Understanding Allowability of Business Expenditure under section 37 of the Income Tax Act, 1961 with latest case laws. In a number of judgments viz. 1. 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Though the nature of such expenditure is revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. In calculating income for tax purposes, accounting for prepaid expenses and deferred charges should, in most cases, be in accordance with the matching principle, a generally accepted accounting principle, except where the Income Tax Act provides otherwise (for example, see paragraph 20(1)(e) and section 37). Deferred Revenue Expenditure: - In some cases, the benefit of a revenue expenditure may be available for period of two or three or even more years. 2001 & 2002/ Ahd./2001) Dated: October 17, 2008, 8. 207.1 - PART XI.1 - Tax in Respect of Deferred Income Plans and Other Tax Exempt Persons; 207.3 - PART XI.2 - Tax in Respect of Dispositions of Certain Properties; 207.5 - PART XI.3 - Tax in Respect of Retirement Compensation Arrangements; 207.8 - PART XI.4 - Tax on Excess EPSP Amounts In other cases where the same does not result in the creation of any capital asset or.where the same is not allocable over defined future time periods there .can be-no case for amortising the same under the Act over the expected period over which the benefit is likely to arise there from since in such cases the expenditure is essentially revenue in nature Out is amortised in the books only on account of some other considerations. Understanding Allowability of Business Expenditure under section 37 of the Income Tax Act, 1961 with latest case laws. Whether or not expenditure is of enduring nature, the Hon’bte Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 has itself observed that, “The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions ,nor are the notions of “capital” or “revenue” a judicial fetish. In detail Facts The taxpayer, M/s Fine Jewellery (India) Ltd.1, was engaged in the business of manufacturing and exporting jewellery and incurred certain recurring Such expenditure is then known as "Deferred Revenue Expenditure" and is written off over a period of a few years and not wholly in the year in which it is incurred. The expenditure is either capital or in nature or revenue. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. 9: Treatment of tax expense on deemed income under section 56(2)(viia) of the Income-tax Act, 1961 arising on purchase of investments. The concept of deferred revenue expenditure is not in the Income Tax Act. The concept of deferred revenue expenditure is not in the Income Tax Act. Ld. Maintained by V2Technosys.com, Taxguru Consultancy & Online Publication LLP, 509, Swapna Siddhi, Akurli Road, Near Railway Station, Kandivali (East), Allowability of Deferred Revenue Expenditure u/s. However market research and promotional expenditure fall outside the ambit of R&D deductions so … Accounting for the share of expenditure incurred by the company on development of power sub-station and for obtaining power connection. Non-resident ship owners to pay tax on demurrage charges The measure In detail Facts The taxpayer, M/s Fine Jewellery (India) Ltd.1, was engaged in the business of manufacturing and exporting jewellery and incurred certain recurring It recognises only two types of expenditure. Under s EW 12, the Applicants are required to use a spreading method to calculate an amount of income or expenditure for each income year over the term of the Deferred Payment Arrangement, other than the income year in which a base price adjustment (BPA) is required (s EW 13(1)). Such expenditure is then known as "Deferred Revenue Expenditure" and is written off over a period of a few years and not wholly in the year in which it is incurred. It recognises only two types of expenditure. Ld. What is the accounting treatment of interest free loan from directors under accounting standards? 2 The TWDV is the amount of allowable expenditure still to be written off after a portion of the wear building’ accounted as a deferred revenue expenditure in the books of accounts, would be an admissible deduction under section 37(1) of the Income-tax Act, 1961 (the Act). The benefit of this advertising campaign will last quite a few years. However, law is settled that accounting practice can not determine allowability of an expense under Income Tax Act. Examples of Deferred Revenue Expenditure. Expenses covered under section 30 to 36: If any expense is covered under section 30 to section 36 of the Income tax Act, 1961 and could not be allowed due to non satisfying condition laid down under section, same cannot be allowed under this residuary section. 37(1), Section 194J & 194C Monetary Limit unchanged for Individual/ HUF, Failure to pass draft assessment order U/s. Every day, thousands of new job vacancies are listed on the award-winning platform from the region's top employers. The concept of deferred revenue expenditure is not in the Income Tax Act. Currently, businesses can choose to fully expense the costs of research and development (R&D); that is, they can deduct the costs of R&D from their taxable income in the year that those costs occur. ¶ 22 was added to explain the income tax treatment applicable to rebates of GST/HST as well as input tax credits used in calculating the amount of GST/HST payable by a person who is registered under the Excise Tax Act. But, it should be noted, loss resulting from transactions entered into, such as speculative purchase or sale of a large quantity of a commodity, cannot be treated as deferred revenue expenditure. year in which such tax has been paid. Under s EW 12, the Applicants are required to use a spreading method to calculate an amount of income or expenditure for each income year over the term of the Deferred Payment Arrangement, other than the income year in which a base price adjustment (BPA) is required (s EW 13(1)). Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. Deferred Revenue Expenditure. The tax deductions for qualifying R&D expenditure are subject to specific restriction rules for certain categories of expenses disallowed under Section 15 of the Income Tax Act. JCIT [ (2005) 4SOT 393 (Mumbai)],it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in … Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability incurred which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written-off over a period of time e.g. In Rev. Need for provision for deferred tax arises when any expenditure is debited in the computation of net taxable income is in excess of what have been actually debited in the books of account and vice versa. We find that there is no concept of deferred revenue expenditure under the Income Tax Act except under certain specific, provisions like section 35D. Get Fresh Updates On your job applications, and stay connected. When the company receives … 8. Accordingly, the Ld. Terms of Use - Expenditure for Obtaining Right to use Spectrum for Telecommunication Services [Section 35ABA] Section 35ABA provides tax treatment of spectrum fees on the following lines — So, there is no clear provision under the I.T. Cookie Policy, Question added by NILA REJESH ACA , Auditor , SAJEEV & AJITH CHARTERED ACCOUNTANTS, Answer added by Ibrahim El-Morsi Ibrahim El-Morsi El-Morsi, Regional Accountant , Gulf Elevators & Escalators Co. The expenditure is either capital or in nature or revenue. What is accounting treatment. Record the deferred revenue. Register now However under Income tax, if Preliminary and share issue expenses are for the first time issue and falling under section 35D, it is to be claimed in 5 installments as expenditure, this requires accounting of deferred tax asset/liability due to timing difference. 