?t + IN THE HIGH COURT OF DELHI AT NEW DELHI ITA 5l OF 2011 ITA 52 0F 2011 rTA 58 0F 2011 Juclgment Reserved On: I2-09.201I Jatlgment Pronounced On : 3 0.9.20 I I (1) ITA sl oF 2011 NARAINGARH SUGAR MILLS LTD. COMMISSIONER OF INCOME TAX ItrrgUgb. Ms. Suruchi Counsel. (2) ITA s2 oF 2011 NARAINGARH SUGAR MILLS LTD. . . . APPELLANT Through : Mr. C.S. Aggarwal, Sr. Advocate with Mr' Prakash Kumar, Advocate. VERSUS . ..RESPONDENT Aggarwal, Sr.Standing . . . APPALLANT Throueh : Mr. C.S. Aggarwal, Sr' Advocate with Mr' Prakash Kumar" Advocate' VERSUS COMMISSIONER OF INCOME TAX . . .RI]SPONDENT 'I'hroush: Ms. Suruchi Aggarwal, Sr'Standing Counsel. ITA Nos.51,52, & 58 of 2011 Page 1 of 2 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified (3) ITA s8 oF 201r NARAINGARH SUGAR MILLS LTD. . . . APPELLANT Through : Mr. C.S. Aggarwal- Sr' Advocate with Mr' Prakash Kumar. Advocate' VERSUS COMMISSIONER OF INCOME TAX . . .RESPONDENT Through: Ms. Suruchi Aggarwal' Sr'Standing Counsel. CORAM:- HON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE SIDDHARTH MRIDUL l. whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not'l 3. whether the Judgment should be reported in the Digest? A.K. SIKRI. J. l. For orders. see ITA 57l20ll - t/ ffi4r- Y sr t---'-'- F- --- | (A.K.SIKRI) JUDGE t /l.l -- c\' -- \ (SIDDHARTH MRIDUL) JUDGE SEPTEMBER 30,2011 skb ITA Nos.51,52, & 58 of 2011 Page 2 of 2 't- ) IN THE HIGH COURT OF DEI.HI AT NEW DEI,I{I + ITA 57 OF 2011 ITA sL 0F 2011 ITA s2 0F 2011 ITA 58 0F" 20L1 Judgment Reserved On: 12.09.201I % Judgment Pronotutced On:30.9.2011 (1) rTA s7 OF 20L1 NARAINGARHSUGARMILLSLTD. I ...APPI'LI-ANT 'lhrough : iVIr. C.S. Aggarwal, *. Oduo.atc with Mr. Prakash l(umar. Advocate. VERSIJS COMMISSIONER OF INCOME TAX . . .IItrSPONDIINT Through: Ms. Suruchi Aggarwal, Sr.Slancling Counsel. (2) rTA sl OF 201.L . NNN.AINGAIUI SUGAR MILLS LTD. . . . API'ELLANT 'fluoueh : Mr. C.S. Aggarra'al, Sr. Adrrocate with Mr. Prakash I(umar. Advocate. t \ VI]RSUS . COMMISSIONER OF INCOME TAX . . .I{ESI'ONDENT . \ Through: Ms. Suruchi Agganval, Sr.Stancling Counsel. ITA Nos.5L,52,57 &.58 of 2OLI Page L of L3 I (sl rrA sz oF 2or 1 NARAINGARH SUGAR MILLS LTD. COIVIMISSIONER OF INCOME TAX (4) ITA s8 OF 2011 NARAINGARH SUGAR MILLS LTD. . . . APPEI-LANT Through : Mr. C.S. Aggarwal, Sr. Advocate with Mr:. Prakash l(urirar. Advocate. VERSUS . . .R.ESPONDENT ' Tluough: Ms. Suruchi Aggarwal, Sr.Standing Counsel. . . . API}E]-N.ANT I Tluough : Mr. C.S. Aggarwal, Sr. Advocate with Mr. Prakash l(umar. Advocatc. VEITSUS COMMISSIONER OF INCOME TAX . . .II.ESPONDENT Thlough: Ms. Suruciri Aggarwal, Sr.Standing " Counscl. CORAM:- ItrON'BLE MR. JUSTICE A.K. SIKRI HON'BLE MR. JUSTICE SIDDIIARTH MITIDUL alr' l. Whether Reporters of Local newspapers rnay be allowcd to see the Judgment? 2. To be referred to the Reporter or not? 3. Wrether the Judgrnent should be reported in the Digest? ,.h ITA Nos.5L,52,57 &.58 of 2OLl. Page 2 of L3 ( A.K. SIKRI. J. 1. Though the Assessing Officer while, fi'arning the assessrnent for the assessrnent yeu 2003-04, had made three additions we are, concernecl in these appeals with oniy one itern narnely clisallowance of clairn ,of deferred revcnue expenditure which arises in these four appeals and pertains to assessrnent year 2003-04 to 2006-07. The question has initially arisen in the assessmcrit year 2003- 04 [out of which ITA 571201 1 arises] and in other years it is spill over of that very issue and, therefbre, we wonld like to take note of the facts appearing oI' I fl\ \5712011. We rnay also clarify that the facts pertaining to the aforesaicl issuc only are recapitulated by us. 2. The appellant is a public limited corllpany which was incorporatccl under the Companies Act in the year 1991. 'lhe appellant is engaged in producing sugal', molasses and bagasse. For the instant assessulent ycar 2003-04, the appellant company filed its return of incorne declaring total loss of { 9,58 ,5I,076/-. The return of incorle was processed on 3'd February,2004 uncler Section 143 (1) (a) ol' the Act at the returned loss. Thereafter, the case was selected for scnrtiny and notice under Section I43 (2)of the Act was issued. The Assessing Of{lc"r. *nl"O an assessrnent under Section 143 (3) of the Act determining the loss at {6,81,51,750/-. The Assessing Officer, inter alia made the following disallowancs:- ITA Nos.5L,52,57 &.58 of 2OLl Page 3 of L3 a (i). disallowallce of clairn of deferrecl revenue expencliturc . of T 1,08,43,872/-. We ruay point out in this behalf that the asscssee had taken loans tou,arcls working capital as well as term loans fi'om various banks. Ou these loans, during the year in question, the assessee paid a total interest of < 6,23,73,9471-. Flor,vevcr, entire interest paid was not shown as revenue.expencliture in this year. Instead the assessee booked a suln of { 1,06,68,2471- to profit and loss account as rcvdnue expenditure adopting the foruiula of 26 days : 150 days.. The bzrlance amoLtut of { ' 5,16,99,700/- was transferred by the assessee'to deferrecl revenue cxpenditure. 