IT : Where assessee incurred certain expenditure towards research and development and in books of account treated one-third of expenditure as relating to assessment year 1992-93 and remaining two-third was written off in succeeding two financial years and further in assessment year 1992-93 claimed entire expenditure as deductible, assessee was entitled to claim entire expenditure as deduction in assessment year in question and it had to be allowed
IT : Where assessee claimed deduction of certain expenditure incurred on entertainment as attributable towards employees' participation, Tribunal was right in allowing 30 per cent of such expenditure
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[2013] 38 taxmann.com 113 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax, Meerut
v.
Modi Olivetti Ltd.*
SUNIL AMBWANI AND Surya Prakash Kesarwani, JJ.
IT Appeal No. 144 of 2005†
AUGUST 19, 2013
I. Section 37(1), read with section 35D, of the Income-tax Act, 1961 - Business expenditure - Year in which deductible [R & D expenses] - Assessment year 1992-93 - Assessee was engaged in business of manufacture and sale of computers - During year it incurred certain expenditure towards research and development - In books of account, assessee treated one - third of expenditure as relating to assessment year 1992-93 and remaining two - third was written off in succeeding two financial years - In assessment year 1992-93, assessee claimed entire expenditure as deductible on plea that it was of revenue in nature and incurred during previous year - Assessing Officer held that expenditure was deductible only under section 35D and accordingly disallowed claim of deduction - Commissioner (Appeals) held that expenditure was revenue in nature and directed Assessing Officer to allow deduction to extent of one - third of expenditure in assessment year in question - Whether provisions of section 35D had no application to instant case - Held, yes - Whether since expenditure incurred by assessee was of revenue nature and had been spent wholly and exclusively for purposes of business, assessee was entitled to claim entire expenditure as deduction in assessment year in question and it had to be allowed - Held, yes [Paras 8 to 11] [In favour of assessee]
II. Section 37(2) of the Income-tax Act, 1961 - Entertainment ependiture [Expenses incurred on entertainment] - Assessment year 1992-93 - Assessee claimed deduction of certain expenditure incurred on entertainment as attributable towards employees participation - Tribunal following decision of Delhi High Court rendered in case of CIT v. EXPO Machinery Ltd. [1991] 190 ITR 576/59 Taxman 182 allowed 30 per cent of expenditure - Whether Tribunal was justified in its view - Held, yes [Para 3] [In favour of assessee]
FACTS-I
| ■ | The assessee was engaged in the business of manufacture and sale of computers. During the previous year it incurred certain expenditure towards research and development. This expenditure represented salary of employees of system development division and other expenses. In the books of account, the assessee treated one-third of the expenditure as relating to the previous year relevant for the assessment year 1992-93 and the remaining two-third was written off in the succeeding two financial years on the plea that the benefit from the research and development was likely to flow for three years and, therefore, the expenditure was also spread over for the period for which it derived benefit. In the assessment year 1992-93, the assessee claimed the entire expenditure as deductible on the plea that it was of revenue in nature and incurred during the previous year. | |
| ■ | The Assessing Officer held that the amount was paid only as salary to employees. The system which they developed was not specified nor the details of research and development were given. The expenditure on research and development or other expenditure which resulted in a benefit in the capital field was deductible only under section 35D. He, therefore, disallowed the claim for deduction of expenditure in question. | |
| ■ | On appeal, the Commissioner (Appeals) held that the expenditure was revenue in nature. The treatment given by the assessee in its books of account of this expenditure, i.e., claiming one-third of it in three years was the right treatment and hence it was liable to be allowed as such. He, therefore, directed the Assessing Officer to allow deduction to the extent of one-third of the expenditure. | |
| ■ | On cross appeals, the Tribunal held that the entire expenditure incurred by the assessee was allowable in the assessment year 1992-93. | |
| ■ | On appeal to High Court: |
HELD
| ■ | The contention of the revenue as to applicability of section 35D is baseless. Section 35D provides for amortization of certain preliminary expenses with respect to preparation of feasibility report, preparation of project report, conducting market survey or any other survey necessary for the business of the assessee, legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee and legal charges for drafting the memorandum and articles of association of the company, etc. before the commencement of his business or after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit. However, section 35D has no application on the facts of the instant case. [Para 8] | |
| ■ | Now coming to the issue of allowing merely one-third expenditure in the assessment year in question and leaving the rest for the next two years as held by Commissioner (Appeals), such deferment in respect of revenue expenditure is wholly unknown under the Income-tax Act. Under the Act tax is exigible on the 'real income', which means actual income received or accrued to the assessee. The treatment given by the assessee in its books of account is not conclusive. The determination of income-tax has to be made in accordance with the provisions of the Act. The expenditure is of two kinds, namely, capital expenditure and revenue expenditure. In the instant case, there is no dispute that the expenditure incurred by the assessee is of revenue nature. So it has to be allowed as deduction while computing the income of the year in which the expenditure was incurred or crystallized in accordance with the system of account employed by the assessee. [Para 9] | |
| ■ | The Commissioner (Appeals) as well as the Tribunal has recorded the findings of fact that the expenditure incurred by the assessee was of revenue nature. As per provision of section 37 any expenditure not being expenditure of the nature described under sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly or 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'. Once a finding of fact has been recorded that the expenditure is of revenue nature and has been spent wholly and exclusively for the purposes of the business, the same is allowable expenditure and has to be deducted while computing the total income. [Para 10] | |
| ■ | In view of the above facts, the entire expenditure incurred by the assessee being revenue in nature was allowable and the assessee was entitled to claim the entire expenditure as deduction. Therefore, the order of the Tribunal deserved to be upheld. [Para 11] |
CASE REVIEW-I
Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) (para 11); Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 11) followed.
