Naraingarh Sugar Mills Ltd. vs Commissioner Of Income Tax
2011 Latest Caselaw 4906 Del

*                IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                     ITA 57 OF 2011
                                      ITA 51 OF 2011
                                     ITA 52 OF 2011
                                     ITA 58 OF 2011

                                             Judgment Reserved On: 12.09.2011
%                                            Judgment Pronounced On:30.9.2011
(1)     ITA 57 OF 2011

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.

(2)     ITA 51 OF 2011

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.


ITA Nos.51,52, 57 & 58 of 2011                                          Page 1 of 13
 (3)     ITA 52 OF 2011

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.

(4)     ITA 58 OF 2011

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

        1.       Whether Reporters of Local newspapers may be allowed
                 to see the Judgment?
        2.       To be referred to the Reporter or not?
        3.       Whether the Judgment should be reported in the Digest?




ITA Nos.51,52, 57 & 58 of 2011                                          Page 2 of 13
 A.K. SIKRI, J.

1. Though the Assessing Officer while framing the assessment for the

assessment year 2003-04, had made three additions we are concerned in these

appeals with only one item namely disallowance of claim of deferred revenue

expenditure which arises in these four appeals and pertains to assessment year

2003-04 to 2006-07. The question has initially arisen in the assessment year 2003-

04 [out of which ITA 57/2011 arises] and in other years it is spill over of that very

issue and, therefore, we would like to take note of the facts appearing of ITA

57/2011. We may also clarify that the facts pertaining to the aforesaid issue only

are recapitulated by us.

2. The appellant is a public limited company which was incorporated under the

Companies Act in the year 1991. The appellant is engaged in producing sugar,

molasses and bagasse. For the instant assessment year 2003-04, the appellant

company filed its return of income declaring total loss of ` 9,58,51,076/-. The

return of income was processed on 3rd February, 2004 under Section 143 (1) (a) of

the Act at the returned loss. Thereafter, the case was selected for scrutiny and

notice under Section 143 (2) of the Act was issued. The Assessing Officer framed

an assessment under Section 143 (3) of the Act determining the loss at

`6,81,51,750/-. The Assessing Officer, inter alia made the following disallowance:-

(i). disallowance of claim of deferred revenue expenditure of ` 1,08,43,872/-.

We may point out in this behalf that the assessee had taken loans towards

working capital as well as term loans from various banks. On these loans, during

the year in question, the assessee paid a total interest of ` 6,23,73,947/-. However,

entire interest paid was not shown as revenue expenditure in this year. Instead the

assessee booked a sum of ` 1,06,68,247/- to profit and loss account as revenue

expenditure adopting the formula of 26 days : 150 days.. The balance amount of `

5,16,99,700/- was transferred by the assessee to deferred revenue expenditure.

The aforesaid approach of treating the interest paid as deferred revenue expenditure

did not gel with the Assessing Officer. He asked the assessee to substantiate

accuracy and genuineness of the claim supported by documentary evidence. In

reply the assessee had stated that the deferred revenue expenditure included

expenses of Director foreign travel and excess of interest on term loan and working

capital taken proportionately to the period of operation in current year as compared

to the previous year. According to the Assessing Officer, as no documentary

evidence was furnished, he disallowed the claim of ` 1,08,43,872/- and added the

same in the income of the assessee The assessee preferred appeal against this order

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

before the CIT (A).

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 stated above is

reflected in the following chart:-

Details of the Interest for the period 01.-04-02 to 31-03-03 Interest on Working Capital `4,15,14,312 (SBI, SBOP, OBC and Canara Banks) Interest on Term Loan: `95,60,352 IDBI bank HSIDC `30,48,267

ICICI Bank `66,67,384

SBI bank `15,77,632

Total Interest `6,23,67,947

Less: booked as Revenue ` expenditure to P&L A/c (26/152) She. „M‟ 1,06,68,247

Balance Transferred to `5,16,99,700 Deferred Revenue Expenditure

3. As per the assessee that interest transferred to deferred revenue expenditure

was to be amortized for a period of five years starting from the assessment year

2003-04 itself and, therefore, 1/5th of the aforesaid figure which came to `

1,08,43,872 was debited to profit and loss account in this very year and the

calculations submitted in this behalf has submitted by the assessee were as under:-

