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TMI Blog2009 (5) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... Total income 55,90,506 3. The CIT(A) allowed part relief and his order has been challenged by the Department in the present appeal. Ground No. 1 "1. The order of the learned CIT(A) is contrary to law and facts of the case." 4. This ground is general in nature and does not require adjudication. Ground No. 2 "2.1 The learned CIT(A) erred in deleting the addition of Rs. 10,26,667 made by disallowing amortized license fee on the ground that the assessee had delivered an enduring advantage from the licence fee expenditure and hence, the same is of capital nature and that the impugned expenditure did not fall in the categories which qualify for amortization under the IT Act. 2.2 The CIT(A), while holding the licence fee expenditure as revenue in nature, has observed that no computer software now-a-days has any enduring value but, while allowing the assessee's claim of amortization of licence fee expenditure, has observed that the utility of the licence was found to last for three years. This clearly shows that there was enduring benefit to the assessee. 2.3 Having regard to the decision of the Hon'ble Rajasthan High Court in the case of CIT vs. Arawali Constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Sun. - that the payment was only for licence to resell LMS software. - that the amount due was Rs. 28,80,000 which was remitted in April, 2002 during the previous year relevant to asst. yr. 2003-04. - that the assessee debited Rs. 10,26,667 out of the licence fee to the P&L a/c for the year ended 31st March, 2003 and the balance representing the value of unexpired rights of the licence was taken to subsequent year. - that the AO disallowed and added Rs. 10,26,667 on the ground that amortization was not permissible under the IT Act, except under ss. 35D, 35DD and 35DDA. - that the issue is squarely covered by the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). - that the AO did not reject the method of accounting adopted by the assessee under s. 145 of the Act. - that in the alternative the entire amount of Rs. 28,80,000 be allowed. - that reliance was placed on the decisions in the following cases: (i) Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC); (ii) Taparia Tools Ltd. vs. Jt. CIT (2003) 180 CTR (Bom) 256 : (200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'." 13. The expression 'capital expenditure' is not defined in the Act and the words 'in the nature of capital expenditure' appearing in s. 37(1) make the meaning of the expression more elastic in its application to the facts of each case. The tests to be applied to distinguish 'capital expenditure' from 'revenue expenditure' have been enumerated in various decisions. 14. The tests for 'capital expenses', inter alia, are: expenditure for procuring an enduring benefit, expenditure incurred 'once and for all', expenditure made for establishing a business, for extension of business, for substantial replacement of equipment, expenditure for acquisition of an asset or a right of permanent character, expenditure being part of fixed capital of the business. 15. The tests for 'revenue expenditure', inter alia, are: expenses h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions of s. 37(1) of the Act, has to be allowed in its entirety in the year in which it is incurred. And, in the IT Act, 1961 there is no general provision allowing amortization of expenses. The amortization of expenses is permitted under specific situations mentioned in ss. 35D, 35DD and 35DDA of the Act. However, in cases where a revenue expenditure results in a continuing benefit to the business of the assessee over a number of years, and allowing the entire expenditure in the year in which it is incurred is likely to distort the profit of that particular year, the Courts have introduced the concept of 'matching principle' for allowing amortization of expenses. 22. In the case of Madras Industrial Investment Corporation Ltd., the assessee-company issued debentures in December, 1966, at a discount. The total discount on the issue of Rs. 1.5 crores amounted to Rs. 3 lakhs. For asst. yr. 1968-69, the assessee-company wrote off Rs. 12,500, out of the total discount of Rs. 3 lakhs, being proportionate amount of discount for the period of six months ending 30th June, 1967. The AO disallowed the claim but the AAC allowed it. The Tribunal held that the entire expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based on the accounting period concept. The paramount object of running a business is to earn profit. In order to ascertain the profit made by the business during a period, it is necessary that 'revenues' of the period should be matched with the costs (expenses) of that period. In other words, income made by the business during a period can be measured only when the revenue earned during a period is compared with the expenditure incurred for earning that revenue. However, in cases of mergers and acquisitions, companies sometimes undertake to defer revenue expenditure over future years, which brings in the concept of deferred tax accounting. Therefore, today it cannot be said that the concept of accrual is limited to one year. It is a principle of recognizing costs (expenses) against revenues or against the relevant time period in order to determine the periodic income. This principle is an important component of accrual basis of accounting. As stated above, the object of AS-22 is to reconcile the matching principle with the fair valuation principles. It may be noted that recognition, measurement and disclosure of various items of income, expenses, assets and liabilities is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opment by LMNK for use by assessee in its e-learning activities. The product thus obtained itself is not sold as such but was made use of in its e-learning activities. Hence, the products thus procured cannot form part of stock-in-trade. This being so the expenditure by way of development fee cannot fall in revenue field. Hence the assessee in a way resorted to amortization of the expenses over 3 years. 5. As already discussed in para C-3 above amortization of such expenditures is not permitted under the IT Act. Secondly, the said expenditure cannot be said as revenue expenditure for the reasons discussed in para D-4 above. Hence the claim of the assessee for deduction of Rs. 15,60,000 as development fee is disallowed." 29. The CIT(A) allowed the assessee's claim for the reasons given in para 4.2.3 of his order as under: "4.2.3 The arguments put forward by the learned Authorised Representatives have carefully been examined vis-a-vis the contentions raised by the AO in the assessment order. After carefully analyzing the facts relating to the appellant's case, I find that the appellant's proportionate claim of the development fee is of the same nature as the licence fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomer." 32. The AO rejected the explanation and added Rs. 39,68,208 for the reasons given in his order as under: "4. The system of accounting followed by the assessee was mercantile. In such method of accounting the receipt on sale needs to be re-recognized once a sales invoice was raised. Once a customer is billed, there can be no other treatment except to recognize the sale in the assessee's books. It is also a fact admitted by the assessee that payments were received on the basis of invoices. The non-recognition of a sale in these circumstances does not depend upon final approval of the customer, who has been making payments on the basis of invoices raised by assessee. The argument of the assessee that it needs to refund the amounts to customer under certain circumstances does not hold ground. In case a customer returns the products sold by the assessee and the assessee is required to refund the payments received from the customer, the assessee can book the same as sales returns. Hence, the system adopted by the assessee cannot be accepted and so the unrecognized income of Rs. 39,68,208 is now treated as income." 33. The CIT(A) deleted the addition and his order has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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