Income Tax Appellate Tribunal - Delhi
Assistant Commissioner Of Income Tax vs Medicamen Biotech Ltd. on 8 November, 2004
Equivalent citations: (2006)99TTJ(DELHI)873
ORDER
N.V. Vasudevan, J.M.
1. This is an appeal by the Revenue against the order dt. 1st Sept., 2000 of CIT(A)-II, New Delhi, relating to the asst. yr. 1997-98. The grounds of appeal of the Revenue read as follows :
(i) On the facts and in the circumstances of the case, the learned CIT(A) has erred in treating the expenditure of Rs. 47,71,110 as revenue in nature and deleting the disallowance made by the AO who treated it as capital expenditure, when the assessee itself in books of account had treated it as deferred revenue expenditure.
(ii) The appellant craves to be allowed to amend, delete or add any other grounds of appeals during the course of hearing of this appeal.
2. The assessee is a company which is engaged in the business of manufacture and sale of pharmaceuticals. The company also does some liaisoning work from which it derives income. During the previous year, the assessee had incurred a sum of Rs. 47,71,118 on marketing of its products. The details of expenditure incurred by the assessee are as follows :
Details of deferred revenue expenses ______________________________________________ Particulars Amount (Rs.) ______________________________________________ Business promotion 35,671.00 Conference expenses 2,984.00 Design and 3,425.00 Development charges 12,387.00 Advertising expenses 1,14,457.80 Retainership fee 10,457.00 Field allowance 9,10,376.00 Daily allowance 1,39,506.08 Literature expenses 1,92,941.50 Printing. & stationary 17,66,687.02 Salary 10,505.00 Bonus 1,64,907.50 Travelling allowance 4,57,867.20 Tour & travelling 31,181.60 Training expenses 31,890.50 Med. Rep's bags samples 8,85,874.40 _______________ 47,71,118.60 _______________ In the P&L a/c the assessee claimed only 1/10th of these expenses as deduction. The assessee had treated these expenses as deferred revenue expenses. According to the assessee, the benefits out of these expenses are likely to be received by the assessee over a period of 10 years and that is the reason why in the books of account these expenses are claimed by spreading over the expenses for a period of 10 years. In the computation of income, the assessee, however, claimed the entire expenses as deductible. It is in these circumstances the claim of the assessee was examined by the AO. According to the assessee these expenses were incurred in connection with launch of products of the company and that substantial efforts are required to be made for the purpose of marketing. The AO was of the view that the assessee-company had established a huge factory for the purpose of preparing beta lactum block for dry syrup and capsules and since the assessee is a new entrant in this field it had to establish itself as a dependable and quality manufacturer. He also made an observation that in the pharmaceutical trade it is the quality of the product and the brand name which counts. He, therefore, was of the view that the benefit of the expenses will be visible only in successive years. He, therefore, held that the assessee's action in deferring these expenses over a period of 10 years was proper and the entire expenses cannot be allowed to be written off during the previous year. Aggrieved by the aforesaid order of the AO, the assessee preferred appeal before the CIT(A). The CIT(A) held that the nature of business of the assessee is quite different from normal business and that the pharmaceutical products have to be aggressively marketed and this might involve lot of travelling by the staff employed to market the product. By doing so in the initial years, the assessee gets a foothold in the market. He also found that similar expenses had been incurred by the assessee in the subsequent assessment year also and that such expenses need to be incurred in this line of business. He held that the nature of these expenses were of a revenue nature and merely because these expenses have been incurred in the course of launch of a product, the character of these expenses will not change and they will continue to remain as revenue expenses. He was of the view that the expenses are wholly and necessarily in connection with business of the company and were not of a capital expenditure in nature. He, held that the test of enduring benefit is not a conclusive test and the benefit accruing to the assessee has to be looked at in a commercial sense. He was of the view that the expenses merely facilitated the assessee's trading operations and helped in conduct of the assessee's business more efficiently and profitably leaving the fixed capital untouched. Regarding the observation of the AO about the treatment given by the assessee in its books of account, the CIT(A) held that the entries in the books of account were not determinative of the nature of expenses and one has to look into the real nature of the expenses while considering its allowability. He, therefore, held that the expenditure was fully allowable as claimed by the assessee. Aggrieved by the order-of the CIT(A), the Revenue is in appeal before us.
