Case Law Details
DCIT Vs Hinduja Leyland Finance Ltd. (ITAT Chennai)
In the present case, entire expenditure has been incurred at the beginning of the sanctioning of term loan and also qualifies to be revenue expenditure. Therefore, in our considered view the decision of the Hon’ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) is squarely applicable to the facts of present case and hence, we are of the considered view that learned CIT(A) was right on allowing deduction towards various expenses as revenue expenditure.
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 there is no doubt of whatsoever that said expenditure are purely revenue expenditure, which does not give any enduring benefit or resulting in creation of asset either tangible or intangible. Therefore, these expenses are essentially revenue expenses and needs to be allowed when such expenditure has been incurred, but only requirement is whether said expenditure is incurred for the purpose of business or not. In this case, it is not a case of Assessing Officer that those expenditure are not revenue in nature and further, those expenditure are not incurred for the purpose of business of the assessee. Therefore, we are of the considered view that once Assessing Officer come to the conclusion that expenditure incurred by assessee are revenue in nature and further the same are incurred wholly and exclusively for the purpose of business, then the same needs to be allowed in the year of incurrence, irrespective of length of period for which finance is sanctioned. The learned CIT(A) after considering relevant facts has rightly held that expenditure incurred by the assessee are revenue in nature which does not give any enduring benefit to the assessee or resulting in creation of asset as tangible or intangible which needs to be allowed as deduction, when such expenditure has been incurred.
In this view of the matter and by respectfully following the decision of the Hon’ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra), we are of the considered view that learned CIT(A) was right in deleting additions made by the Assessing Officer towards disallowance of prepaid expenses and hence, we are inclined to uphold the findings of the learned CIT(A) and dismiss appeal filed by revenue.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the Revenue is directed against order of the learned CIT(A)-6, Chennai dated 02.08.2019 and pertains to assessment year 2016-17.
2. The Revenue has raised following grounds of appeal:-
“The Order of the learned Commissioner of income Tax Appeals) is contrary to the Law and facts of the case.
1. CIT(A) erred in deleting the addition on account of prepaid expenses of `43,99,74,573/- by holding that different treatment given in the books of account could not be a factor to deprive assessee from claiming entire expenditure as a deduction in the year of incurrence itself.
1.2. CIT(A) erred in relying the decision of Hon’ble Supreme Court decision in the case of Taparia Tours Ltd. v. JCIT,(2015) 372 ITR 605(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, marketing fees, sourcing expenses, C.V. business sourcing expenses, share issue expenses and other expenses etc. while lending long term finance. The assessee, in its books of account has classified these expenses as prepaid expenses and amortized over the period of loans upto assessment year 2015-16. However, for the first time, the assessee has filed revised return for assessment year 2016-17 and changed its method of accounting for treatment of expenses incurred for long term finance business and claimed that entire expenses was deductible in the year of payment. The case was taken for scrutiny assessment and during the course of assessment proceedings, the Assessing Officer was of the opinion that the assessee has changed its method of accounting for accounting of various expenses incurred in relation to loan processing and treated as revenue expenditure deductible in the year of payment . However, such expenditure has been treated as prepaid expenses upto assessment year 2015-16 and amortized over the period of loan by following matching concept principles of accounting. The Assessing Officer further was of the opinion that although assessee has accounted said expenses in the books of account as prepaid expenses upto A.Y.2015-16 but for the assessment year 2016-17 full deduction has been claimed on the ground that all expenditure are in the nature of revenue expenditure and same needs to be allowed in the year of payment. But, no explanation has been furnished to justify change of method of accounting for said expenses. Therefore, he was of the opinion that prepaid expenses incurred while lending long term finance should have spread over period of term loan and accordingly, rejected the claim of assessee towards deduction of prepaid expenses amounting to `43,99,74,573/- and added back to total income. The relevant findings of the Assessing Officer are as under:-
“The submission of assessee was considered. The assessee has not claimed the said prepaid expenses of Rs. 43,99,74,573/-. In the original return and subsequently claimed the prepaid expenses in the revised return. The pre-paid expenses pertains to stamp charges , processing fees or term loans, marketing fees, sourcing expenses, C.V. business, sourcing expenses Lap, share issue expenses and other expenses etc. the assessee has incurred these expenses while lending long term finance. . The assessee 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 sanctioned on accrual basis. The assessee offering the interest income in the year in which it was accrued. So the assessee should follow the same principle for the prepaid expenses also.
