Revenue expenses allowed despite different treatment in books

Brief of the Case

ITAT Mumbai held in the case of Reliance Wellness Ltd. vs. DCIT that  treatment given in the books of account is not relevant to examine the claim put forth by the assessee. In this case Assessee was in  the process of expansion of its business operations by opening various new shops and booked revenue nature  expenditures  for the purposes of expansion of its business, which cannot be identified with any Particulars shop  under the head ‘Project Development Expenditure’ even though the assessee had shown the same in the Balance Sheet as “Capital work in progress”.

These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature. Hence expenditure are allowable in the year under consideration irrespective of the treatment given by the Assessee to such exopenses in its books of account.

Facts of the Case

The assessee is engaged in the business of trading and merchandising of goods and services.  In the financial year relevant to the assessment year 2008-09, the assessee had already started its operation from nine of its stores located in various states.  The AO noticed that the assessee had claimed expenses booked by it under the head “Project Development Expenditure” as deduction in the computation of total income in both the years under consideration, even though the assessee had shown it in the Balance Sheet as “Capital work in progress”. When questioned, the assessee submitted that it is in the process of expansion of its business operations by opening various new shops and the revenue expenses, which could not be identified with a particular shop was shown under the head “Project Development Expenses” and taken to Balance sheet.

The assessee further contended before the AO that the expenditure booked under the head “Project development expenditure” is fully allowable u/s 37(1) of the Act as all the conditions prescribed therein are satisfied. However, the AO took the view that the assessee has not incurred such expenses for routine operations and further noticed the assessee itself has considered the same as capital in nature in the books of account.  Accordingly, he disallowed the claim of project development expenditure made by the assessee in both the years under consideration.

Contention of the Assessee

The ld counsel of the assessee submitted that there is no dispute with regard to the fact that the assessee was already operating nine stores during the year relevant to the assessment year 2008-09.  This is further fortified by the fact that the assessee has disclosed sales revenue of Rs.28.44 crores and 246.18 crores for the AY 2008-09 and 2009-10 respectively. He submitted that the expenses incurred with regard to the opening of new stores have been taken to Balance Sheet as “Capital work in progress” in the books of account.  However, the same has been claimed as revenue expenditure under the Income tax Act, since all the conditions relating to deduction u/s 37(1) of the Act have been satisfied.

He further submitted that the assessee has segregated capital expenses, if any, out of Project development expenses, if they are capital in nature and claimed only those expenses, which are revenue in nature.  He submitted that the assessee was incurring expenses in common for all the stores that are going to be reopened and hence it was constrained to treat the same as „Capital work in progress‟ in the books of account.  He submitted that the expenses have been directly booked as revenue expenditure in the books of account, if it is identified with a particular store.

He further submitted that the entries made in the books of account are not determinative to decide about the deduction allowable under the Act.  In this regard, he placed reliance on the decision rendered by Hon‟ble Supreme Court in the case of Taparia Tools Ltd Vs. JCIT (2015)(55 taxmann.com 361).  In the above said case, the assessee issued debentures and offered the investors an option to get one time upfront discounted interest.  The interest so paid was treated as deferred revenue expenditure in the books of account, but it was claimed fully for income tax purposes.  The claim of the assessee was held to be allowable by Hon‟ble Supreme Court.  He submitted that the CIT (A) was not correct in law and on facts in holding that the assessee has set up new source of income.

Contention of the Revenue

The ld counsel of the revenue submitted that the Ld CIT (A) has taken up the view that the assessee has set up new source of business by establishing new stores.  Accordingly, the CIT (A) has taken the view that the project development expenditure is capital in nature.  He further submitted that the assessee has furnished details relating to “other expenses” included in Project development expenses.  He further submitted that the assessee has not generated revenue from new stores and hence under “revenue cost matching principle”, the expenses claimed by the assessee are not allowable.

Held by CIT (A)

CIT (A) confirmed the addition made by AO. The CIT (A) referred to the settled legal proposition that the expenses incurred prior to setting up of the business cannot be allowed as deduction.  The CIT (A) then held that there is difference between ‘expansion’ of business and ‘extension’ of business.  The CIT (A) took the view that the assessee’s case is a case of extension of business activity, i.e., setting up a new source of income.  Accordingly, the CIT (A) held that the assessee is not entitled to claim deduction of project development expenditure, since it is a case of extension of business, i.e., setting up of new source of income.

Held by ITAT

ITAT held that the assessing officer has taken the view that the expenditure claimed by the assessee is not allowable, since the assessee itself has treated the same as capital expenditure.  The AO has also taken the view that the expenditure was not incurred such expenses for routine operations.  However, the view taken by the assessing officer is against the proposition laid down by the Hon‟ble Supreme Court in the case of Kedarnath Jute manufacturing Company Ltd. V/s CIT [1971] 82 ITR 363 (SC) and Taparia Tools Ltd. (2015) (55 taxmann.com 361), wherein the Hon‟ble Supreme Court held that the treatment given in books of account are not determinative or conclusive and the claim of the assessee should be examined on the touchstone of provisions contained in the Act. In view of the decisions of Hon‟ble Supreme Court, referred above, the treatment given in the books of account is not relevant to examine the claim put forth by the assessee.

The next reasoning given by the AO is that the assessee has not incurred these expenses for the routine operations. However, the claim of the assessee is that these expenses were incurred in the routine operations. There is no dispute with regard to the fact that the assessee has already established the business and has also declared sales revenue. The assessee has explained that it has followed the practice of charging expenses each store wise and hence the expenses which could not be identified with any particular store (may be operational store) was booked under the head „project development expenditure‟.  It is also submitted that the capital expenditure, if any, incurred in the opening of new stores have been capitalized in the books. A perusal of the above said expenses, prima facie, show that they are revenue in nature.  Hence, as pointed out by Hon‟ble Supreme Court in the case of Taparia Tools Ltd, what is required to be seen is – Whether these expenses could be allowed as deduction under the provisions of the Act.

Further whether the expenditure claimed by the assessee is allowable under the Act. The very same question was examined by the co-ordinate bench of Tribunal in the case of M/s Reliance Foot Prints Ltd. (ITA No.5997/Mum/2011 dated 23.10.2013) and held that disallowance is made mainly on the ground that the assessee cannot give duel status to these expenditure i.e. as “capital” in books of accounts and as “revenue” for Income tax purpose. However, such view of the AO cannot be upheld in view of the decision of Hon‟ble Supreme Court in the case of Kedarnath Jute Mfg. Company Ltd. [1971] 82 ITR 363 (SC) wherein it has been held that the issue that whether the assessee is entitled to  a particular deduction will depend upon the provisions of law relating thereto and not on the view which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decision or conclusive in the matter.

Further in the letter submitted by the assessee before AO it is clearly mentioned that when the expenditure is incurred for the purposes of expansion of business which is already in existence and, which is in the nature of revenue, then the same is allowable as revenue expenditure irrespective of the treatment given by the assessee to such expenditure in its books of account. No material has been bought on record by the AO to negate such submissions made by the assessee. Therefore, it has to be held that these expenditures incurred by the assessee are for the purposes of expansion of its business and those expenditure are in the nature of revenue. These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis-à-vis computation of income filed along with return.

Since the facts are identical in nature, we are inclined follow the above decision. We set aside the orders passed by CIT (A) in both the years under consideration and direct the assessing officer to allow the impugned expenditure in both the years.

Accordingly appeals of the assessee allowed.

CA Deepak Aggarwal