CASES REFERRED TO
Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) (para 9) and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) (para 10).
D. Awasthi for the Appellant.
ORDER
Surya Prakash Kesarwani, J. - This appeal has been filed by the Revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'Act') relating to the assessment year 1992-93. The appeal was admitted vide order dated 24.9.2007 on the following substantial questions of law : —
| "(1) | Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance of Rs.97,867/- under the head entertainment expenses following the ratio lf law laid down by the Hon'ble Delhi High Court in case of Expo Machinery Ltd. reported in 190 ITR page 876 ? | |
| (2) | Whether, on the facts and in the circumstances of the case the Tribunal have erred in law in deleting the disallowance's of Rs.31,77,716/- under the head "Product Development" ? |
2. We have heard Sri Dhanajnay Awasthi, learned counsel for the appellant and perused the records. No one appears for the respondent-assessee despite service of notice by registered post. We have perused the office report dated 18.1.2013 and 22.3.2013 and find the service of notice on the respondent to be sufficient.
Question No.1
3. We find that the issue with regard to entertainment expenses has been settled by the Tribunal in the own case of the assessee for assessment year 1990-91. We have also dismissed the appeal of the Revenue being Income Tax Appeal No. 143 of 2005 relating to the assessment year 1991-92 on similar question. In paragraph 3 of the impugned order the Tribunal has recorded the following findings:—
"Before us, it is not in dispute that similar issue arose for consideration in Assessee's own case for A.Y. 90-91 and this Tribunal following the decision of the Delhi High Court in the case of Expo Machinery Ltd. (Supra) was pleased to allow 30% of expenses incurred on entertainment as attributable towards employees participation. Facts and circumstances being identical, there is no compelling reason to take a different view in this assessment year. The order of the CIT(A) is therefore confirmed and this ground of appeal by the Revenue is dismissed."
4. We find no error in the impugned order of the Tribunal in view of facts and circumstances of the case and accordingly the question no. 1 is answered in negative i.e. in favour of the assessee and against the revenue.
Question No. 2
5. Briefly stated the facts of the present case are that the assessee-respondent is engaged in the business of manufacture and sale of computers and incurred expenses for a sum of Rs.37,77,716 towards research and development. This sum represented salary of employees of system development division and other expenses. These employees, according to the assessee were instrumental in developing product for newer application in the same line of business. In the books of accounts the assessee treated 1/3rd of this expense as relating to the previous year relevant for the A.Y. 1992- 93 and the remaining 2/3rd expense was written off at 1/3rd each in the succeeding two financial years. According to the assessee the benefit from the research and development was likely to flow for three years and therefore the expenditure on such research and development was also spread over for the period for which the assessee derived benefit. The assessee in the return of income however, claimed the entire expenditure as deductible since they were of revenue in nature and incurred during the previous year. The AO disallowed the claim for deduction by observing that the amount was paid only as salary to employees. The system which they developed, was not specified nor the details of research and development were given. According to the AO the expenditure on research and development or other expenditure which results in a benefit in the capital field, only deduction under Section 35-D of the Act was to be allowed. The AO therefore disallowed the claim for deduction of Rs.31,77,716/- and this sum was added to the total income. On appeal by the assessee, the CIT(A) was of the view that the expenditure was revenue in nature. He, however, held that the treatment given by the assessee by treating only 1/3rd of this expenditure as attributable to this year was to be allowed. He directed the AO to allow deduction to the extent of 1/3rd of the expense. In paragraph 9, the CIT(A) has given details of expenses which relates to salary, staff welfare, P.F., communication expenses, travel and conveyances, rent, printing and stationery, repairs and maintenance and other miscellaneous expenses which were incurred for development of new products. He further observed in paragraph 9.3 that the assessee had a product development division whose main function is to develop new products and vendors in the line of business carried on by him and improve the manufacture of existing products. However, the CIT(A) took the view that the treatment given by the assessee in its books of account to this expenditure i.e. claiming 1/3rd of it in three years is the right treatment and hence, it is liable to be allowed as such. The disallowance to the extent of 2/3rd of the expenses was confirmed by the CIT(A).