1 The afolesaid approach of treating the intelest paid as deferred revenue cxpcnditure did not gel with the Assessing Officer. I{e asked the assessee to substantiale accuracy and genuirleness of the clairn supported by docurneutary evicleuce. hl reply the assessee had stated that the deferred revenue expenditure incluclecl experses of Dilector foreign travel and excess of interest on term loau aucl working capital taken proportionately to the period o.f operation in current year as compared to the previous year. According to the Assessing Officer, as no docutncntary evidence was furnished, he disallowed the clairn of T i,08,43,8721- and addecl the salne in the income of the assessee The assessee preferred appeal against this ordcr raising a grievance that no adequate opportunity was given to the assessee for furnishing the evidence in support of the claim. The assessee gave the details -l bcfore the CIT (A). ITA Nos.5L,52, 57 & 58 of 2O11 Page 4 of L3 alx These details of the interest paid to various banks on working capital as \ well as term loan and details of the expenditure in the manner statcd abovc is reflected in the following chart:- Details of the Interest for the period 01.-04-02 1-03-03 Interest ou Working Capital (SBI, SBOP, OBC and Canara Banks) T4,15,14,312 Interest on Term Loan: IDBI bank <95,60,352 I-ISIDC <30,48,267 ICICI Bank <66,67 ,384 SBI bank T15,77,632 Total Interest <6,23,67,947 Less: booked as Revenue expenditure to P&L Alc (261152) She. 'M' t 1,0 6 ,68 ,247 Balance Transferred to Deferled Revenue Expenditure T5,16,99,700 3. As per the assessee that interest trairsferred to defbrred revenue expenditure .J.'was to be amortizecl for aperiod of five years starting fiorn the assessment year 2003-04 ,itself and, therefore, 1/5tl' of thc aforesaid figure which catne to { ' - 1,08,43,8J2 was debited to profit and loss account in this vel'y year and the' calculatiols submitted in this behalf has subrnitted by the assessee were as uttdcr:- Details of Deferred Revenue Expenditure for fTA Nos.51,52,57 &.58 of 201L . Page 5 of L3 I 0o tlre A.Y. 2003-04: Particulars Gross Amount Amortis"O 1il5"'; a) Opening balance {4,42,000 T3,56,000 b) Interest including Interest on term loan and working capital of current F.Y. {5,16,99,700 Rs 1,03,30,940 c) Foreign travel of Directors t7,39,660 t 1.4 1,932 Total atnount arnortized and debited to P &L Alc as deferted revenue expenditute -She. 'L' T1 OB 43.8 / 2 lJ Ilalance was taken to the capital account and on that amount the assessce claimed dePreciation. 4. The assessee further submitted tliat the aforesaid arnount was treatcd as deferred revenue expencliture ancl written off over a period of fivc ycal's i.c' 1/5tl' in each year o1the'basis of decision of the contpany which have beeu approvcd b)' the Directors as itwas an act of business prudence, in ordel to avail credit facility fi'om the banks. Accorcling to the assessee, thus, it was clone for the commcrcial of the business. The course of action taken for arnortising the saicl expelrditure over a period of five years sought to be justified on the ground that in the case of sugar- industry the work capital funcls are used iri building of stock, benefit whcrcof tTA Nos.51,52, 57 &.58 of 2oLL Page 6 of I-3 \ // I accrues in future. Judgrnent of the Suprerne Court in the case of Mndros Industrial Investnrcld Corporotiort Ys. CIT 225 IIF. 802 was'relied uporl in support of,the contention that concept of deferted revenue expenditurc has been duly approvcd by the Ape>q Court. The contention of the assessee found favour rvitl'r the CI'f (A) who allo,wecl the claim as deferrecl fevenue expenditure thereby deleting tlie adclition of {1,08,43,87 2l -. 