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Facts
The assessee, engaged in egg powder manufacturing and export, incurred expenses of Rs.3,40,02,145/- from FY 2008-09 to 2011-12 for setting up a branch in Russia. This project did not materialize due to unfavorable conditions, so the assessee wrote off these expenses in the assessment year 2013-14, claiming them as revenue expenditure. The AO and CIT(A) disallowed this, arguing the expenses pertained to earlier years and could not be claimed in the current year, or should have been capitalized under Section 35D.
Held
The Tribunal held that since the Russian project failed, the expenses incurred for establishing the branch crystallized in the impugned assessment year (2013-14) and were therefore allowable as revenue expenditure under Section 37 of the Act. They relied on a previous Tribunal decision in the assessee's own case and the Delhi High Court's view that the year of crystallization determines deductibility, especially when tax rates are unchanged, directing the AO to delete the disallowance.
Key Issues
Whether expenses incurred in earlier years for a failed business expansion project, initially intended for capitalization, can be written off and claimed as revenue expenditure under Section 37 in the year the project is abandoned and the expenses crystallize.
Sections Cited
37, 35D, 143(2), 142(1), 143(3)
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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI S.S. VISWANETHRA RAVI, HON’BLE & SHRI S.R.RAGHUNATHA, HON’BLE
PER S. R. RAGHUNATHA, ACCOUNTANT MEMBER:
This appeal by the assessee is filed against the order of the Commissioner of Income Tax (Appeals), Chennai-20, dated 09.10.2024 for the assessment year 2013-14.
The assessee has raised the following grounds of appeal:
1. The order of the CIT(A) to the extent it upholds the addition of Rs.3,40,02,145/- is erroneous as the same is contrary to the facts of the case and provisions of law.
:-2-: ITA. No:2933/Chny/2024 2. The CIT(A) erred in upholding the addition of Rs.3,40,02,145/- made by the AO, being the disallowance of expenditure incurred by the appellant during the earlier years for setting up business operations in Russia.
3. The appellant having duly explained the reason as to why the expenditure was being claimed during this year and not during the earlier years, the CIT(A) grossly erred in failing to consider the same and in merely upholding the disallowance made by the AO.
4. The expenses incurred for the Russian project which stood abandoned, being allowable u/s.37 of the Act, the CIT(A) grossly erred in upholding the disallowance made by the AO.
Any other ground raised at the time of the hearing.
The brief facts are that the assessee is a public limited company engaged in manufacturing and export of egg powder and poultry farm. The assessee initially filed its return of income for the assessment year 2013-14 on 29.09.2013 and subsequently, filed revised return on 04.10.2014 admitting ‘nil’ income after setting off brought forward losses and unabsorbed depreciation as per normal provisions as well as the MAT provisions of the Income Tax Act, 1961 (hereinafter the ‘Act’). The case was selected for scrutiny under CASS. Notice u/s.143(2) & 142(1) of the Act along with questionnaire was issued. In response, the assessee filed reply and written submissions. After considering the assessee’s contentions and submissions, the AO completed the assessment u/s.143(3) of the Act dated 09.10.2024 by disallowing various expenses
:-3-: ITA. No:2933/Chny/2024 amounting to Rs.3,59,67,203/- and adding to the income of the assessee on account of the following: - Disallowance of Russian Branch Expenses Rs.3,40,02,145/- - Disallowance of Depreciation Rs. 19,65,057/- Aggrieved by the assessment order of the AO, the assessee preferred an appeal before the ld.CIT(A) – 20, Chennai.
Before the ld.CIT(A), the assessee submitted that there is no dispute that said expenses are in the nature of revenue expenditure. The assessee also submitted that the expenditure has been incurred at Russia under 15 heads of expenses from the financial year 2008- 09 to 2011-12 to tune of Rs.3,40,02,145/-. Further, the assessee explained that these expenses were incurred for the establishment of Russian branch in the nature of revenue expenditure. Further, the assessee also explained that similar issue of the assessee’s own case came up for consideration for the assessment year 2011-12 concerning the prior period expenses before the CIT(A)-3, Coimbatore, who had allowed the appeal in favour of assessee, which was later confirmed by the Tribunal vide its order dated 31.08.2021 in ITA No.3431/CHNY/2016. However, the Ld.CIT(A) was not convinced with the submissions and stated that the assessee’s case decided by the Tribunal was in respect of :-4-: ITA. No:2933/Chny/2024 expenditure reimbursed to the assessee’s subsidiary company at Netherlands, which is a separate legal entity for the past financial years in the assessment year 2011-12 and hence, dismissed the appeal of the assessee vide his order dated 09.10.2014 by holding as under:- “On the facts of the case, I am of the opinion that there is no valid explanation submitted by the appellant for not claiming the corresponding expenditures in the respective year itself and claiming the same in the year under consideration. On examination of the said expenditures as submitted by the appellant, it is noted that the appellant had periodically incurred the above expenditures which are in the nature of Revenue Expenditure from the AY 2009-10 to 2012-13. However, the appellant did not claim these expenditures which are completely in its knowledge in those years. The appellant had finally resorted to making a claim in the year under consideration, for regularizing the claim which was not claimed in the earlier years, by invocation of the provisions of section 37 of the Act, which is not allowable. Thus, this ground raised by the appellant is dismissed.”
