Income Tax Appellate Tribunal - Delhi
Silicon Graphics Systems (I) (P) Ltd. vs Deputy Commissioner Of Income Tax on 8 December, 2006
Equivalent citations: (2007)106TTJ(DELHI)1153
ORDER
Deepak R. Shah, A.M.
1. These cross-appeals by assessee and by Revenue are directed against order of learned CIT(A)-XI, New Delhi, dt. 25th March, 2003.
2. We shall first deal with appeal of the assessee. The assessee company is carrying on the business of developing, manufacturing, selling and servicing computer system and software. It also renders technical assistance and services for use outside India in connection with the use, purchase, sale, import, export, lease or distribution, licence, design, manufacture of any computer machines, etc. It also provides consultancy services outside India related to the preparation and maintenance of accounting, strategical, scientific information and reports, data processing programming, systems analysis and machine services for solving and aiding commercial, industrial, scientific and research problems, and for all other related business. During the year, the assessee incurred an expenditure of Rs. 55,64,715 on advertisement and publicity, trade shows and other miscellaneous sales promotion items. The AO held that as done in the preceding year, the expenses are in the nature of deferred revenue expenditure. The expenses impart an enduring benefit to the assessee. Since the benefit would accrue for a long period of time, the expenditure should be allowed in a deferred manner. Though the amount has been allowed by learned CIT(A) for asst. yr. 1997-98, since the Revenue has filed further appeal to the Tribunal, only l/5th of the total claim is allowable as allowed in the earlier year. 2.1 The learned CIT(A) held that the expenses are allowable as revenue expenditure as allowed by him in earlier years. The allowability will depend upon the genuineness of the claim. He accordingly asked the assessee to furnish the details of such expenses. Learned CIT(A) noticed that following expenses are pertaining to earlier years:
Rs.
30-9-1997 59,625
October, 1997 4,99,734
24-2-1998 1,68,750
27-2-1998 25,936
6-3-1998 3,29,560
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Total 14,17,445
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He also held that vouchers to the extent of Rs. 44,569 were not produced. He also held that the expenses amounting to Rs. 50,635, it is a hotel bill wherein it is mentioned that the same is to be charged to a client account. He accordingly disallowed all those expenses. The assessee is in further appeal before us.
2.2 The learned Counsel for the assessee, Shri Piyush Kaushik, submitted that expenses worth Rs. 10,83,665 disallowed by the CIT(A) were in fact not claimed as a deduction in current year and therefore, the disallowance on this account is totally unwarranted, The expenses worth Rs. 333,840 disallowed by the CIT(A) have crystallized during the current year and are allowable as a deduction for the current year. The sums of Rs. 44,569 and Rs. 50,635 were incurred in connection with the business of the appellant and have been disallowed by the CIT(A) without confronting the assessee and without providing any opportunity to the assessee to submit its explanation. He invited our attention to pp. 95 and 97 of the paper book. On p. 97 of the paper book is the ledger account of trade show expenses. As sum of Rs. 10,97,532 is credited to such account, being the provision for expenses made for earlier year and reversed during the current year. Thus, he submitted that the expenses were never claimed to the extent of Rs. 10,97,532 as the same are claimed as expenditure in earlier year for which the bills were received during the year and paid during the year. As regards the expenses to the extent of Rs. 3,33,840, he submitted that the expenses crystallized during the year. The same is on account of payment due to M/s Anil Packaging Industries for their bills dt. 24th Feb., 1998 and 10th March, 1998. There was some dispute with M/s Anil Packaging Industries regarding printing of multicolour pamphlets. Due to the same, the assessee never made a provision for such liability payable to M/s Anil Packaging Industries. The dispute was resolved in the month of June, 1998, and was accordingly accounted for. The liability is contractual liability and not a statutory liability. The contractual liability is payable when it is crystallized unlike the statutory liability. For this purpose, he relied upon the decision of Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT , wherein it was held that if any liability though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years, (it) cannot be disallowed as a deduction merely on the basis that the accounts are maintained on mercantile basis. He accordingly pleaded that the amount of Rs. 10,83,605 and the sum of Rs. 3,38,840 be deleted from disallowance. As regards sum of Rs. 44,569, learned CIT(A) did not confront the assessee before disallowing such expenses. As regards the sum of Rs. 50,635, the counsel for assessee submitted that the amount is payable to Hotel Oberoi in respect of conference organized for 20 persons. A bill has been raised by Hotel Oberoi. Though it is mentioned that the same is to be charged to the client account, the same was not charged. At first instance, the liability was that of the assessee. Since the same has been paid by the assessee, it is allowable as business expenditure. If. ultimately the charges are recovered, the same will go to reduce the expenses in subsequent years, However, so long as the same is borne by the assessee, the same is allowable expenditure.