For example, the assessee giving long ter, loan during the year and repayment is five years. The assessee has not offering the entire five years period interest income altogether at a time in the year to which loan sanctioned. He is offering the interest income in particular year in which it is accrued i.e. offering of income over the period of five years. So whatever the prepaid expenses incurred by the assessee also should spread over for the period of five years.
So the prepaid expenses also should spread over the period of term loan as hat of interest income offered. So. the assessee claim is rejected.
The assessee has quoted the Hon’ble Supreme Court decision in the case of M/s. Taparia Tools Ltd. vs. JCIT special range-I, in support of his claim. The issue involved in the said case is amortization of interest expenditure pertains to the debentures, which is totally different from the assessee case. In view of this, the assessee claim is rejected.”
4. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the assessee submitted that expenses incurred while granting long term finance like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. was treated as prepaid expenses and amortized over the period of loan upto assessment year 2015-1 6, but from assessment year 2016-1 7, the same has been claimed as deductible in the year of payment, because expenditure incurred is in the nature of revenue expenditure which are deductible u/s. 37(1) of the Act. The assessee has also filed detailed written submissions which has been produced at para 4.1.1 on pages 3 to 8 of learned CIT(A) order. The sum and substance of arguments of the assessee before learned CIT(A) are that entries in books of account is not a relevant criteria to consider allowablity or otherwise of expenditure under the Income Tax Act, and what is relevant is whether expenditure is revenue in nature or capital in nature, which gives enduring benefit to the assessee. Unless the Assessing Officer makes a point that expenditure incurred is not allowable under the Act, then he cannot 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 accepted the fact that all expenditure are in the nature of revenue, but he has denied deduction only for the reason that assessee has changed its consistent method of accounting from the current financial year without assigning any reasons, ignoring the fact that there is no bar under the provisions of section 145 of the Act, to change the method of accounting followed by the assessee . It is well settled principle of law that assessee can change method of accounting followed for accounting its income and expenditure, but such method should be followed consistently in the subsequent years and further, assessee has to disclose effects on the financial statements on account of changes in method of accounting. The learned CIT(A) has discussed the issue at length in light of the decision of Hon’ble Supreme Court and came to the conclusion that expenses are essentially revenue expenses and the assessee has incurred those expenses while granting loans therefore, even if those expenses are classified as prepaid expenses, because those expenses are already incurred for impugned financial year, they are required to be allowed as deduction while computing income from business or profession. The relevant findings of the learned CIT(A) are as under:-
“4.1.2 The above submissions of the assessee are considered Carefully. The assessee is a non-banking financial company’ engaged in asset financing’. Its income if predominantly interest income received from its financing activities. Similarly, its expenses claimed are also interest payments and related expenses of financing. Apart from the interest expenses paid by assessee the company has also been incurring certain expenses while processing the loans. These expenses are in the form of stamp charges, processing fees or term loans, marketing fees sourcing expenses C . V. business. sourcing expenses Lap, share issue expenses and other expenses etc., incurred while lending the long term Finance. The assessee company, in its books of account has been classifying these expenses as prepaid expenses’ and claiming proportionately over the period of the loans. This is the practice of the assessee consistently followed up to financial year 2014-15 (A.Y.2015-16) in fact in the financial year 2015-16 relevant to the present AY 2016- I7 the asessee has followed the same method in its books of account and also filed its return of income . 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 computing the profits of the year, while the capita! expenses cannot be allowed. These capital expenses ere to be capitalized In the assessee’s books and appropriate depreciation is to be allowed while computing the profits of the year. All expenses incurred for the business, necessarily have to fell in one of these two categories. Before deciding whether a particular expenditure is a capital or revenue expenditure. one has to see its use and benefits. If the expenditure is resuIting in a creation ’of an asset, either tangible or intangible, and the benefits are enduring such expenses are to be classified as capitol expenses and only appropriate depreciation is to be allowed while computing the profits. On the other hand, where the expenses incurred are not resulting in creation of any asset and the benefits are rot enduring, the same are to be considered as revenue expenses and needs to be allowed as deductions while computing the profits of the year.
