“revenue expenditure”
The decision most relied on for revenue expenditure is CIT v. Woodward Governor India Pvt. Ltd. (312 ITR 254), cited in 968 judgments on BharatTax.
Leading authorities on revenue expenditure
Foreign exchange fluctuations, whether gains or losses, are inextricably linked to the underlying business transaction and must be accounted for under the mercantile system. The Supreme Court also affirmed the standard accounting principle of valuing stock at cost or net realisable value, whichever is lower.
When an income or expenditure is revenue neutral across different assessment years, where any benefit derived is offset by a corresponding liability or reversal, no additional tax liability arises, particularly concerning income recognition under the mercantile system of accounting.
A provision for expenses, such as warranty, is a deductible liability for income tax purposes if it constitutes a present obligation arising from past events, and a reliable estimate of the amount of obligation is possible.
Expenditure is classified as revenue or capital based on its practical business effect, necessity, or expediency, rather than solely on the juristic classification of rights; an enduring benefit does not automatically make an expenditure capital if it facilitates trading operations or business efficiency.
Expenditure that provides an enduring benefit should be amortized over its useful life, not allowed as a deduction in a single year, to prevent a distorted picture of profits. Specifically, premium paid on debentures for their issue should be amortized on a straight-line method over the life of the debentures.
An income tax assessment or addition cannot be sustained solely on the basis of suspicion, surmises, or conjectures, as strong suspicion does not amount to proof. The revenue authorities must rely on concrete evidence and material to frame an assessment.
The existence of an international transaction for Advertising and Marketing Promotion (AMP) expenditure requires the revenue to discharge the burden of proof. An explanation inserted under Section 92B does not automatically make AMP expenditure an international transaction.
When there is a nexus between an expenditure and the purpose of business, incurred on grounds of commercial expediency, the Revenue cannot question its reasonableness or assume the role of the businessman to compel profit maximization. This principle applies even if the business is not that of the assessee itself.
