is reasonably certain.
C) AO disallowed and added back royalty as unascertained liability. The CIT (A) upheld the addition made by AO. ITAT observed that assessee had made a provision for royalty payable and R & D cess. The tax was deductible on this payment was duly shown as deduction in the books of account. At the time of making payment, tax deductible on this payment was duly deposited to the credit of the Central Government. ITAT came to the conclusion that as per provisions of section 40(a)(i) the tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed in computing the income chargeable under the head "Profits and gains of business or profession" which stands satisfied in the present case inasmuch as the liability to pay royalty had accrued and it was not contingent as held by the AO. The quantification had taken place at a later point of time. Revenue contended that provision of Section 40(a)(i) of the Act had not been complied with by the assessee.
After hearing both the parties, the High Court held that,
A) ++ neither the Assessing Officer nor the CIT(A) has disputed the revenue nature of the advertisement expenses. Merely because the assessee has firstly shown the entire amount in the books of accounts as deferred revenue expenditure and thereafter debited in the profit and loss account cannot be made a ground to disallow the advertisement expenses. Tribunal has observed that so far as the treatment given by the assessee- company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. The assessee has treated the said expenditure as "deferred revenue expenditure" considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The authorities below considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that if indicated the accrual of advantage to the assessee of enduring nature. The institute of Chartered Accountants of India in its guidance-note issued on the "terms used in financial statements" has defined the term "deferred revenue expenditure" as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. There is nothing to indicate that the concerned expenditure has to be of capital nature. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital filed but the same accrues only in the revenue filed. The authorities below misconstrued the term "deferred expenditure" as capital expenditure. Revenue failed to point out any error of fact or law in the impugned order of the ITAT. AO and CIT (A) have not disputed the nature of advertisement expenses to be revenue expenditure. Thus there is no error in the order of ITAT in setting aside the addition made by AO;
B) ++ in the case of Bharat Earth Movers Ltd Vs. CIT and Rotork Controls India Pvt Ltd, the Supreme Court held that a provision is a liability which can be measured only by using a substantial degree of estimation. Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. Provision for warranty is rightly made by the appellantenterprise because it has incurred a present obligation as a result of past events. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, during the relevant assessment year which was entitled to deduction under Section 37 of the 1961 Act. Following the principles of law laid down by Hon’ble Supreme Court, the order of ITAT is confirmed;
C) ++ out of two conditions as mentioned in Section 40(a)(i), namely, "tax has not been paid" or "deducted", one condition, namely, "not deducted" do not exist inasmuch as the tax has been deducted and therefore, the provision of Section 40(a)(i) will not be attracted. Proviso to section 40(a)(i) provides that where the tax has been paid or deducted in any subsequent year then the amount of royalty shall be allowed as deduction in computing the income of previous year in which such tax has been paid or deducted. Thus, the use of two words, namely, "paid" or "deducted" do not carry the same meaning. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. Subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available u/s 40(a)(i) as it existed during the relevant assessment year. Since the assessee has deducted the tax during the previous year relevant to the assessment year in question, the conditionality of section 40(a)(i) stands satisfied. Thus there is no error in the order of ITAT.
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