4.1.4 In the present case, the expenses categorized as ‘prepaid’expenses are on account of stamp charges, processing fees or term loans, marketing fees, sourcing expenses, C. V. business, sourcing expenses Lap, share issue expenses and other etc. incurred while lending the long term finance. All these expenses are not resulting in creation of any asset, nor resulting in any enduring benefits for the assessee. Therefore, these expenses are essentially revenue expenses in nature and needs to be allowed as deduction in the year of incurrence itself.
4.1.5 Further, the word pre-paid for the expenses incurred by assessee is a misnomer. Prepaid means payments made before incurrence of expenditure or paid before it was due for payment.
In the present case the expenditure has already been incurred. Hence the word prepaid will be inappropriate . sometimes these expenses also referred as deferred revenue expenses in accountancy meaning thereby that the expenses can be attributable for the period of transaction. However, under the provisions of IT Act either deferred revenue expenditure or prepaid expenses are not given any special treatment. Hence, one has to see whether these expenses are capital or revenue in nature; and whether these expenses are incurred for the business purposes. Therefore, any expenditure, which is revenue in nature and has actually been incurred for the business during the year, the same needs 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 1996-97 – Assessee company issued debentures for a period of 5 ears – Apart from option of half yearly periodical interest, debenture holders were given another option to accept one time upfront discounted interest payment – assessee was following mercantile system of accounting – It filed its return claiming deduction of Upfront interest charges paid during relevant year – However, said amount was shown as deferred revenue expenditure in the books of account to be written off over a period of five years – Assessing Officer thus allowed only 1/5th of payment as deduction. Whether since assessee made actual payment and course of action adopted by assessee was in consonance with provisions of Act, merely because a different treatment was given in books of account could not be a factor which would deprive assessee from claiming entire expenditure as a deduction – Held Yes [para 19] [in favour of assessee].
Kedarnath Jute Mfg. Co, Ltd. v. CIT (1971) (82 ITR 363 (SC) S. 37(1) of the Income Tax Act, 1961: Business expenditure – Allowablity of – assessment year 1955-56 – assessee company claimed deduction on account of sales tax determined by sales tax authorities to be payable on sales made by assessee during relevant assessment year – ITO disallowed claim on the ground that assessee had denied its liability to pay that amount and had made no provision in its books with regard to payment of that amount. – Whether when liability had even been quantified and a demand created by notice of notice during pendency of assessment proceedings before ITO and before finalization of assessment said liability remained intact even after assessee had taken appeals to higher authorities or courts which failed – Held, Yes – Whether therefore assessee maintaining accounts on mercantile system was fully justified in claiming deduction of sales tax amount which it was liable under law to pay during relevant assessment year – Held Yes.”
4.1.7 In the present case also, the entire expenditure has been incurred at the beginning of the sanctioning of the long term finance and also qualifies to be revenue expenses. Therefore, the above decision of lie Supreme Court of Taparia Tools Ltd – v. JCIT, [2015) 372 ITR 605 SC] is squarely applicable to the facts of the present case also. Therefore the same needs to be allowed as a deduction, irrespective of the treatment given in the books. 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.
4.1.9 As mentioned in the Foregoing paragraphs treatment of expenses in the books is not a bar for the purpose of claiming the expenses in the return as deductions. If the expenses are allowable as deductions in accordance with the provisions of the Act the same needs to be allowed as deduction, irrespective of the treatment of the expenses in the books, as held by the Hon’ble Supreme Court in the case of Taparia Tools Ltd. V. JClT, (2015] 372 ITR 605 SC) The Court held that a different treatment given in books of account could not be a factor to deprive assessee from claiming entire expenditure as a deduction . this judgement was rendered by Apex Court in the year 2015 by reversing decision of Bombay High Court . This judgement of the Apex Court as explained by the assesee has become a source of inspiration and support for the assessee to claim the entire prepaid expenses, as a deduction in the year of incurrence itself. Thus, there is a reason and justification, for the assessee to change its method of claiming the entire ‘pre- paid expenditure in the return. This is a reasonable and justified reason and needs to be permitted.