Aggrieved by the impugned order of the ld.CIT(A), the assessee is in appeal before us.
The Ld.AR for the assessee submitted that during the F.Y.2012-13, due to various unfavourable conditions, the assessee’s expansion of business by setting up a branch got delayed and did not fructify. Thus, the assessee decided to write-off the expenses incurred during the F.Ys.2008-09 to 2011-12 during current assessment year. The assessee had not claimed these expenses in :-5-: ITA. No:2933/Chny/2024 the years in which the same were incurred for the reason that the assessee was of the idea that the expenses can be capitalized and amortized as per section 35D of the Act, after the business unit in Russia was set-up and commenced operations. However, since the same did not materialize, the assessee wrote-off the expenses during this year.
5.1 The Ld.AR further submitted that the AO had disallowed the assessee’s claim and added back the expenditure to the assessee’s income for the reasons that; a. The appellant has not explained as to how the expenses incurred in the earlier years have crystallized during this year, b. The appellant has not stated as to why the expenses was not claimed in the respective years when it knew about the Branch expenses each year, c. The expenditure incurred can be amortized over a period of time from when the Russian branch commences business, and d. The appellant has not abandoned the Russian Branch and is not eligible to claim the amount for write-off.
5.2 The Ld.AR further submitted that the assessee has challenged the disallowance of expenditure and filed detailed written submissions (Pages 1 to 8 of the PB) before the Ld.CIT(A). The assessee had also filed a chart of the expenses incurred over the years regarding the Russian branch (Page 9 of the PB). However, the Ld.CIT(A) dismissed the appeal by holding that the appellant did not provide any valid explanation
:-6-: ITA. No:2933/Chny/2024 for not claiming the corresponding expenditures in the respective year itself.
5.3 The Ld.AR stated that both the AO and Ld.CIT(A) have erred in stating that the assessee had not provided a valid explanation for not claiming the expenses in the corresponding years in which the same were incurred. The Ld.AR submitted that the assessee had incurred the expenditure and was of the intention to capitalize the expenses and amortize the same after the branch in Russia commenced its activities. This is a valid submission and supported by section 35D of the Act. The Branch that was being attempted to be set-up in Russia was to carry out the same business operations as in India (i.e.) manufacturing and exporting of egg powder. Since the attempt to set up a branch in Russia was an expansion of the assessee's business, the expenditure incurred for the same could very well have been capitalized and amortized in the assessee's books. However, since the Russian branch did not fructify, the assessee was constrained to write-off the expenses incurred for setting up the same during this year. Since the assessee took the conscious decision of writing-off the expenses during this year owing to several unfavourable conditions, the expenses
:-7-: ITA. No:2933/Chny/2024 have in fact crystallized during this year as the expenses can no longer be capitalized and amortized owing to the failure to set- up a unit in Russia.
5.4 The Ld.AR placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Shri Ram Pistons & Rings Ltd. [2008] 220 CTR 404 (Delhi) wherein it was held as under: “18. In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount.”
5.5 The Ld.AR stated that both the AO and the CIT(A) duly agree that the expenses so incurred by the assessee were revenue in nature. The only dispute is the year in which the same are to be allowed. The assessee had demonstrated in its submissions before the AO and the CIT(A) as to why the same could not be claimed in the respective years. The expenses have thus crystallized only during this year. The expenses incurred being revenue in nature and allowable, the same are to be allowed u/s.37 of the Act during this year and the disallowance of expenditure by the AO is to be deleted in full.
:-8-: ITA. No:2933/Chny/2024 6. Per contra, the Ld.DR supported the orders of the AO as well as the Ld.CIT(A) and prayed for confirming the same.
