TaxTMI 
TaxTMI 
2013 (8) TMI 562
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....e Tribunal have erred in law in deleting the ddisallowance's of Rs.49,37,042/- on account of provisions for royalty, ignoring the provisions of Section 40(a)(i) of the Income Tax Act, 1961 ? (4) Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in confirming the order of the CIT (A) in deletion of Rs.82,352/- out of entertainment expenses ? Question No.1 2. The respondent-assessee is a company engaged in the business of manufacturing of Mini Computers / Micro Processor based systems etc. and filed the return of income for Assessment Year-1991-92 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 with respect to launching of a new product. In the books of accounts he had capitalized the entire amount and out of that debited a sum of Rs. 29,51,909/- to the profit and loss account claiming the same as deduction. In the computation of income the assessee added back Rs.29,51,909/- to the profit as per profit and loss account and claimed deduction of the entire sum of Rs.77,16,120/- as advertisement expenses. The Assessing Officer rejected the claim on the ground t....
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....penditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital filed or revenue filed so as to decide the exact nature of the said expenditure and allowability of the same under the Income-tax Act. As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered as different from the one followed for the purpose of computing the total income under the Income Tax Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. V. CIT [1971] 82 ITR 363, the 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, which are not decisive or conclusive in this regard. The expenditure in question was incurred towards advertisements in launching of a new product and was revenue in nature. The action of the revenue authorities in treating the same as capital expenditure and disallowing the claim for deduction was ....
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.... 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 expenditure" in its books of account and according to the Revenue authorities the said expenditure incurred on Advertisement would result in benefits which will accrue to the Assessee over a period of time beyond the previous year. 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. In this regard, we find that the assessee has treated the said expenditure as "deferred revenue expenditure" considering ....
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....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 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 considering the nature of the impugned expenditure as its allowability of the same under the provisions of the Income -Tax Act. 11. "The Honourable Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT [1980] 124 ITR 1 has observed as under: ' There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, 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 nature of the adv....
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....ndings recorded by the ITAT. In the case of CIT Vs. Woodward Governor India Private Limited [(2009) 13 SCC 1 Page 1] vide paragraph no. 24, 25 and 33, the Hon'ble Supreme Court has held that Section 37 enjoins that any expenditure not being expenditure of the nature described in Sections 30 to 36 laid out or expended wholly and exclusively for the purposes of business or profession should be allowed in computing the income chargeable under the head "profits and gains of business". The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of "12 months". In the case of Commissioner of Income Tax, Mumbai Versus Walfort Share and Stock Brokers Private Limited (2010) 8 SCC 137 para 38, Hon'ble Supreme Court has held that the scheme of Sections 30 to 37 is that profits and gains must be computed subject to certain allowance for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred in business. A deduction for expenditure for loss which is not within the prohibition must be allowed if it is on the facts of the case ....
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....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. To reach to the aforesaid finding, the ITAT applied the principles of law settled by the Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. Vs. CIT 245 ITR 428 (SC) and the judgment of Privy Council in the case of Commissioner of Inland Revenue Vs. Mitsubishi Motors New Zealand Ltd.(222 ITR 697 PC). The ITAT has recorded the following findings in paragraph 22 : - 22. The basis of computation of the warranty for the AY 90-91was 1.5% of the total cost of sales. In the AY 91-92, which is the year in dispute in the present appeal, the provision has been made @ 1.5% of the cost of sales in respect of goods sold with the country and 5% on export sales. The assessee also wrote back the provision made for the AY 90-91, from the estimated liability for AY 91-92 and the difference alone is sought to be claimed as a deduction while determining the income for Assessment Year 91-92. Even for the subsequent A.Y. the provision on account of liability under warranty has been made on a scienti....
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.... laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession. 40A. Expenses or payment not deductible in certain circumstances - (7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in Clause (a) shall apply in relation to: (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year; (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely: (1) the provision is made....
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....ured only by using a substantial degree of estimation. A provision is recognized when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognized. 23. 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. A past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It is only those obligations arising from past events existing independently of the future conduct of the business of the enterprise that is recognized as provision. For a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation. Where there are a number of obligations (e.g. product warranties or similar contracts) the probabili....
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..... The Assessing Officer rejected the explanation of the assessee. The provision for royalty was made at Rs.47,70,089/- which is exclusive R&D Cess of Rs.1,66,953/-. The aggregate of both the amount is Rs.49,37,042/- is shown in the balance sheet. The CIT(A) upheld the addition made by the Assessing Officer. The ITAT found that in the books of account relevant to the Assessment Year 1991-92, the assessee had made a provision for royalty payable for the period 1.1.1990 to 31.3.1991 at Rs.47,70,089/- and R&D Cess at Rs.1,66,953/-. The tax deductible on this payment amounting to Rs.14,31,028/- was duly shown as deduction in the books of account on 31.3.1991. Later on, the actual amount payable to the collaborator in terms of the collaboration agreement was worked out at Rs.44,77,151/- and R&D cess at Rs.1,56,700/-. This amount was paid in the previous year relevant to the A.Y. 1992-93 i.e. in November, 1991. At the time of making payment, tax deductible on this payment namely a sum of Rs. 13,43,145/- was duly deposited to the credit of the Central Government within the time specified under the provisions to Chapter XVII B of the Act. After considering the facts of the case and the prov....
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....ning. 15. In the present case the tax has been deducted and thus in that event the provision of Section 40(a)(i) stands satisfied. This provision of Section 40(a)(i) was substituted by Finance Act (No.2), of 2004 which puts the condition that where tax is deductible at source under Chapter XVII B, and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-Section (1) of Section 200, then the royalty shall not be deducted in computing the income chargeable under the head "Profits and gains of business of profession". Thus, subsequent amendment making specific provision of deduction and payment thereof in the previous year or in the subsequent year was not available under Section 40(a)(i) as it existed during the relevant assessment year i.e. Assessment Year 1991-92. For convenience of interpretation the provision of Section 40(a)(i) as existed at the relevant point of time i.e. during the assessment year 1991-92 and as substituted by Finance ( No.2) Act , 2004 are reproduced below : - Section 40(a)(i) as existed during the A.Y. 1991-92:- 40. Notwithstanding anythi....
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....lause (vi) of sub-section (1) of section 9; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of Section 9." 16. In view of the discussion made above we are of the view that since the assessee has deducted the tax during the previous year relevant to the assessment year in question i.e. A.Y. 1991-92, the conditionality of Section 40(a)(i) stands satisfied. The finding of the Assessing Officer that the royalty as claimed by the Assessee-Respondent was unascertained liability, has been found to be incorrect by the ITAT. Under the circumstances, we find no error in the impugned order of the ITAT. In result the Question No. 3 is answered in negative i.e. in favour of the assessee and against the revenue. Question No.4 17. With regard to the dis-allowance of entertainment expenses, the learned counsel for the appellant has submitted that in view of the Section 37(2A) of the Act and the finding recorded by the Assessing Officer, a sum of Rs.82,352/- was not allowed towards entertainment expenses and the CIT (A) has erred in directing to allow it. In this regard the findings recorded by the ITAT in paragraph 43 of the ....