3. We have heard the rival submissions. We are of the view that the order of the CIT(A) does not call for any interference. A bare perusal of the details of the expenses incurred by assessee clearly show that they were of revenue nature. The fact that these expenses were in relation to the business of the assessee is not in dispute. The test of enduring benefit as rightly held by CIT(A) was not conclusive. The decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT is relevant in this regard. As held by the Hon'ble Supreme Court what has to be seen is the nature of the expenses considered in a commercial sense. The nature of expenses are such that they do not result in enduring benefit to the assessee. The learned Departmental Representative, however, sought to place reliance on the decision of Hon'ble Madras High Court in the case of EID Parry (I) Ltd. v. CIT . We have perused the said decision. The said decision does not help the case of the Revenue. The specific finding in the aforesaid decision is that the expenses were in connection with a new project. Such are not the facts in the present case. The business of the assessee has already commenced and, therefore, the aforesaid decision is of not any use to the case pleaded by the Revenue. As far as the treatment in the books of account of the assessee are concerned, the same is not conclusive. The reason for making the addition by the AO as capital expenditure was mainly for the reason that the assessee had treated the same as 'deferred revenue expenditure' in its books of account and according to the AO the said expenditure incurred on advertisement would result in benefits which will accrue to the assessee over a period of time beyond the previous year. So far as the treatment given by the assessee-company in its books of account in respect of the said expenditure is concerned, it is pertinent to ascertain as to whether such expenditure has been treated by the assessee as capital expenditure in its books of account. In this regard, we find that the assessee has treated the said expenditure as 'deferred revenue expenditure' considering the advantage of enduring nature accrued to it which was going to last for a few years beyond the previous year. The AO, however, considered this treatment given by the assessee to resemble with the capital expenditure specifically considering that it indicated the accrual of advantage to the assessee of enduring nature. Before we consider the relevance of the test of enduring benefits for ascertaining the nature of expenditure, it would be appropriate to find out the meaning and nature of the term 'deferred revenue expenditure'. The ICAI in its guidance note issued on the 'terms used in financial statements' has defined the term 'deferred revenue expenditure' as the expenditure for which payment has been made or liability has been incurred in a particular year, but which is carried forward on the presumption that it will benefit over a subsequent period or periods. The ICMA defined the said term in its publication as an expenditure incurred during an accounting period but not fully charged against income in that period, the balance being carried forward and charged in the next or a subsequent period. From the perusal of these definitions, it is abundantly clear that there is nothing to indicate that the concerned expenditure has to be of capital nature for the purpose of treating the same as deferred revenue expenditure. On the contrary, although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital field but the same accrues only in the revenue field. As a matter of fact, the very purpose of categorising certain expenditure differently under the head 'deferred revenue expenditure' for the purpose of drawing financial statements appears to be that the said expenditure even though is of revenue nature results into benefit of enduring nature to the assessee and the same, therefore, deserves a different treatment in terms of preparation of the annual accounts to determine, inter alia, the profit of a particular period/year as the benefit "thereof accrues over a period exceeding the accounting year in which the same is incurred. It is thus clear that when any expenditure is treated as a 'deferred revenue expenditure', it presupposes that the concerned expenditure, creating benefit, in the revenue field, is a revenue expenditure but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. It is thus clear that the AO misconstrued the term 'deferred revenue expenditure' as capital expenditure on the basis of accounting treatment given by the assessee in its books of account and proceeded to draw an adverse inference without considering the nature of the impugned expenditure and its allowability of the same under the provisions of the IT Act. The Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT (supra) has observed as under:
There may be cases where expenditure even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, 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 nature of the principle laid down in this test. What is material to consider is 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 assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be of revenue account, even though the advantage may endure for an indefinite future.
From the perusal of the aforesaid observations of the apex Court, it is evident that the test of enduring benefit alone is not conclusive for treating any expenditure as capital expenditure and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to the assessee in the capital field or revenue field so as to decide the exact nature of the said expenditure and allowability of the same under the IT Act.
As regards the relevance of accounting method followed by the assessee, we have already observed that the treatment given by the assessee to the impugned expenditure as deferred revenue expenditure cannot be considered, as different from the one followed for the purpose of computing the total income under the IT Act. In any case, as held by the Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT , the allowability of a particular deduction depends on the provisions of law relating thereto and not on the basis of entries made in the books of account, which are not decisive or conclusive in this regard. The expenditure in question was incurred towards launching of a new product and was revenue in nature. The action of the AO in treating the same as capital expenditure and disallowing the claim for deduction was not proper.
4. The learned Departmental Representative also placed reliance on the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT and submitted that the concept of deferred revenue expenditure has been recognised by the Hon'ble Supreme Court. We have perused the said judgment. The facts of that case were that a company issued debentures at a discount and the difference between the issue price and the redemption price of the debenture was claimed as a revenue expenditure. The entire expenditure was spread over the period for which the funds raised through issue of the debentures were available for use by the company and claimed proportionately. In the books of account as well as in the return of income the assessee claimed only proportionate expenditure as deduction. Under these circumstances, the Supreme Court upheld the plea of the assessee. The following were the observations of the Supreme Court:
Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, 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. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is 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. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.
It is pertinent to note certain distinguishing features in the present case. Firstly, the assessee in the present case has claimed the entire expenditure as a revenue expenditure in the year in which it was incurred whereas the assessee in the case before the Hon'ble Supreme Court has claimed deduction in the return of income at only a proportionate part of the expenditure. Secondly, the Hon'ble Supreme Court felt that in the case of discount on debentures such a treatment would be justifiable. Thirdly, the Hon'ble Supreme Court has not laid down only fetters on the right of an assessee to claim the expenditure in one lump sum in the year in which the expenditure was incurred. We are, therefore, of the view that the said decision will not be of any assistance to the case pleaded by the Revenue.
Considering all the facts, circumstances of the case and also the judicial pronouncements in this regard, we are of the view that the order of CIT(A) is just and proper and does not call for any interference. Accordingly, the appeal of the Revenue is dismissed.
5. In the result, the appeal by the Revenue is dismissed.