TMI Blog2004 (6) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant in its return of income. 1.4 That the CIT(A) erred in holding that the appellant is also not to be allowed any deduction of Rs. 29,51,509 as it has been voluntarily offered for taxation in the computation of income and no claim for its deduction has been made either at the assessment stage or at the appellate stage". 4. The assessee is a company, which is engaged in the business of manufacturing of mini-computers/micro-processor based systems, etc. The return of income for asst. yr. 1991-92 was filed by the assessee declaring a loss of Rs. 4,73,69,920. During the previous year the assessee had spent a sum of Rs. 77,16,120 towards advertisements costs relating to launching of a new product. In the books of account of the assessee, the entire expenses of Rs. 77,16,120 had been capitalised and only a sum of Rs. 29,51,909 had been debited to the P L a/c and claimed as a deduction. In the computation of income the assessee had added back Rs. 29,51,909 to the profit as per P L a/c and claimed deduction of the entire sum of Rs. 77,16,120. According to the assessee, the expenditure on advertisement was revenue in nature and was fully allowable as a deduction in computing the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been allowed in full. Reliance was placed on the decision of the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) and Hindustan Commercial Bank Ltd., In re (1952) 21 ITR 353 (All). 6. The CIT(A) held as follows: "I have considered the arguments of the learned Authorised Representative as well as observations of the AO. Total expenses on advertisement incurred during the year were Rs. 1,06,68,029 (Rs. 77,16,120 + Rs. 29,51,909) out of which the appellant had treated Rs. 29,51,909 as pertaining to this year only and, hence, claimed them in the P L a/c as revenue expenditure. The balance expenditure of Rs. 77,16,120 was treated by the appellant as relating to the subsequent assessment years and, hence, shown as deferred revenue expenditure. This sum of Rs. 77,16,120 was shown in the balance sheet on the asset side as prepaid expenses. However, in the return of income the appellant has given just the opposite treatment, i.e., surrendered Rs. 29,51,909 and claimed deduction of Rs. 77,16,120 which is totally unjustified. Looking to the nature of advertisement expenses which were mostly on advertisement in newspaper and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative relied on the orders of the Revenue authorities. 10. We have considered the rival submissions. A copy of the computation of the total income for the asst. yr. 1991-92 is placed at pp. 20-21 of assessee s paper book. Perusal of the same indicates that the assessee had debited a sum of Rs. 29,51,909 in its P L a/c and this sum was added back to the profit as per P L a/c and the entire sum of Rs. 77,16,120, was claimed as deduction. By disallowing the entire sum of Rs. 77,16,120 the AO has in effect disallowed a sum of Rs. 29,51,909 in excess of what has been claimed by the assessee as deduction. The disallowance at best could have been only Rs. 47,64,211 (Rs. 77,16,120 less Rs. 29,51,909) for the reason that even as per the AO the expenditure to the extent of Rs. 29,51,909 was of a revenue nature as the benefit from incurring this expenditure resulted in benefit to the assessee to that extent during the previous year. Be that as it may, we may now consider the concept of deferred revenue expenditure. The reason for making the addition by the Revenue authorities below as capital expenditure was mainly for the reason that the assessee had treated the same as "deferred revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly under the head "deferred revenue expenditure" for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period/year as the benefit thereof accrues over a period exceeding the accounting year in which the same is incurred. It is thus clear that when any expenditure is treated as a "deferred revenue expenditure", it presupposes that the concerned expenditure, creating benefit in the revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the authorities below misconstrued the term "deferred revenue expenditure" as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorities in treating the same as capital expenditure and disallowing the claim for deduction was not proper. We direct the AO to delete the addition of Rs. 77,16,120 made to the total income. Thus, grounds No. 1.1, 1.2 and 1.4 are allowed while ground No. 1.3 does not require any adjudication in view of the decision on grounds No. 1.1, 1.2 and 1.4. 15. Grounds of appeal No. 2 and 2.1 of the assessee read as follow: "2. That the CIT(A) erred on the facts and in law in confirming the disallowance of Rs. 33,77,573 being provision for warranties as being unascertained, unincurred and contingent in nature. 