Details of Deferred Revenue Expenditure for

the A.Y. 2003-04:

                   Particulars            Gross Amount       Amortised (1/5th)

                   a)     Opening          `4,42,000         `3,56,000
                   balance
                   b)     Interest         `5,16,99,700      Rs 1,03,30,940
                   including Interest on
                   term loan and working
                   capital of current F.Y.
                   c)     Foreign travel `7,39,660           ` 1,47,932
                   of Directors
                   Total           amount                    `1,08,43,872.
                   amortized and debited
                   to P & L A/c as
                   deferred        revenue
                   expenditure -She. „L‟

Balance was taken to the capital account and on that amount the assessee

claimed depreciation.

4. The assessee further submitted that the aforesaid amount was treated as

deferred revenue expenditure and written off over a period of five years i.e. 1/5th in

each year on the basis of decision of the company which have been approved by the

Directors as it was an act of business prudence, in order to avail credit facility from

the banks. According to the assessee, thus, it was done for the commercial of the

business. The course of action taken for amortising the said expenditure over a

period of five years sought to be justified on the ground that in the case of sugar

industry the work capital funds are used in building of stock, benefit whereof

accrues in future. Judgment of the Supreme Court in the case of Madras Industrial

Investment Corporation Vs. CIT 225 ITR 802 was relied upon in support of the

contention that concept of deferred revenue expenditure has been duly approved by

the Apex Court. The contention of the assessee found favour with the CIT (A)

who allowed the claim as deferred revenue expenditure thereby deleting the

addition of `1,08,43,872/-.

5. The department felt aggrieved of the aforesaid order of the CIT (A) and

hence preferred the appeal before the ITAT. In the meantime for other assessment

years also, the expenditure was allowed @ 1/5th by the CIT (A), the Revenue filed

four appeals in respect of all these assessment years. All these appeals were

consolidated and have been decided by the learned Tribunal vide common decision

dated 8th January 2010. After taking into account the facts, narration whereof has

already given above, as well as the submission of the parties, the Tribunal got

persuaded by the argument of the Revenue and thus set aside the order of the CIT

(A) and restore that of the Assessing Officer, supported by the following

discussion:-

"We have heard both the parties and gone through the material placed on record. There is no dispute that the assessee is following mercantile system of accounting. Therefore, the liability incurred on account of interest payable on term loan and working capital as well as other expenditure by way of directors foreign travel expenses are allowable as deduction in the year in which such

liability is incurred. There is no concept of deferred revenue expenditure in Income-tax Act. The assessee had taken a decision to claim 1/5thof such expenditure in the year in which the expenditure is incurred and the balance expenditure has been claimed in four subsequent years equally. The expenditure which had been claimed 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 incurred in relation to certain investments, the effect of which would be spread over in more than one year. Therefore, the assessee cannot be allowed deduction under Section 37 in respect of expenditure, which was incurred in earlier years on the principal of deferred revenue expenditure, as claimed by the assessee. The income of the assessee has to be 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 open flood gates for litigations under which the assessee can defer any expenditure the way they like and claim the same in the year in which its becomes more convenient and beneficial to them. Therefore, we 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 deferred revenue expenditure, which has come from earlier years, can be allowed as deduction in the years under consideration as the same will constitute the prior period expenditure. The decision relied upon by the Ld. CIT (Appeals) in the case of Madras Industrial Investment Corporation (supra) is not applicable to the facts as pointed out by the Ld. Sr. DR. Accordingly, in our considered opinion, the Ld. CIT (Appeals) was not justified in allowing the claim of assessee in respect of deferred revenue expenditure. We, therefore, set aside the order of the Ld. CIT (Appeals) and restore that of the assessing officer. The ground relating to deferred revenue expenditure in all the years is allowed in favour of the Revenue."