We have heard both the parties, perused materials available on record and gone through the orders of the authorities below along with the judicial decisions relied on. Admittedly, the assessee is carrying on the business of manufacturing and exporting of egg powder and with an intention to expand the business at Russia had incurred expenditure to the tune of Rs.3,40,02,145/- during the financial years 2008-09 to 2011-12 under the various head like rent, salary, wages, travelling and administration expenses along with the project feasibility expenses. As stated by the assessee, during the financial year 2012-13 due to various unfavourable conditions, the assessee’s expansion of business by setting up of a branch at Russia did not materialize and hence, the expenditure spent during the above said four financial years was written off by debiting it to the Profit & Loss account in the impugned assessment year. It was also submitted by the assessee that these expenditures had not been claimed as expenses in those respective assessment years with an intention to capitalize, once the business was set up at Russia and amortize as per Section 35D of the Act on commencement of operations. Since the idea of setting up of a :-9-: ITA. No:2933/Chny/2024 branch was dropped / failed, the expenditure incurred for the earlier assessment years 2008-09 to 2011-12 were written off during the financial year 2012-13 and claimed as expenditure. The AO had disallowed the said expenditure stating that these expenses are related to earlier assessment years and the same shall be amortized over a period of time after the commencement of business and hence, not allowable as a revenue expenditure during the assessment year 2013-14. The CIT(A) also confirmed the same stating that the assessee has not claimed these expenses which were completely in its knowledge in the respective assessment years, in which it has been spent. On perusal of the submissions made by the Ld.AR, we note that these expenditures are spent for establishing a branch office at Russia for expansion of its existing business during the financial years 2008-09 to 2011-12 under the various heads to the tune of Rs.3,40,02,145/-. Further, we find that this has been claimed as expenditure by debiting to the P&L account during the impugned assessment year since the assessee decided to windup the setting up of a branch at Russia due to various unfavourable business conditions. Since the AO and the Ld.CIT(A) have not disputed the fact that the expenditures have been spent by the assessee during those years and not claimed as revenue expenditure in the respective assessment years, in our
:-10-: ITA. No:2933/Chny/2024 considered view, these expenses have been crystalized during the impugned assessment year due to discontinuation of expansion of opening a branch at Russia. Therefore, the same has been claimed as an expenditure in the impugned assessment year, which is an allowable expenditure u/s.37 of the Act.
7.1 It is further pertinent to note that reliance of assessee in its own case in for the assessment year 2011- 12, in respect of claim of expenditure of earlier assessment years during the assessment year 2011-12 on account of reimbursement of expenses to its subsidiary has been decided in favour of assessee by this Tribunal by observing as under:- “Therefore, we are of the considered view that once any particular expenditure is crystallized during relevant accounting period, the same needs to be allowed as deduction irrespective of the fact that said expenditure pertains to earlier financial year and paid in subsequent financial years. In this case, the ld.CIT(A) has recorded categorical finding that the liability towards expenditure was crystallized during the current year and hence, it does not constitute prior period expenses. We further noted that it is not a case of the AO that expenditure claimed by the assessee is not deductible at all. In fact, the AO has not made any adverse comments about deductibility of expenses. As regards, case law relied upon by the ld.DR in the case of Delhi Tourism & T.D.C. Ltd., vs. CIT, supra, we find that facts of the case before Hon’ble Delhi High Court was entirely different, where in that case it was the findings of the Hon’ble High Court that although the assessee known certain expenditure, it could not discharge its duty of providing the same in the books of accounts and hence under those
:-11-: ITA. No:2933/Chny/2024 facts, the Hon’ble Delhi High Court held that known expenditure of earlier financial years cannot be allowed in subsequent assessment years. In this case, on perusal of facts available on record, we find that although expenditure pertains to earlier financial years but the same was accrued and crystallized during current assessment year and hence, we are of the considered view that there is no error in the findings recorded by the ld.CIT(A) to delete addition made by the AO towards reimbursement of expenses to subsidiary company. Hence, we are inclined to uphold the findings of CIT(A) and reject ground taken by the Revenue.”
7.2 Further, the assessee’s reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs. Shri Ram Pistons & Rings Ltd., (supra), wherein the Hon’ble Court has observed that there was no change in the rate of tax for the assessment years in which expenditure has been incurred and the assessment year in which the expenditure has been claimed and hence, the expenditure claimed should be allowed. The relevant extract of the order is given below: “18. In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount.”
:-12-: ITA. No:2933/Chny/2024 6.3 Therefore, in the present facts and circumstances of the case and by relying on the various decisions of Hon’ble Courts supra, we are of the considered view that the AO as well as the Ld.CIT(A) have erred in disallowing the expenditure incurred and claimed by the assessee on account of expansion of business at Russia. In view of the above discussion we are inclined to set aside the order of the Ld.CIT(A) and direct the AO to delete the disallowance of expenditure to the tune of Rs.3,40,02,145/- claimed by the assessee during the impugned assessment year by allowing all the related grounds of the appeal raised by the assessee.
In the result, the appeal filed by the assessee is allowed.