2.3 The learned Departmental Representative, on the other hand, submitted that the issue needs to be considered along with ground raised by Revenue in this regard. It is the contention of AO that having received benefit of enduring nature, such expenses cannot be allowed in entirety. Though the AO has not examined the liability or otherwise of the expenses, learned CIT(A) wrongly proceeded to examine the same without asking the AO to furnish any record thereof. She further submitted that for earlier years the expenses were treated as deferred revenue expenditure by the AO. The Revenue has also preferred an appeal against order of learned CIT(A) for asst. yr. 1999-2000, wherein it is contended that such expenditure should be treated as deferred revenue expenditure and only l/5th of such expenditure is allowable. There is no grievance if only l/5th of expenditure is allowed but if the expenditure will be held as allowable in its entirety, the matter needs to be sent back to the AO for verification.
2.4 We have considered rival submissions. There is no concept of deferred revenue expenditure known to the IT Act. The expenditure is either revenue expenditure or capital expenditure. The allowability of the same is to be looked into as per provisions of Sections 28 to 44 of the IT Act. The expenditures were treated as deferred revenue expenditure by the AO and 1/5th of such expenditure were allowed. At first instance, it can be said that having satisfied himself that the expenditures are genuine and allowable as such, the AO allowed 1/5th of the same. Since the expenditures are in relation to advertisement, publicity, trade shows, etc., it can be held that the same are revenue in nature. Such expenditures do not bring any capital asset into existence. Thus, the same were rightly treated as revenue expenditures by learned CIT(A). It is also true that the CIT(A) is competent to examine the allowability or otherwise of such expenditure. When the details were called for, the assessee has submitted that the sum of Rs. 10,83,605 out of such expenses was never claimed as expenses as the same were claimed in earlier years. The provision made in this regard for earlier year is now reversed. Thus, there is no question of any disallowance of such expenditure. We accordingly delete the disallowance of Rs. 10,83,605.
2.5 As regards allowability of a sum of Rs. 3,33,840, it was always contended before learned CIT(A) that the expenditures were disputed and since the liability crystallized during the year, the same were claimed. In our opinion, the claim of assessee could not have been dismissed holding the same as prior period expenditure. Any liability though relating to earlier year depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the year, cannot be disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it related to a transaction of the previous year, The expenses are contractual in nature and not statutory payments. Thus, the same will be allowed as liability in the year in which such liability crystallizes. Thus, the expenditures which were earlier in dispute and in view of the fact that the dispute is settled during the year under consideration, the same are allowable in such year. We accordingly delete the disallowance of Rs. 3,33,840.
2.6 As regards expenditure of Rs. 44,569, learned CIT(A) is not justified in disallowing the same without asking the assessee to furnish the vouchers for the same. It is to be noted that the assessee has specifically mentioned in his letter dt. 21st March, 2003 that the vouchers in respect of small items are not submitted and even if required, will be submitted on being asked to do so. There is nothing on record to suggest that learned CIT(A) asked for such vouchers of small amounts ranging between Rs. 6,367 to Rs. 14,294. There is nothing on record to suggest that the assessee has denied or shown any unwillingness to submit such vouchers. The total expenses under this head are more than Rs. 55 lacs. In fact, the ledger accounts contained details of all the expenses. It is also seen that even the expenses of Rs. 11,179 forming part of total sum of Rs. 44,569 disallowed by learned CIT(A) do not even form part of the expenses accounted under the head "Trade shows". Thus, learned CIT(A) has mechanically disallowed the expenses for want of vouchers without asking the assessee to furnish the same. Since the expenses are mentioned in detailed accounts filed and it is also fact that such accounts are duly audited as per Section 44AB of the Act, the same are allowable as such. We accordingly delete the disallowance of Rs. 44,569.
2.7 As regards the expenses amounting to Rs. 50,635, the expenses were ' incurred when the trade shows were organized. The assessee through trade shows reaches to its customers. During such trade shows a meeting was organized in the hotel and expenses relate to such meeting organized. Thus, the liability to pay such expenses at first instance is that on the assessee. Subsequently, even if the assessee has to recover the same or failed to recover such expenses, will not alter the claim of assessee. The expenses having been incurred during the trade show, which is in the course of business, the same are allowable as such. We accordingly delete the disallowance of Rs. 50,635.
3. The next ground of appeal is against disallowance of a sum of Rs. 87,52,111 being the foreign exchange fluctuation loss for increase in liability for repayment of working capital loan availed from M/s Silicon Graphics Inc., USA. The AO held that the assessee has taken a term loan of US $ 30 lacs to meet the working capital requirement. Learned CIT(A) held that such loss can be allowed only when the assessee actually repays these loans. Till that time it is a hypothetical loss.