6. It is not in dispute that the liability incurred on account of interest payable

on term loan as well as working capital and also other expenditure by way of

director‟s foreign travel expenses. It is also not in dispute that the liability on this

account accrued in the year 2003-04 and incurred by the assessee in that year. It is

also an admitted fact that the assessee is following mercantile system of accounting.

The expenditure of this nature, on the face of it is revenue expenditure and there

was no reason to spread over the same over a period of five years. In fact on these

very term loans and working capital the assessee had paid interest in the succeeding

year as well and claimed deduction on entire expenditure as revenue expenditure in

those succeeding years. It was not a case of the assessee that there was an enduring

benefit and effect thereof was over a period of five years.

7. We agree with the reasoning of the ITAT that the move on the part of the

assessee in amortizing the said expenditure, over a period of five years treating

them as deferred revenue expenditure was clearly misconceived and fraught with

dangers, inasmuch as the assessee could not be given such a levy permitting it to

deferred any expenditure the way it likes and claim the same in the year in which it

become more convenient and beneficial to it.

8. The Tribunal is right in holding that in the instant case the judgment of

Supreme court in Madras Industrial Investment Corporation (supra) would not be

applicable.

9. Insofar as judgment of this Court in Commissioner of Income Tax Vs.

Industrial Finance Corporation 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 allowed.

However, there was no such proposition laid down in absolute term. It was clearly

stated that such a course of action would be admissible only if the principle of

matching concept is satisfied which was restricted to the cases of debentures. This

Court categorically observed that the general principle stated even in Madras

Industrial Investment Corporation (supra) was that ordinarily revenue incurred

wholly or exclusively for the purpose of business can be allowed in the year in

which it is incurred. There may be some exceptional cases justifying spreading the

expenditure and claiming it over a certain number of years, that too, when the

assessee chose to do so. The discussion was summed up in the following manner:-

"Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed

to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.

What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the Income Tax department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over 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 expenditure over a period of five years. For this

reason, we dismiss the ITA 51/2011, 52/2011 and 58/2011.

11. In fact, Mr. Aggarwal, at the time of arguing these appeals, after putting a

feeble attempt in questioning the wisdom of the Tribunal adopting the aforesaid

approach, laid emphasis on altogether different aspect and the effect thereof

would be only on ITA 57/2011. His plea was that if the course of action adopted by

the revenue authorities is to be accepted, that would mean that it was not open for

the assessee to spread over the said expenditure in the form of interest etc. over a

period of five years which would mean that the assessee could have claimed the

entire expenditure in the year in question i.e. in the assessment years 2003-04. On

this premise, his submission was that in that eventuality, when there was no dispute

that the expenditure was in fact incurred in the said assessment year, the entire

expenditure of ` 6,23,73,947/- should be allowed to the assessee in the assessment

year 2003-04.

12. Ms. Suruchi Aggarwal, learned counsel appearing for the Revenue, on the

other hand, submitted that when no such claim was ever made by the assessee in the

year in question, it should not be allowed. She further submitted that for the first

time this plea was raised in the instant appeal and even before the Tribunal no such

case was set up. She argued that unless the claim is made either in the return or at

least in the revised return, the assessee will not permitted to push that claim.

13. Technically , Ms. Suruchi Aggarwal may be correct in her submissions. At

the same time, that would amount to not allowing the appellant/assessee the claim

the expenditure incurred on interest etc. even in the assessment year 2003-04

though the assessee was admittedly entitled to claim the same in that year, we make

this observation having regard to the fact that there is no dispute about the

genuineness of the said expenditure incurred in the assessment year in question.

14. In these circumstances, we permit the assessee to raise such a claim in the

year in question by approaching the Assessing Officer, in accordance with law.

15. These appeals are disposed of in the aforesaid terms.

(A.K. SIKRI) JUDGE

(SIDDHARTH MRIDUL) JUDGE SEPTEMBER 30,2011 skb