5. The departrnent felt aggrieved of the aforesaid order.of the CIT (A) and hence preferred the appeal before thc ITAI'. In the tneautime for other asscsstncnt years also, the expenditure was allorved @ ll5'n by the CIT (A), thc I{evenue filccl four appeals in respect.of all these assessrnent years. All these appeals r.vere consolidated and have been decided by the learned Tribunal vide cotlmon clccision dated 8tl'January 2010. Aftertaking into account the facts, narration whereof has already givbn above, as well as the subrnission of the parties, the Tribtural got persuaded by the argurnent of the Revenue and thus set asidc the order of the CII' (A) and restore that of the Assessing Officer, supported by the fbllorving cliscussion:- "We have heard both the parties aud gone thror"rgh the material placed on record. There is no dispute that the assessee is followillg rrercantile systetn of accouutiug. Therefore, the liability incurred on accoullt of intercst payable on term loan and wotking capital as well as other expenditure by way of directors foreign travel expenscs are allowable as deduction in the year in which such fTA Nos.5L,52,57 & 58 of 2oLL Page 7 of L3 /2 a\ liability is incurred. There is no concept of dcferred revenue expenditure in Incorne-tax Act. The assessee liad taken a decision to clairn l/sthof such expenditure in the year in which the expenditq'e is incurred and the balalce expelditure has been claimed i1 four subsequeut years equally. The expenditure which had been clairned in subsequent years constitutes the part of previous year's expenditure, which is not allowable as deduction. It is not a case where the expenditure was itlculted in relation to certain iuvesttnents, the effect of which would bc spread over in lnore than one year. Thereforc, the assessec cannot be allowed deduction under Section 37 in tespcct of expelditure, which was incurred in earlier years on the principal of deferred revenue eirpenditul€, as claimed by the assessee. The income of the assessee has to bc determined on the basis of the facts of each year. If the contention of the assessee is accepted that expenditure should be allowed on the basis of decision taken by the assessee, it will opeu flood gates for litigations under which the assessee can defer any expenditure the way they like and clairn the satle in the year in which its becotncs rirore convenient and bendficial to thetn. Thcrefore, wc do not approve the contention of the aSSeSSee that revenue expenditure which has been incurred in a particular year should be deferred to subsequent years. Therefore, no deduction out of defemed revenue expenditure, which has come fi'orn earlier years, can be allowed as deduction in the years under consideration as the satne will constitutc the prior period exlrenditure. The decision relied upon by the Ld. CIT (Appeals) in the case of Madras Industrial Investtnent Corporation (supra) is not applicable to the facts as pointed out by the Lcl. Sr. DR' Accordingly' in our considered opinion, the Ld.'CIT (Appeals) was uot justified in allowing the claim of assessee in respect of deferred revenus expenditure. We, therefore, set aside the order of the Ld. CIT (Appeals) and restore that of the assessing officer. revenue expenditure of the Revenue." The ground relating to deferred in all the vears'is allowed in favour fTA Nos.51,52, 57 &.58 of 2oLl Page 8 of 13 tg 6. It is not in dispute that the liability incurred on accoullt of intcrcst payable on term loan as well as working capital and also other expenditure by way of director's fbreign travel expellses. It is also not in dispute that thc liability on this ' account acerued in the year 2003-04 and incurred by the assessee in that year. It is also an admitted fact that the assessee is following rnercantile system of accounting. fhe expencliture of this nature, on the face of it is revenuc expcnditurc zurcl there was no reaso[ to spread over the salne over a period of five years. In fact on these very term loans and working capital the assessee had paid interest in the succecding year as well ancl clairned decluction on entire expencliture as revenlle cxpcllcliture in I those succeecling years. It was not a case of the asscssee that there was all cncluring benefit ancl effect thereof was over a period of five years. L We agree with the reasoning of the ITAT that the rnove on thc part of thc assessee in arnortizing the said ex.penditure, over a period of five years treating thetn as deferred revenue expenditure was clearly misconceived and fi'aught ivit.h dangers, inasmuch as the assessee could not be given such a lcvy perrnitting it to 1 deferred any expenditure the way it likes and clairn the same in the year in which it become rnore convenient and beneficiai to it. ' fTA Nos.sl,52,57 & 58 of 2OLL Page 9 of L3 b, The Tribunal is right in holcling that in the instant'case thc jLrdgurent of Snpreme court in Madros htdustriol Investnrcnt Corytoratiort (supra) woulcl not be applicable 9. Insofbr as judgment of this Court in Comntis.sioner oJ'Inconle Tsx