TMI Blog2011 (3) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... t - It is clear that the Assessing Officer had not gone into the question as to whether the expenditure incurred on leasehold improvements was capital or revenue in nature - assessee has treated part of the said expenditure as capital in nature and depreciation thereon was claimed - Commissioner of Income-tax (Appeals) accepted the stand of the assessee only after verification of the records and arriving at a finding of fact that the expenditure on the afore-said account was revenue in nature - Decided in favour of the assessee - 1820 and 1974 of 2010 and 1 and 5 of 2011 - - - Dated:- 30-3-2011 - SIKRI A. K., MEHTA M. L., JJ. JUDGMENT A. K. Sikri J.- 1. These four appeals are directed against the common order passed by the Income-tax Appellate Tribunal in respect of the same assessee and pertain to the assessment years 2001-02 and 2002-03. I. T. A. No. 1974 of 2010 and I. T. A. No. 5 of 2011 relate to the assessment year 2001-02 in which the following two questions of law are proposed : "(a) Whether the Income-tax Appellate Tribunal was correct in law in allowing the entire expenditure incurred by the assessee on advertisement under section 37(1) of the Act ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were cited by the assessee. The argument of the assessee did not convince the Commissioner of Income-tax (Appeals) who reiterated the view taken by the Assessing Officer namely the expenditure incurred needed to be amortized under section 35D(2) of the Act. The Commissioner of Income-tax (Appeals) referred to and relied upon the judgment of the Madras High Court in Madras Fertilizers Ltd. v. CIT [1994] 209 ITR 174 (Mad) and dismissed this ground taken by the assessee in its appeal. 5. In further appeal to the Tribunal, the assessee has succeeded. The Tribunal has held that section 35D of the Act was wrongly invoked as it had no applicability. The reason was simple, viz., the nature of expenditure does not fall under the ambit of preliminary expenditure as envisaged under section 35D of the Act. The Tribunal further opined that the advertisement expenditure had actually been incurred during the year and there is a nexus between the expenditure of the assessee's business and, there-fore, this expenditure was allowable under section 37 of the Act having regard to the principle laid down by this court in the case of CIT v. Salora International Ltd. [2009] 308 ITR 199 (Delhi). The T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The appellant, therefore, had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of Rs.12,500 over the relevant accounting period in question. In this connection, we agree with the reasoning and conclusion of the Madhya Pradesh High Court in the case of M. P. Financial Corporation v. CIT [1987] 165 ITR 765. The view that we have taken is also in conformity with the accounting practice of showing the discount in the 'discount on debentures account' which is written off over the period of the debentures." 7. She thus submitted that there may be circumstances when the expenditure incurred in a particular year can be spread over a period of enduring years. More particularly, when allowing the expenditure in one year may give a distorted picture of the profits of a particular year. She bolstered this submission in the present case on the ground that the assessee on the leasing business was itself spreading the income over the years keepi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drop, we have to consider the arguments of the Revenue predicated on the so-called enduring benefit which the expenditure on account of advertisement and publicity confers. This argument is based on the judgment of the apex court in Madras Industrial Investment Corporation Ltd. [1997] 225 ITR 802 (SC). In that case, the Supreme Court had referred to this "matching concept". It was held that ordinarily revenue expenditure incurred wholly or exclusively for the purpose of business, can be applied in the year in which it is incurred. However, the facts may justify spreading the expenditure and claiming it over a period of ensuing years, where allowing the entire expenditure in one year could give a very distorted picture of the profits of a particular year. One such instance was issuing debentures at discount. The Supreme Court was of the opinion that though in such cases the assessee had incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure the benefit over a number of years. There was a continuing benefit to the assessee of the company over the entire period and, therefore, the liability was to be spread over the period of debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility is a continuing liability which stretches over a period of 12 years. It is, there-fore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the asses-see has written it off in his books over a period of years. However, the facts may justify an assessee 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. CIT [1983] 144 ITR 474 (Cal), 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One such test which was specifically spelled out and may be relevant for our purpose was "when an expenditure is made not only once and for all, but with a view to bringing into existence of an advantage for which enduring benefit of a trade, the expenditure can be treated as capital in nature and not attributable to revenue". However, cautioned the court, it would be misleading to suppose that in all cases securing a benefit for business expenditure would be capital expenditure. The court added the caution in the following words (page 10) : ". . . There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars thereby allowing 1/3rd expenditure incurred in that particular year. The matter was taken up in appeal and before the Commissioner of Income-tax (Appeals), the assessee questioned the aforesaid approach of the Assessing Officer by contending that in the course of its business, the assessee enters in the loan agreements of hire purchase which agreements are required to be stamped in accordance with the provisions of the Indian Stamp Act. The stamp duty paid by the assessee is debited to the agreement stamping fee under the major head of "Rates and taxes" and is claimed as revenue expenditure. This entire process of getting stamped the agreements had been out-sourced by the assessee to the contract processing associates (CPA) and who are paid remuneration as well. Therefore, the expense towards stamping as well as commission paid to the agents is debited in whole in the year in which it is incurred and could not be treated as advertisement expense. 17. The Commissioner of Income-tax (Appeals) was unimpressed with this argument and found that the assessee was spreading over the income during the number of years that the financing is spread over and, therefore, expenditure on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. He thus treated the aforesaid expenditure of leasehold improvements as capital expenditure and allowed depreciation at 10 per cent. We may note here that the said expenditure of Rs. 1,52,24,029 was incurred by the respondent on account of laying of cables, electrical connections, installation OVC conduits, CATS, sanitary fittings, partitions and pin boards, civil works, brickwork, water proofing, flooring, false ceiling, wall finishes, toilet furnishings, paints on walls and ceilings, earthing, switches and receptacles, glazing on ventilators etc. 20. The Commissioner of Income-tax (Appeals) went into the expenses incurred on the aforesaid items details thereof were furnished at pages 282 to 336 in the paper book filed before him. He noted that the gross amount as per the bills was Rs. 1,92,01,959. Out of this, the assessee had himself capitalized Rs. 39,77,930 as furniture and claimed the balance amount of Rs. 1,52,24,028 as leasehold improvements which were revenue in nature. After verifying the nature of expenses from the bills and details produced by the assessee, the Commissioner of Income-tax (Appeals) was convinced with the justification provided by the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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