4.1.10 In view of the above reasons, I am of the considered opinion that the Assessing Officer is not justified in rejecting the assessee’s claim of deduction on the amounts shown as prepaid expenses in its books. The Assessing Officer is directed to allow the assesses claim of deduction of prepaid expenses of Rs.43,99, 74,573/-. The assessee succeeds in its appeal in this regard.”
6. The learned DR submitted that learned CIT(A) has erred in deleting additions on account of prepaid expenses by holding that different treatment given in books of account could not be a factor to deprive assessee from claiming entire expenditure as a deduction in the year of incurrence. The learned DR further submitted that learned CIT(A) has erred in relying on the decision of Hon’ble Supreme Court in the case of Taparia Tools Ltd. v. JCIT,(supra) without understanding the facts of those cases that the Hon’ble Supreme Court has rendered the decision in the context of issue of debentures and interest payment on said debentures. The learned DR further submitted that whenever debentures were issued income from them was utilized in the same year of issue and thus, entire interest payment claimed as deduction is allowable. In this case, assessee has recognized 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 long term finance and the same has been treated as prepaid expenses upto assessment year 201 5-16 and amortized over the period of loan, but same has been changed from current assessment year 2016-17 and claimed as deduction in the year of payment and said treatment was supported by decision of Hon’ble Supreme Court in the case of M/s.Taparia Tools Ltd. v. JCIT (supra), where it was categorically held that once 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, irrespective of treatment given in books of account. The learned CIT(A) after considering relevant facts has rightly deleted additions made by the Assessing Officer and his order should be upheld.
8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below along with various case laws cited by the learned counsel for the assessee. The facts with regard to impugned dispute are that assessee has incurred various expenditure which are in the nature of revenue expenditure in the course of its business of long term finance. It is also an undisputed fact that those expenditure has been treated as prepaid expenses in books of account upto the assessment year 2015-16 and amortized over the period of loan by following matching concept principles of accounting, because interest from loans has been recognized for the period of loan. However, from impugned assessment year, assessee has changed its method of accounting and claimed deduction towards various expenditure in the year of payment on the ground that those expenditure are in the nature of revenue expenditure and further the same are incurred wholly and exclusively for the purpose of business of the assessee.
9. We have given our thoughtful consideration to the facts and various reasons given by the Assessing Officer to disallow deduction claimed by the assessee towards prepaid expenses and find that expenditure incurred by the assessee like stamp charges, loan processing fee on term loan, marketing fees, sourcing expenses, share issue expenses etc. are in the nature of revenue expenditure, which does not give any enduring benefit to the assessee. In fact, the Assessing Officer has categorically admitted that expenditure incurred in connection with business was revenue in nature and are deductible 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, the same should be consistently followed without any changes. In case assessee changed its method of accounting to give differential treatment to income or expenditure which is beneficial to the assesse, then the same needs to be consistently followed in subsequent years and further, a disclosure needs to be given in Notes to account the effects in change in method of accounting on the financial statement of the relevant financial year. Therefore, in our considered view, the Assessing Officer cannot deny deductions for legitimate expenses incurred in the course of business of the assesse, if such expenses are otherwise allowable under the Act, for the simple reason that assessee has changed its method of accounting, more particularly when the assessee has explained reasons for change in method of accounting and such change is supported by the decision of Hon’ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra). If the Assessing Officer is not satisfied about correctness or completeness of the accounts of the assessee or whether the method of accounting provided under section 145 of the Act has not been regularly followed, then the Assessing Officer can make an assessment in the manner provided u/s.144 of the Act, but he cannot deny deductions for any expenditure which is otherwise allowable under the Act.