2.1 That the CIT(A) erred on the facts and in law in not allowing deduction for provision of warranties amounting to Rs. 9,10,094 created in asst. yr. 1990-91 and disallowed in that year, which has been reversed in the year under appeal." 16. The assessee is in the business of manufacturing and sale of computers. The assessee offers one year warranty on each computer sold by it. The assessee in terms of the warranty has to provide free maintenance including replacement of parts within one year from the date of sale/installation of the computer. The assessee estimated its lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the basis of ascertaining this liability adopted by the assessee copies of which are placed at pp. 25 to 28 of the assessee s paper book, and submitted that going by the provision made for these expenses in the year of sale and the actual expenditure incurred in the subsequent year, and the assessee writing back provision made in excess in the year of sale in the subsequent year when the actual expenditure is incurred, there can be no hesitation in accepting the mode of computing or ascertaining liability under this head as adopted by the assessee. For the proposition that liability debited to the P L a/c if can be ascertained with reasonable certainty the same should be allowed as deduction he relied on the following decisions: (i) Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC) (ii) IRC vs. Mitsubishi Motors, New Zealand Ltd. (1996) 222 ITR 697 (PC) (iii) Majestic Auto Ltd. vs. IAC in ITA No. 7/Chd/1988 (Chd Bench) RA made by Revenue dismissed as reported in CIT vs. Majestic Auto Ltd. (1994) 48 TTJ (Chd)(TM) 566 : (1993) 47 ITD 1 (Chd)(TM) (iv) ITO vs. Wanson (India) Ltd. [sic Voltas Ltd. vs. Dy. CIT] (1998) 64 ITD 232 (Bom) (v) Bharat Earth Movers Ltd. vs. CIT (2000) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with a claim for deduction on account of anticipated liability under warranty. It was a case of a car manufacturer who had undertaken to repair defects appearing within one year of delivery or until the vehicle has been driven for 22,000 kms. whichever period is shorter. The assessee car manufacturer sought deduction of its anticipated liability under the warranty remaining unexpired at the end of the year in which the vehicles were sold. The Privy Counsel held as follows: "The taxpayer s liability under the warranty for each vehicle sold was contingent on a defect appearing and being notified to the dealer within the warranty period so that no liability was incurred by the taxpayer until those conditions were satisfied, regard could be had to its estimation of warranty claims based on statistical information which showed that as a matter of existing fact not future contingency 63 per cent. Of all vehicles sold to the taxpayer contained defects likely to be manifested within the warranty period and require work under warranty; that since theoretical contingencies could be disregarded, the taxpayer was in the year of sale under an accrued legal obligation to make payment unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k in the subsequent assessment year. In the light of the circumstances, a legal obligation to make a payment in future can be said to have accrued. It is not required to wait for the contingency to occur. We can infer that a business liability has definitely arisen in the accounting year though the quantification or discharge of this liability was at a future day. The estimation by the assessee of its liability is reasonably certain. In the circumstances it can be said that the liability is in presenti to be discharged at a future date and not a contingent one. We, therefore, direct the AO to allow a sum of Rs. 33,77,573 claimed as deduction by the assessee. 23. The 3rd ground of the appeal of the assessee reads as under: "That the CIT(A) erred on facts and in law in confirming the disallowance on account of provision for royalty amounting to Rs. 49,37,042 on the ground that the tax on royalty has been paid in November, 1991, that is, during the previous year relevant to asst. yr. 1992-93." 24. The assessee had a technical collaboration with M/s ING. C. OLIVETTI ofItaly. As per the terms of the collaboration agreement the assessee had to pay royalty to the collaborator at 5 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business of profession' (a) in the case of any assessee (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B. Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation For the purposes of this sub-clause (A) royalty shall have the same meaning as in Expln. 2 to cl. (vi) of sub-s. (1) of s. 9; (B) fees for technical services shall have the same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9". 26. It is clear from the perusal of the provisions of s. 40(a)(i) that if royalty is payable outsideIndia, tax has to be deducted or paid under Chapter XVII-B and only then the deduction can be claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A). We, accordingly set aside the order of the CIT(A) and direct the AO to allow the claim of the assessee." 