3.1 Learned Counsel for assessee submitted that identical issue arose before the Tribunal in assessee's case for asst. yr. 2001-02. The Tribunal, following the decision of Special Bench in the case of Oil & Natural Gas Corpn. Ltd. v. Dy. CIT (2002) 77 TTJ (Del)(SB) 387 : (2002) 83 LTD 151 (Del)(SB) and the decision of Tribunal in Dy. CIT v. Maruti Udyog Ltd. (2006) 101 TTJ (Del) 760 : (2006) 99 LTD 666 (Del), held that such loss is allowable as business revenue loss.
3.2 The learned Departmental Representative, on the other hand, submitted that the loss is contingent in nature and unless paid for, merely making provision for the same will not entitle the assessee to claim the same as allowable loss.
3.3 We have considered rival submissions. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT held that where profit or loss arises to assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. Admittedly, in the present case, the foreign currency loan was taken for working capital requirement. The decision of Hon'ble Supreme Court will, therefore, squarely apply. The liability on the date of balance sheet has to be reckoned in the accounts on the basis of fluctuation in the rate of exchange during the year and not merely when the loan is repaid, particularly when the assessee is following mercantile system of accounting. The Special Bench of the Tribunal held that such loss cannot be called as notional or contingent loss. We also find that the loss was allowed while deciding the appeal of assessee for asst. yr. 2001-02. The decision of Special Bench of the Tribunal as well as that rendered in the case of Maruti Udyog Ltd. (supra) squarely applies. Thus, the loss of Rs. 87,52,111 is allowable as claimed.
4. We now take up the appeal of Revenue. The first ground of appeal is against deletion of disallowance of Rs. 8,50,78,263 made by the AO under Section 43B in respect of customs duty paid during the year and included in the closing stock valuation.
4.1 The assessee pays customs duty at the time of import of raw material. The assessee from year to year claims the amount of customs duty paid as deduction under Section 43B even though such duty is forming part of closing stock valuation. For the next assessment year, in order to ensure that double deduction is not claimed, such amount is excluded from the computation of opening stock. The AO held that by claiming the deduction, the assessee has off-loaded the amount so paid from the closing value of the stock. The Hon'ble Supreme Court in the case of CIT v. British Paints India Ltd. held that duty paid should be added to the cost of stock for the purpose of valuation of same. As per Section 43B, the expenditures are allowable on payment basis provided the same are otherwise allowable. Though the decision of the Special Bench of Tribunal in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 206 FIR 96 (Del)(SB)(AT) supports the contention of assessee, since a reference has been filed in this case before the High Court, he concluded that since the excise duty paid on closing stock inventory was not payable during the year, i.e., the liability to pay customs duty did not arise during the year, the same cannot be allowed under Section 43B merely because the payment had been made. The learned CIT(A) held that similar claims for earlier years i.e. 1996-97, 1997-98 and 1998-99 were decided in favour of assessee following the decision of the Special Bench in the case of Indian Communication Network (P) Ltd. (supra).
4.2 The learned Departmental Representative submitted that the amount though paid during the year can be allowed provided the same is payable during the year. Since there was no liability to pay customs duty during the year, the question of allowability thereof did not arise.
4.3 The learned Counsel for assessee, on the other hand, submitted that the customs duty is payable on importing the same unlike the customs (sic-excise) duty which is payable on production of goods. Thus, the liability for payment of customs duty arose as soon as the goods were imported. The issue is now squarely covered in favour of the assessee by the decision of Hon'ble Supreme Court in the case of Berger Paints India Ltd. v. CIT .
4.4 We find that similar issue has been decided in favour of the assessee by the earlier decision of the Tribunal for asst. yrs. 1996-97 and 1997-98. Hon'ble Supreme Court in the case of Berger Paints India Ltd. (supra) held that the entire amount of customs duty paid by assessee in a particular accounting year is allowable under Section 43B as a deduction in respect of that year irrespective of the amount of customs duty included in the valuation of assessee's closing stock at the end of accounting year as relating thereto. While so holding, Hon'ble Supreme Court approved the decision of the Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. (supra). We accordingly dismiss this ground.
5. The next ground of appeal is against deletion of disallowance of Rs. 44,51,775 out of the total expenditure of Rs. 55,64,715 debited under the head 'Advertisement and publicity'.
5.1 The AO held that the amount paid under the head 'Advertisement and publicity' are to be treated as deferred revenue expenditure and only l/5th of the same is allowable. The issue has been considered along with the appeal of the assessee in ground No. 1. For the reasons stated therein, we hold that the amount is allowable as revenue expenditure and the concept of deferred revenue expenditure cannot be applied to such expenses in disallowing part of the same.
6. In the result, the appeal of assessee is allowed and that of Revenue is dismissed.