Birlasoft Ltd. Vs ACIT (ITAT Delhi)
Assessment of a software development company was completed u/s 143(3) making two key disallowances:-Lease Equalization Reserve (LER) & Bad Debts Written Off. On appeal CIT(A) upheld both disallowances.
Before the Tribunal, assessee raised two main issues-whether LER (created under Accounting Standard-19) is an allowable business expenditure & whether write-offs of certain advances & deposits can be treated as business loss under Section 37(1).
ARGUMENTS OF THE ASSESSEE
Lease Equalization Reserve (LER)
Lease rentals under operating leases were increasing year-on-year. As per Accounting Standard-19 (AS-19), rent must be accounted for on a straight-line basis over the lease term. Actual rent paid was higher than equalized rent; difference was shown as LER & claimed in the ITR. This treatment was consistently followed & accepted in prior & subsequent years. LER is not a “provision” or “contingent liability” but a timing adjustment to account for escalating rent. The reserve reflects the difference between actual rent paid & equalized rent charged in the Profit & Loss Account. Rent was actually paid through banking channels & was subject to TDS—proving the expenditure was genuine.
Bad Debts Written Off
As far as the nature of Expenses, the written-off items were business-related deposits and advances, such as Rent deposits for employee accommodations, Deposits with STPI, BSNL, VSNL & Amounts for IT asset rentals. Further, as these were not regular trade receivables, they were not claimed as bad debts u/s 36, but rather as business loss u/s 37(1). These expenses were part of normal business operations and became irrecoverable, hence allowable as revenue losses. Reliance was placed on the decision of Supreme Court in the case of Calcutta Co. Ltd.: 37 ITR 1 wherein the Hon’ble Court observed that it was not practical for law makers to specifically provide for allowance of all types of expenses that might be incurred during the course of business or profession and therefore, general commercial principles should also be borne in mind while computing the taxable income. Losses incidental to business, which are revenue in nature, such as loss of stock-in-trade on account of fire; embezzlement or theft of cash during the course of business, etc. were held to be admissible deduction in the computation of taxable income on the basis of common principles of accounting and commercial expediency.