37 of the Income Tax Act, 1961 by the assessee company in its Income tax return for that year. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. Only loss arising from circumstances beyond one's control can be so treated. To conclude, the position emerging from the above discussion can be summed up as follows:-. Accordingly, the Ld. act about its allowance from business income. Disallowance of business expenditure on account of non-deduction of tax on payment to resident-payee [Sec. 37(1). Amar Raja Batteries Ltd. v. ACIT [(2004) 91 ITD 280 (Hyd)j,JCIT v. Modi Olivetti Ltd. [(2005)4 SOT 859 (Delhi)], ACIT vs. Medicamen Biotech Ltd. [(2005) 1 SOT 347 (Delhi)],Hero Honda Motors Ltd. v. Joint Commissioner of Income Tax [(2005) 3 SOT 572 (Delhi)] and Charak Pharmaceuticals v. JCIT [(2005) 4SOT 393 (Mumbai)],it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. Could anybody please inform us as to under which head of the Balance Sheet, deferred revenue expenditure is to be included. expenditure under the Income Tax Act. ITAT, AHMEDABAD BENCH `B’ (SPECIAL BENCH), ACIT v/s Ashina Syntex Ltd. (ITA Nos. If the amount is spent on increasing the earning capacity of an asset, it is capital expenditure, e.g., expenditure incurred for fitting new windows of factory building. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The company receives cash (an asset account on the balance sheet) and records deferred revenue (a liability account on the balance sheet). Usually, the benefit is consumed in the period in which it is incurred except in the case of deferred revenue expense. There is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. Following are the examples of fictitious assets are-preliminary expenses, discount on issue on debenture and shares, underwriting commission, miscellaneous expenditure, profit and loss ). However market research and promotional expenditure fall outside the ambit of R&D deductions so … (iv) Purpose of transaction. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”. Generally, the R&D benefits granted would depend on the place that the R&D work is conducted and whether the R&D is related to the existing trade of the taxpayer. When the benefit of expenditure is not likely to be available for more than one year, it is treated as revenue expenditure. It will be better to write off the expenditure in there or four and not in the first year.When loss of a specially heavy and exceptional nature is sustained, it can also treated as deferred revenue expenditure. Query No. In some cases, the benefit of a revenue expenditure may be available for period of two or three or even more years. 9. 8: Segment Reporting. act about its allowance from business income. Bayt.com is the leading job site in the Middle East and North Africa, connecting job seekers with employers looking to hire. The scheme of s. 35 of the Income tax Act, 1961 provide for deduction upto 200% for research and development expenditure irrespective of whether capital or revenue in nature. A Public Ruling as provided for under section 138A of the Income Tax Act 1967 is issued for the purpose of providing guidance for the public and officers of the Inland Revenue Board Malaysia. Join our newsletter to stay updated on Taxation and Corporate Law. If it is not so prohibited, then alone the allowability may be considered under Sec. As a normal rule Income tax do not recognise the concept of deferred revenue expenditure. Section 37 of the Income tax Act, 1961 is a residuary section for allowability of business expenditure and the same is given below: “37. discount on issue of debentures) akin to prepaid expenses the same would be allowable over the period to which these relate proportionately, applying the matching principle. So, there is no clear provision under the I.T. to join your professional community. 2. Advertisement expenditure is normally to be treated as revenue in nature because advertisements do not have long lasting effect on the general public. 40(a)(ia)] Any interest, commission or brokerage, rent, royalty, fees for professional services, fees Chargeable under the Income-tax Act means that receipt of such income must be taxable in India. It will be easier to understand the meaning of deferred revenue expenditure if you know the word deferred, which means “Holding something back for a later time”, or “postpone”.. where amortisation is specifically provided, such as Section 35D of the Act. It sets out the interpretation of the Director General of Inland Revenue in respect of the particular tax law, and the policy and procedure that An expenditure incurred to earn an income is revenue expenditure, e.g., salary of the staff, advertisement expenses, etc. Whereas, for a single deduction under subsection 34(7) of the ITA, revenue expenditure must be incurred for … It does not increase the capacity of the business. In income tax Act also there are only two types of expenditure, viz., capital expenditure and revenue expenditure. expenditure under the Income Tax Act. Note : Deferred Revenue Expenditure comprises of the following : 1. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. Section 37 of the Income tax Act, 1961 is a residuary section for allowability of business expenditure and the same is given below: “37. If the pre-operative expenses are of revenue nature, the possibility of claiming those expenses under section 37 of the income tax Act is highly debatable because the Section 3 of the Income-tax Act clearly says that previous year begins only on the date of commencement of business,and hence, any expenses incurred before the date of commencement of business cannot be considered as … It is incurred to run the business. difference between the amount of expenses or incomes that are considered in books of accounts and the expenses or incomes that are allowed/disallowed as per Income Tax Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. expenditure on advertisement, sales promotion etc. act about its allowance from business income. 27 April 2011 1.On AS-26, intangible assets, becomes mandatory, an enterprise cannot recognize any expenditure as deferred revenue expenditure. 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