IL & FS INVESTMENT MANAGERS LTD,MUMBAI vs. DCIT 10(1), MUMBAI

O R D E R PER MANOJ KUMAR AGGARWAL (AM):

1. On the facts and circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in confirming the disallowance of the payment of placement fees amounting to Rs. 2,55,84,118/-. The appellant prays that the conclusion reached by the learned Commr. of Income Tax (Appeals) is erroneous. The appellant prays that the deduction of Rs. 2,55,84,118/- may be granted.

2. On the facts and circumstances of the case the appellant denies the liability of payment of interest u/s. 234B. On the facts and circumstances of the case the appellant submit that levy of interest u/s. 234B is not justified and be deleted.

2. The facts in brief, are that the assessee is a resident public company engaged in the business of asset management for venture capital and private equity funds. It has filed its return of income for Assessment Year 2009-10 declaring total income at Rs.59,43,92,710/- which was initially processed under Section 143(1) and later taken up for scrutiny assessment under Section 143(3). The assessment thereof was completed by Assessing Officer [AO] vide its order dated 18.03.2013 computing total income at Rs.62,24,18,260/- after making certain disallowances and additions. One of the issues was related with the ‘placement fees expenditure’ claimed by assessee on payment basis. During the year the assessee floated two venture capital funds namely ‘Tara India Fund III Trust’ and ‘Tara India Fund III Domestic Trust’ and both Trust raised funds aggregating Rs. 171.30 Crores. The funds were placed with the help of three entities namely Standard Chartered, IL&FS Financial Services Ltd and IL&FS Investment Securities Ltd. For rendering these services, assessee made a payment of placement fees of Rs.3,06,85,289/- (net of service tax) to these entities as per the normal practice in the line of business. These expenses were treated as deferred revenue expenditure in the books of the accounts of the assessee and accordingly only a portion thereof amounting to Rs.51,01,171/- was debited to Profit & Loss Account of the assessee. But the same was claimed in full as revenue expenditure in computation of income. After hearing the contentions of the assessee, AO disallowed the claim of assessee and allowed only that portion of these expenses which were debited to the profit and loss account by making following observations:-

“The contentions of the assessee have been considered but the same are not tenable. As per the submission of the assessee it is seen that the assessee has himself treated the expenses as deferred revenue expenditure and accordingly debited an amount of Rs. 51,01,171/- as the expenses attributable to the income of the current year. By disallowing the expenses pertaining to the current year and claiming the total amount of the expenses, the assessee is infringing the matching principle. As per the matching principle, the expenses attributable to the income for a given year have to be claimed against the income in the given year. Expenses cannot be claimed against the income which it does not pertain to. As per the I. T. Act it is mandatory for a company to follow accrual basis of accounting, wherein the income and expenses accruing in a given year have to be accounted in that year only. Accordingly, the assessee has to book the expenses in the year of accrual and offer to tax the income in the year of occurrence. In the present case, the assessee has claimed the total expenses pertaining to the setting up of the funds, whereas the income from which is going to accrue in the following years. It is also pertinent to note that the assessee has himself treated this expenditure as deferred revenue expenditure, whereby the expenses pertaining to the current year have been debited to the P & L A/c. By claiming the total expenses in the computation, the assessee has claimed the higher expenses in the current year and thereby paid lower taxes by postponing the tax liability to next years. Thus by adopting this method, the assessee has decreased the income of the year to the extent of Rs. 2,55,84,118/- , since this is against the provision of I.T. Act, the amount of Rs. 2,55,84,118/- pertaining to placement fees is disallowed and added to the income of the assessee. Penalty proceedings u/s. 271(1)(c) of the I.T. Act, 1961, are initiated for furnishing inaccurate particulars and/or concealment of income.”

“I have considered this issue in detail. The appellant had claimed all the expenditure at one go though these expenditure was spread over in various years in the books of accounts. In this process appellant had reduced the tax liability by claiming all the expenditure though part of expenditure pertains to later years. I find no infirmity in the order of A.O. as appellant has to follow mercantile system of accounting in which matching and revenue expenses has to be same then correct tax liability can be determined, hence, I find no infirmity in order of A.O. and the additions made by the AO is upheld. This ground of appeal is dismissed.”

4. Aggrieved by the stand of CIT(A), the assessee is in appeal before us. Before us, the learned Authorised Representative (AR) has contended that an expenditure incurred wholly and exclusively for the purposes of business are allowed in full under Section 37(1) provided the same is not in the nature of capital expenditure or personal expenses of the assessee. There is no concept of deferred revenue expenditure in the Income Tax. Whenever expenditure has been incurred for the purpose of the business and the same is revenue in nature, the same is allowable in full in the current year itself and cannot be spread over to different years, unless statute mandates the same. Moreover, the assessee has claimed this expenditure in full during the impugned assessment year and has suo-moto disallowed subsequent amortized amount debited to profit and loss account in the subsequent years. In support, AR submitted computation of income of the assessee for various subsequent years. The AR has also placed reliance upon the decision of Apex Court in the case of the Taparia Tools Limited Vs. JCIT (372 ITR 605). The departmental representative (DR), on the other hand has relied upon the stand of the CIT (A) and contended that funds have been raised by the assessee, the benefit of which accrues to the assessee over different years and therefore, the expenditure should also be spread in the like manner over the different years. The assessee himself has treated the same as deferred revenue expenditure in the books of accounts but claimed the same in full in computation of income which violates the Matching principal of accounting and hence the AO has rightly disallowed a portion of these expenses.

At the outset it would be prudent to reproduce a portion of section 37(1) which deals with deduction of these expenses and reads as follows:-

“Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Therefore, whenever expenditure has been incurred wholly and exclusively for the purpose of the business or profession, the same is allowed in full in computing the income chargeable under the head profits and gains of business and profession provided the same are not capital expenditure or personal expenses of the assessee. Admittedly, the nature of impugned expenses is not in dispute. Hence, whenever the expenses are found to be of revenue in nature and found to be laid out exclusively and wholly for the purposes of the business of the assessee, the same are allowed in full as per the statutory provisions.

Over above conclusion find strength from the following observation of Apex court in the case of Taparia Tools Ltd. Vs. JCIT (supra):-

There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.