04 September 2008
we are in air hostess training services, in the month of feb and march we did udaan activity in which we collect rough data from the school and colleges than we give the rough data to a IT company for converting in to final data from which we can call the student from april onwards from this we received the business which generate revenue in comming year. my query is that whethwe we can deferred the exp incurred in collecting the data in the month of feb & march.to the period in which we generate revenue from this activity. pls give some supporting evidence for ur reply of the same such as any AS, Section , Case Study , Guidance , so i can discussed with my boss
04 September 2008
You can do so, provided you are in a position to demonstrate the corelation. The amount paid/incurred can be treated as deferred to the period to which the benefit is expected to flow.
04 September 2008
pls give some supporting evidence for ur reply of the same such as any AS, Section , Case Study , Guidance , so i can discussed with my boss
04 September 2008
we are in air hostess training services, in the month of feb and march we did udaan activity in which we collect rough data from the school and colleges than we give the rough data to a IT company for converting in to final data from which we can call the student from april onwards from this we received the business which generate revenue in comming year. my query is that whethwe we can deferred the exp incurred in collecting the data in the month of feb & march.to the period in which we generate revenue from this activity. pls give some supporting evidence for ur reply of the same such as any AS, Section , Case Study , Guidance , so i can discussed with evidence
04 September 2008
Supreme Court in CIT vs Madras Industrial Investment Corporation Ltd (225 ITR 802). The issue in this case was whether discount on the issue of debentures is to be allowed as a deduction in the year of issue of the debentures or to be deferred proportionately over their life.
The court, while reiterating the aforesaid principle, held that 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 since allowing the entire expenditure in one year might give a distorted picture of the profits of a particular year.
The court reasoned that issuing debentures was an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years.
Since there was a continuing benefit to the assessee over the entire period of the debentures, the discount was allowable over the life of the debentures and not in the year of issue.
The aforesaid Supreme Court decision has been applied in several cases including that of the Bombay High Court in CIT vs Taparia Tools Ltd (260 ITR 102). The case related to allowability of the upfront one-time payment of interest made by the borrower to the lender at the time of issue of debentures. The debentures had been issued for a period of five years.
While allowing the deduction over the life of the debentures and not in the year of issue, the court held that the assessing officer (AO) is required to compute the income in accordance with the method of accounting regularly employed by the assessee and in appropriate cases he has to make variations where the system adopted by the assessee does not indicate the correct profits.
The court relied upon the “matching concept”, that is, that costs were to be matched with the revenue and, therefore, the assessee was required to claim expenses year-wise to the extent of income which can be said to have arisen from such expenses.
There have, however, been a few decisions which have considered and distinguished the decision of the Supreme Court on the issue.
The Hyderabad Tribunal in the Amar Raja Batteries vs ACIT (272 ITR 1 ITAT Suppl) case had an occasion to deal with an issue relating to allowability of advertisement expenses which had been written off over a period of five years in the books of account.
The Tribunal upheld the principle that the expenditure must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years.
It observed that the entries in the books did not clinch the issue either way and they did not determine the allowability or otherwise of the expenditure. The Supreme Court in the Madras Industrial Investments case was distinguished on the ground that the period for which the assessee had secured benefit in that case (that is, the debenture life) was specified. However, in the facts of the present case, the assessee had launched a new product and the period for which the assessee could be said to have secured the benefit by incurring the expenditure could not be reasonably estimated since the new product launched may fail to take off or may have a long life as a product.
As the number of years for which benefit can be said to have been derived could not be estimated, the “matching concept” also failed in the case. Thus the entire expenditure was held to be deductible in the first year.
The Bombay High Court in CIT vs Bhor Industries Ltd (264 ITR 180) had held that the entire expenditure incurred under a VRS scheme was allowable in the year in which it was incurred and could not be spread over the years in which it had been deferred by the assessee in its books of account.
The court distinguished its earlier decision in the Taparia Tools case on the basis that there was a finding in that case indicating distortion of profits and in that case the “matching concept” was required to be applied since there was an income stream over the life of the debentures.
The court held that in the present case VRS payments were made for making future savings in expenses and were not referable to any income-yielding asset. Implicitly therefore the “matching concept” could not be applied in the case in the absence of any revenue stream.
An assessee may not be able to rely upon this decision of the Bombay High Court for claiming a deduction for expenditure which is deferred in the books since the principles laid down by the Supreme Court were not found to be applicable in the facts of the case. VRS payments in any case are now allowable under Section 35DDA over a period of five years after the introduction of this section by the Finance Act, 2001 w.e.f. April 1, 2001.
Recent High Court ruling
Recently, the Madras High Court, in CIT vs Brilliant Tutorials Pvt. Ltd (292 ITR 399), gave a ruling on this issue. The assessee in this case had incurred advertisement expenditure, purportedly for courses which were offered by it. The fees which were collected in advance by the assessee were accounted and offered for tax over the duration of the course.
The advertisement expenditure had however been claimed in its entirety in the first year for tax purposes by the assessee, a claim which was not accepted by the assessing officer. It appears that the entire expenditure was also accounted as such in the first year and had not been deferred in the books of account by the assessee.
The Tribunal in its decision had negatived the contention raised by the department that the expenditure should be allowable over the period in which the receipts had been accounted in accordance with the “matching concept”.
It had distinguished the decision in Madras Industrial Investments case, cited by the department, on the basis that though the benefit of the expenditure would be available for a long period, the same could not be defined by any method.
The High Court, while affirming the decision of the Tribunal, further held that once the expenditure is of a revenue nature and incurred wholly and exclusively for business purposes, a further enquiry as to whether income has flowed thereon from the expenditure would not be a justifiable ground for rejection of the assessee’s claim and the entire expenditure was, therefore, deductible upfront under Section 37 of the I-T Act.
It may be noted that in this case the assessee had accounted and offered for tax the fees received by it over the duration of the course, a fact which apparently was not considered relevant by the court while allowing deduction of the expenditure.
The matter will reach finality only after the Supreme Court delivers a ruling on the issue. Till then an assessee could, by relying upon the aforesaid decisions, distinguish the Supreme Court ruling in the Madras Industrial Investments case and claim deduction of the entire expenditure in the first year in cases where it can be shown that the benefits, if quantifiable, cannot be estimated with reasonable certainty or that the period over which the benefits would be derived is incapable of any precise determination.
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