Supreme Court approves 'deferred revenue' expense option

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Supreme Court's recent judgment in Taparia Tools Limited on tax treatment of debenture issue discount would be the most significant judgment on "deferred revenue expenditure" treatment.  Supreme Court has overruled the Bombay High Court judgment and has allowed deduction for discount on issue of debentures (which was in the nature of upfront interest payment).

 



The most critical observation from Supreme Court is on the ratio of famous ruling in Madras Industrial Investment Corporation Limited case (again involving debenture discount). Supreme Court at Para 18 has observed that "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 IT 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". Supreme Court while reconciling with Madras Industrial Investment decision, noted that a mere different treatment in the books of accounts cannot deprive claim for revenue expenditure.

 

The impact of this observation would be that taxpayers would have an option, going forward, in respect of deferred revenue expense (which is otherwise allowable as a revenue expenditure). There have been judgments wherein Courts did not accept deferred revenue expenditure as a concept under income tax law and instead classified expenditure either as revenue or capital. After Taparia Tools Limited ruling, taxpayer can claim deferred revenue items as revenue expense (like Taparia Tools facts and not like Madras Industrial Investment situation) or can defer the expense over a period. The endorsement of second option by the Supreme Court could benefit taxpayers having losses in initial years or those who are claiming tax holiday.
 
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