10. We further noted that it is well settled principle of law by decisions of various courts that any change in method of accounting is to bound to make some change in the taxable income more particularly in the year of change . However, merely because by virtue of change in method of accounting employed by assessee its taxable income stands reduced in a particular year can by no stretch of imagination be treated as a factor that said action was undertaken by with an intent to deliberately reduce the tax burden. In our considered view, the assessee is entitled to change its method of accounting as long as said change in method of accounting is bonafide. Section 145 of the Act, nowhere provides if assessee follows one method of accounting for many years, it cannot change the same in subsequent year. The assessee can very well change method of accounting to give better treatment to various income and expenses in books of account to give true and correct income, but such change should be disclosed in notes to account and effects on taxable income 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 201 5-16 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) – assessment year 1996-97 – Assessee company issued debentures for a period of 5 ears – Apart from option of half yearly periodical interest, debenture holders were given another option to accept one time upfront discounted interest payment – assessee was following mercantile system of accounting – It filed its return claiming deduction of Upfront interest charges paid during relevant year – However, said amount was shown as deferred revenue expenditure in the books of account to be written off over a period of five years – Assessing Officer thus allowed only 1/5th of payment as deduction. Whether since assessee made actual payment and course of action adopted by assessee was in consonance with provisions of Act, merely because a different treatment was given in books of account could not be a factor which would deprive assessee from claiming entire expenditure as a deduction – Held Yes [para 19][ in favour of assessee ].
Kedarnath Jute Mfg. Co, Ltd. v. CIT (1971) (82 ITR 363 (SC) S. 37(1) of the Income Tax Act, 1961: Business expenditure – Allowablity of – assessment year 1955-56 – assessee company claimed deduction on account of sales tax determined by sales tax authorities to be payable on sales made by assessee during relevant assessment year – ITO disallowed claim on the ground that assessee had denied its liability to pay that amount and had made no provision in its books with regard to payment of that amount. – Whether when liability had even been quantified and a demand created by notice of notice during pendency of assessment proceedings before ITO and before finalization of assessment said liability remained intact even after assessee had taken appeals to higher authorities or courts which failed – Held, Yes – Whether therefore assessee maintaining accounts on mercantile system was fully justified in claiming deduction of sales tax amount which it was liable under law to pay during relevant assessment year – Held Yes.”
11. In the present case, entire expenditure has been incurred at the beginning of the sanctioning of term loan and also qualifies to be revenue expenditure. Therefore, in our considered view the decision of the Hon’ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra) is squarely applicable to the facts of present case and hence, we are of the considered view that learned CIT(A) was right on allowing deduction towards 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 there is no doubt of whatsoever that said expenditure are purely revenue expenditure, which does not give any enduring benefit or resulting in creation of asset either tangible or intangible. Therefore, these expenses are essentially revenue expenses and needs to be allowed when such expenditure has been incurred, but only requirement is whether said expenditure is incurred for the purpose of business or not. In this case, it is not a case of Assessing Officer that those expenditure are not revenue in nature and further, those expenditure are not incurred for the purpose of business of the assessee. Therefore, we are of the considered view that once Assessing Officer come to the conclusion that expenditure incurred by assessee are revenue in nature and further the same are incurred wholly and exclusively for the purpose of business, then the same needs to be allowed in the year of incurrence, irrespective of length of period for which finance is sanctioned. The learned CIT(A) after considering relevant facts has rightly held that expenditure incurred by the assessee are revenue in nature which does not give any enduring benefit to the assessee or resulting in creation of asset as tangible or intangible which needs to be allowed as deduction, when such expenditure has been incurred.
13. In this view of the matter and by respectfully following the decision of the Hon’ble Supreme Court in the case of M/s. Taparia Tools Ltd. (supra), we are of the considered view that learned CIT(A) was right in deleting additions made by the Assessing Officer towards disallowance of prepaid expenses and hence, we are inclined to uphold the findings of the learned CIT(A) and dismiss appeal filed by revenue.
14. In the result, the appeal filed by Revenue is dismissed.
Order pronounced in the open court on 1st March, 2021.