Ys. Irtdustrial Finance Corporatiort of India Ltd. 185 TAXMAN 296 it is not applicable in the present case.. In that case, this Court held that the assessee himself wanted to spread the expenses over a period of ensuing year it should be allowecl. Fiowever, there was no such proposition laid down in absolute tertn. It was clearly Ilstated that such a course of action would be.adrnissible only if the principlc o[ rnatching concept is satisfied which was restricted to the cases of clebenturcs. This Court categorically observed that the general principle stated eveu in Modras Indwtrisl Investnterfi Corporutiort (supra) was that ordinarily revellue incurred wholly or exclusively for the purpose of business' can be allowcd in the year iu , which it is incurecl. There may be solne exceptional cases justifying spreacling the expenditrire and clairning it over a certain number of years, that too, when the . assessee chose to do so. The discussion was sulnlned up in the following manner:- -J /t f' "Thus, the first thing r.vhich is to be noticed is that though the entire expenditru'e was incttrt'ed in that year, it was the assessee who wanted the spread over. The Court was collscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incured, but at the instance of the assessee, who wanted spreading over, the Cout agreed fTA Nos.5L,52, 57 &.58 of 2OL1 Page 1O of L3 I l'i to allow the assessee that benefit when it was found that there was a conlinuing benefit to the business of the company over the entire period. What follows fi'orn the above is that normally the cirdinary rule is to be applied, narnely, revenlrc expenditure incured in a particular year is to bc allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax depafiment cannot deny the same. I-Iowever, in those cases where the assessee hirnself wants to spread the expenditr"rre bver a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which upto now has been restricted to the cases of debentures." -10. Even when we apply the aforesaid test in the present case, the assessee would not be entitled to defer the expenditurc over a period of fivc years. For tliis reason, we dismiss the ITA 5l/201),,52/2011 and 58/2011. I1. In hct, Mr. Aggarwal, at the time of arguing these appeals, aftcr putting a fbeble altetnpt in questioning the r.visdom of the Tribunal adopting the aforesaid approach, laid ernphasis on altogether clifferent aspect ancl the effect thereof 1 rvould be only on ITA 5712011. I{is plea was that if the course of action adopted by ttre revenue authorities is to be accepted, that would mean that it rvas not open for the assessee to spread over the said expenditure in the folm of interest elc. over a a period of five years which would rnean that the assessee could have clairled thc entire expenditure in the year in question i.e. in the asscdsiuent years 2003-04, On ITA Nos.5L,52,57 & 58 of 2OLI Page LL of L3 ft this premise, his subrnission was that in that eventuality, when there wzls l1o disptrte that the expenditure was in fact incurred in the said assesstnent year, the entire expenditure of { 6,23,73,947l- should be allowed to the assessee in the assesstncut year 2003-04. 12. Ms. Suruchi Aggarwal, learned counsel appearing for the I{evenuc, ou tlie other hand, subrnittecl that when no such claitl was ever urade by the assessec in the year in question, it should not be allowed. She further subrnitted that fior ttre first tirne this plea was raised in the instant appeal and even beforc the Tribunal no such I case was set up. .-She argued that unless the clairn is tnacle either in the retttrn or zrt least in the revised r€turn, the assessee will not perrnitted to push that claim. 13. Technically , Ms. Suruchi Aggarwal rnay be cotrect in her subrnissions. l\t the same time, that would amount to not allowing the appellant/assessce the claitn the expencliture incurred on interest etc. even in the assesslnent year 2003-,04 though the assessee was adrnittedly entitled to claim the sarie in that year, rvc make this observation 'having regard to the fact that .therc is' no dispute zrbout the. genuineness of the said expenditure incurred in the assesstnent year in questioti. 14. In these cilcurnstances, we pennit the assessee to raise such a claitn in the year in question by approaching the Assessing Officer, in accordance rvith law. lTA Nos.5L,52, 57 & 58 of 2OL1 Page 12 of 13 a These appeals are disposed of in the aforesaid tertns. lT 15. .IUDG[' l, ,(.-- ot--'t i.. SEPTEMBER 30"201.1. skb ITA Nos.5L,52, 57 & 58 of 2OIL (sIDDr{AttTFI MttXDrIlL) JUEGE Page 13 of 13 .J I >t',r 1/lL tK. slKxu)