27. For the reasons stated above, we are of the view that the Revenue authorities were not justified in disallowing the provision made for royalty. The addition made by the AO in this regard is directed to be deleted. The 3rd ground of the appeal of the assessee is allowed. 28. The 4th ground of the appeal of the assessee was not pressed; the same is dismissed as not pressed. 29. The 5th and 6th grounds of the appeal of the assessee are as under: 5. "That the CIT(A) erred on facts and in law in disallowing Rs. 2,62,394 on account of income-tax paid by the appellant on the salary of managing director, without appreciating that such payment was approved under the provisions of s. 10(6)(viia). 6. That the CIT(A) erred on the facts and in law in enhancing the assessment by directing the AO to restrict the value of perquisite given to the managing director to Rs. 45,000 only in complete disregard of the terms of the agreement duly approved by the Government of India and without giving the appellant an opportunity of rebuttal." 30.One Dr.L. Sella, an Italian nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submissions of the learned counsel for the assessee as well as the learned Departmental Representative. 34. We shall first deal with the disallowance of a sum of Rs. 2,62,394 representing the income-tax liability of Dr. L. Sella which was borne by the assessee. As already stated, the approval of the appointment of Dr. L. Sella has nothing to do with the claim for allowability of this expenditure as a business expenditure. The law is well-settled that discharge of tax liability of others cannot be considered as an expenditure incurred in the conduct of business. Reference may be made to the decision of the Hon ble Supreme Court in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) in this regard wherein the assessee, a resident company, incorporated outside India, paid estate duty payable on the death of its shareholders not domiciled in India and claimed the same as deduction. The Hon ble Supreme Court held that such payment has nothing to do with the conduct of business. The Court also held that it does not make any difference if the payment is voluntary or statutory. The argument of the learned counsel for the assessee before us was that the tax paid was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such raw material and the rates on which such payments have been made. It may be noted that even before CIT(A) such details have not been furnished. Moreover, the assessee has failed to prove that the purchase from the foreign collaborator and its vendors were at the competitive rates and that these were excessive or unreasonable." 39. The assessee during the previous year purchased raw material from its collaborator M/s ING. C. OLIVETTI. A total sum of Rs. 2,08,30,600 was paid by the assessee to the foreign collaborator as per following details: Particulars Amount Raw material 1,44,39,570 Technical know-how 6,54,772 Royalty 31,34,006 Export commission 26,02,252 40. The assessee pleaded before the AO that purchase of raw material from the foreign collaborator was necessary because the plant and machinery used by the assessee was based on patents and designs supplied by the collaborator. It was also pointed out that the purchases were effected from the collaborator and its approved vendors. The AO was of the view that quantitative details of raw material purchased from the foreign collaborator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently, the first ground of the appeal of the Revenue is dismissed. 42. The second ground of the appeal of the Revenue reads as follows: "The learned CIT(A) has erred in law and on facts in directing to allow 25 per cent of entertainment expenses as pertaining to employees' participation and to consider the balance for disallowance under s. 37(2A) ignoring the fact that the entertainment expenses in respect of employees are specifically excluded from the provisions of s. 37(2A). Hence, the entire amount of Rs. 3,29,400 shown by the assessee as relatable to provisions of s. 37(2A) shall be considered for this purpose and relief allowed by the CIT(A) is not admissible. Without prejudice to the above, the assessee has failed to produce any evidence to the effect of employees participation in this regard." 43. It is not in dispute that identical issue had come up for consideration in assessee s own case in the asst. yr. 1990-91 in ITA No. 7010/Del/1995 and this Tribunal was pleased to hold that 30 per cent of the expenses incurred on entertainment was to be treated on account of employees participation. The decision of the Tribunal is in line with the decision of the Hon ble De ..... X X X X Extracts X X X X X X X X Extracts X X X X
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