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TMI Blog2021 (3) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... 05(SC) which pertains to issue of debentures. 1.3 CIT(A) ought to have appreciated the fact that when the debentures were issued, the income from them was realized in the same year of issuance, thus the entire interest payment claimed as deduction is allowable. Whereas in the instant case, the income from the loans was not received during the financial year itself. Hence, this case is factually distinguishable from the case of Taparia Tools Ltd. v. JCIT(2015) 372 ITR 605(SC). 1.4. CIT(A) omitted to consider the fact that loans advanced which results in enduring benefit in the form of interest income to the assessee. Thus, the expenses incurred should be proportionately amortized across the years and deduction be allowed accordingly." 3. Brief facts of the case are that assessee company is engaged in the business of non-banking financial services and asset financing filed its return of income for assessment year 2016-17 on 28.11.2016 declaring total income of Rs. 2,52,54,10,110/-.The main source of income of the assessee is interest income from financing activities for which the assessee has incurred certain expenses including loan processing fee on term loan, stamp charges, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has followed the principle of matching concept for the prepaid expenses till AY 205-16. The assessee has amortized these pre expensesto the years equivalent to the repayment period term loan in the books of accounts and accordingly claimed the amortized portion of expenditure pertains to the particular financial year in return of income . This method was followed by the assessee consistently up to A.Y 2015-16. In the A.Y 2016-17 also assessee has amortized the said expenses in books of account and there is no change in the method of accounting of -repaid expenses. The same the method of accounting for prepaid expenses adopted by the assessee while filing the original return or income but have changed method of accounting for the prepaid expenses and filed the revised return on the basis of not following 'matching concept'. The assessee incurred those prepaid expenses while lending the long term loan. Naturally the expenses should have spread over the period of term loan. The assessee cannot claim all the prepaid expenses in the year In which it was incurred because the assessee has not offered the entire interest income of the term loan in the year in which it was sancti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallow claim of the assessee on the ground that assessee has changed its method of accounting to give differential treatment to the expenditure for impugned assessment year. The assessee has also taken support from decision of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. Vs JCIT (2015) 372 ITR 605 and argued that once an expenditure is incurred and made payment, the same needs to be allowed irrespective of treatment given in books of account. 5. The learned CIT(A) after considering relevant submissions of the assessee and also by following the decision of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) observed that treatment of expenses in the books is not a bar for the purpose of claiming expenses in the return as deduction, if the expenses are allowable as deduction in accordance with the provisions of the Act, irrespective of the treatment of expenses in the books. The learned CIT(A) further observed that it is not a case of the Assessing Officer that various expenditure incurred in connection with business of the assessee are capital in nature which gives enduring benefit to the assessee. In fact, the Assessing Officer has a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome . However, it was only in its revised return of A.Y.2016-17 the assessee for the first time, changed its stand and claimed the entire amount of such prepaid expenses as revenue expenditure and claimed as a deduction accordingly. The contentions of the assessee for changing its method of claiming the expenses are that though these expenses are classified as 'pre-paid expenses in its books, they are essentially revenue expenses in its nature and hence allowable as expenditure in the year of incurrence of expenditure itself, especially in view of the latest decision of the Apex Court in the case of 'Taparia Tools Ltd. vs. JCIT [2015] 372 ITR 605 rendered in the year 2015. On the other hand the contention of the Assessing Officer, while rejecting the assessee claim, is that there was no justification for changing the consistently followed method by the assessee; and the above expenses we to be spread over the period of the tenure of the loan. 4.1.3 Generally. the expenses incurred by an assessed during the course of conducting business , could be of two types. namely, (i) revenue expenses and (ii )capital expenses. The revenue expenses are to be allowed as deductions while com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds to be allowed as deduction, while computing the income of the year. 4,1.6 For this purpose, reliance is placed on the decision of the Hon'ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT. [2015) 372 ITR 605 (SC) where the Court held that once an expenditure is incurred and made the payments and the claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assessee, irrespective of the treatment given in books of account. similarly a sales tax Iiability determined by sales tax authorities to be payable on sales made by assessee during relevant accounting year is to be allowed as deduction in the relevant assessment year assessee during relevant accounting year, even if the assessee has disputed the demand and also has not made any such provision in the books of account maintained on mercantile basis, 'as held by the Apex Court in the case of Kedarnath Jute Mfg. Co, Ltd. v. CIT (1971) (82 ITR 363 (SC). The head-notes of the decisions are as under: "Taparia Tools Ltd. Vs.JCIT (2015) 372 ITR 605(SC): Section 36(1)(iii) of Income Tax Act, 1961 - Interest on borrowed capital (Upfront