6. Aggrieved by the order of the CIT(A) allowing expense to the extent of 1/3rd the Revenue filed an appeal before the ITAT. The assessee has also filed an appeal before the ITAT, aggrieved by the order of the CIT(A) allowing the deduction only to the extent of 1/3rd and not the entire expenses. The ITAT allowed the appeal of the respondent - assessee and dismissed the appeal of the revenue by the impugned order.
7. In the impugned order the ITAT has discussed both the factual as well as legal aspect.
8. We find that the contention of the revenue as to applicability of Section 35D of the Act is baseless. Section 35D of the Act provides for amortisation of certain preliminary expenses with respect to preparation of feasibility report, preparation of project report, conducting market survey or any other survey necessary for the business of the assessee, legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee and legal charges for drafting the memorandum and articles of association of the company etc., before the commencement of his business or after the commencement of his business, in connection with the extension of his undertaking or in connection with his setting up a new unit. In our opinion, Section 35-D has no application on the facts of the present case. The assessing officer has not recorded any finding based on any material whatsoever in support of his observation as to applicability of Section 35D of the Act. The CIT(A)has also not found any relevance of Section 35D of the Act on the facts of the present case. The ITAT has observed in paragraph 35 of the impugned order that the assessing officer has made a vague reference to the provision of Section 35D of the Act, while the expenditure in question cannot be said to be one falling within the provision of Section 35D of the Act. Thus, the contention of the revenue that the expenditure in question amounting to Rs.31,77,716/- incurred by the assessee on product development shall be governed by provision of Section 35D of the Act is without substance and liable to be rejected.
9. Now coming to the issue of allowing merely 1/3rd expenses in the assessment year in question and leaving the rest for the next two years as held by CIT(A), we find that such deferment in respect of revenue expenditure is wholly unknown under the Income Tax Act. Under the Act, tax is exigible on the "real income" which means actual income received or accrued to the assessee. The treatment given by the assessee in its books of account is not conclusive. The determination of income tax has to be made in accordance with the provisions of the Act. The expenditure are of two kinds, namely, capital expenditure and revenue expenditure. In the facts of the present case there is no dispute that the expenditure incurred by the assessee is of revenue nature. So it has to be allowed as deduction while computing the income of the year in which the expenditure was incurred or crystallized in accordance with the system of account employed by the assessee. In Empire Jute Co. Ltd v. CIT [1980] 124 ITR 1/3 Taxman 69 (SC) it was held as under :—
'The decided cases have, from time to time, evolved various tests distinguishing between capital and revenue expenditure but no test is paramount or conclusive. There is no all embracing formula which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts keeping in mind the broad picture of the whole operation in respect of which the expenditure has been incurred. But a few tests formulated by the court may be referred to as they might help to arrive at a correct decision of the controversy between the parties. One celebrated test is that laid down by Lord Cave, L.C. in British Insulated and Helsby Cables Ltd. v. Atherton(1) where the learned Law Lord stated: "When an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital." This test, as the parenthetical clause shows, must yield where there are special circumstances leading to a contrary conclusion and, as pointed out by Lord Radcliffe in Commissioner of Taxes v. Nechanga Consolidated Copper Mines Ltd.,(1) it would be misleading to suppose that in all cases, securing a benefit for the business would be prima facie capital expenditure "so long as the benefit is not so transitory as to have no endurance at all." 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 the management and conduct of the assesse's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.'
10. The CIT(A) as well as the ITAT in paragraph 13 of the impugned order has recorded the findings of fact that the expenditure incurred by the assessee was of revenue nature. As per provision of Section 37 of the Act, any expenditure not being expenditure of the nature described under Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly or exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head of "profits and gains of business or profession". Once a finding of fact has been recorded that the expenditure is of revenue nature and has been spent wholly and exclusively for the purposes of the business, the same is allowable expenditure and has to be deducted while computing the total income. In the case of the Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) the Court held as under:—
"Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter."
11. In view of the above facts and legal position discussed by us, we find no error in the finding recorded by the ITAT that the entire expenditure incurred by the assessee being revenue in nature was allowable and the assessee was entitled to claim the entire expenditure as deduction. Accordingly the question no. 2 is answered in negative i.e. in favour of the assessee and against the revenue.
12. Both the questions are answered in negative i.e. in favour of the assessee and against the revenue. In result the appeal fails and is hereby dismissed. However, there shall be no order as to cost.
S.K.J. Regards
Prarthana Jalan
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