interest charges) - assessment year 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the classification of the expenses, as prepaid expenses in the books of the assessee, cannot be a bar for claiming these expenses as deduction in its totality while computing the taxable income of the year. 4.1.8 The next aspect to be examined is regarding the justification for changing the method of claiming the deduction. The assessee has been consistently practicing and following the above method of claiming the above prepaid expenses over the period of loan period all along and upto financial year 2014-15 (AY 2015-16) . It was only while filing revised return of A,.Y 2016-17, the assessee for first time changed its stand and claimed entire amount of such pre-paid expenses as revenue expenditure and claimed as deduction, Thus. there is a change in the method of claiming the expenditure. It is not in the method of accounting expenditure in its books. Hence, first of all, this cannot be regarded as a change in the method of accountancy followed by the assessee. The method of accountancy followed by the issessee continues to be the same as it was before, It was only with respect to the nature and extent of expenditure claimed while filing the return of income. 4.1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nized interest income over the period of loan and consequently, expenses incurred in connection with said loans needs to be amortized over the period of loan. The learned CIT(A) without appreciating these facts has deleted the additions made by the Assessing Officer . 7. The learned AR for the assessee, on the other hand, strongly supporting the order of learned CIT(A) submitted that learned CIT(A) has apprised the facts in right perspective of law and allowed deduction towards expenditure by holding that expenditure are in the nature of revenue and same are incurred wholly and exclusively for the purpose of business of the assessee. The learned AR further submitted that it is well settled principle of law by the decision of Hon'ble Supreme Court in the case of M/s. Kedarnath Jute Manufacturing Company Ltd. Vs CIT (1972) 3 SCC 252, where it was categorically held that entries in books of account is not determinative to decide allowablity of expenses or recognition of income and what is relevant is nature of expenses and relevance of such expenses in the business of the assessee . In this case, assessee has incurred various expenditure in connection with business activity of lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act, but he has disallowed the expenditure only on the sole basis of method of accounting followed by assessee in the books of account. According to the Assessing Officer, the assessee has followed matching concept principles of accounting to account those expenditure and accordingly, amortized the expenditure over the period of loans and further excess expenditure has been treated as prepaid expenses in books of account upto assessment year 2015-16 . Further, for the first time from the assessment year 2016-17, the assessee has changed its method of accounting to account those expenditure and claimed deduction in the year of incurrence, without assigning any reason or justification for change in method of accounting. We do not ourselves subscribe to the reasons given by the Assessing Officer to disallow expenditure incurred by assessee for the reason that income chargeable under the head profit and gains from business or profession or income from other sources shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assesse. Further, as per section 145(1) of the Act, whatever method of accounting followed by assesse, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the year on account of change of method of accounting. In this case, the assessee has changed its method of accounting to give better treatment to prepaid expenses shown in the financial statement upto assessment year 2015-16 and such change is supported by the decision of the Hon'ble Supreme Court, where it was categorically held that once an expenditure is incurred and made payment and claim of the assessee is in accordance with the provisions of the Act, the same needs to be allowed to the assesse, irrespective of treatment given in books of account . The Hon'ble Supreme Court in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd. (supra) held that entries in books of account are not determinative and or conclusive and the matter is to be examined on the touchstone of provisions contained in the Income Tax Act. The relevant findings of the Hon'ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) and the decision in the case of M/s.Kedarnath Jute Manufacturing Co.Ltd (supra) are as under:- " Taparia Tools Ltd. Vs.JCIT (2015) 372 ITR 605(SC): Section 36(1)(iii) of Income Tax Act, 1961 - Interest on borrowed capital (Upfront interest charges) - asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s various expenses as revenue expenditure. 12. Having said so, let us examine the issue in another perspective of whether expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are revenue expenditure or capital expenditure, which gives enduring benefit to the assessee . If you see nature of expenditure incurred by the assesse, all expenses are in the nature of revenue expenditure . In fact, the Assessing Officer never disputed the fact that those expenditure are in the nature of revenue expenditure. If expenses incurred by assessee are revenue in nature which does not give any enduring benefit to the assessee, then those expenditure should be allowed as deduction in the year of incurrence, irrespective of the fact that those expenditure are treated as prepaid expenses or deferred revenue expenditure in books of account of the assessee. If the expenditure incurred is capital in nature, then same needs to be capitalized in the books of account and depreciation should be allowed while computing profits of the year. In this case, if you see nature of expenditure incurred by the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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