AO to examine claim of deferred revenue expenditure not claimed in P&L Account

ITAT directs AO to examine claim of deferred revenue expenditure not claimed in profit and loss account

In a recent judgment, ITAT Indore has directed AO to examine claim for deduction of expenses treated by assessee as “deferred revenue expenses” in books of account as books entries are not determinative factors to deal with the income/expenditure whether taxable or deductible.

ABCAUS Case Law Citation:
4571 (2025) (05) abcaus.in ITAT

Important Case Laws relied upon by Parties:
National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC)
Goetze (India) Vs. CIT (SC) 284 ITR 323

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the order passed by the Assessing Officer (AO) ignoring the claim made by the appellant in respect of deferred revenue expenses which were claimed in the revised computation filed during the course of assessment proceedings and were allowable as per the Mercantile System of accounting.

The assessee was a society governed under the provisions of Multi State Cooperative Societies Act, 2002. For the relevant Assessment Year, the assessee filed return which was subjected to scrutiny assessment through notices u/s 143(2)/142(1).

During scrutiny proceedings, the assessee filed a revised “Computation of Total Income” making two-fold adjustments, first, one by of claiming deduction for “deferred expenses” and secondly accepting disallowance u/s 40(a)(ia) on account of non-deduction of tax at source (TDS) out of various payments which included disallowance out of “deferred revenue expenses” paid without TDS).

The said deferred revenue expenses had been represented in Balance-Sheet and not claimed as deduction in the P&L Account. The assessee, however, submitted to AO that such expenditure though shown as “deferred revenue expenditure” was relatable to the year under assessment; was in respect of business undertaken during the year; and was prima facie verifiable from records. The assessee prayed AO to allow the same as deduction while framing assessment.

In assessment-order, however, the AO remained silent qua the adjustment for deferred revenue expenditure and thus did not grant deduction of assessee’s claim of “deferred revenue expenditure” expenses. But the AO made second adjustment by making a disallowance u/s 40(a)(ia) equivalent to 30% of the very same expenditure for failure to deduct TDS.

During first-appeal, the assessee made a detailed submission to CIT(A) claiming that the assessee’s valid claim of deduction of deferred revenue expenditure needs to be allowed but the CIT(A) rejected assessee’s submission and approved AO’s action with the reasoning that the Hon’ble Apex Court has held in Goetze (India) that the AO cannot allow the claim made by assessee through revised Computation of Total Income without filing return/revised return of income.

Before the Tribunal the assessee contended that the valid claim of assessee, even if not allowed by AO, deserved to be allowed by Tribunal which is an appellate authority. He submitted that a legal claim can be admitted by appellate authorities and the decision of Goetze (India) does not come in the way of CIT(A) or ITAT which are appellate authorities. For this proposition, the assessee relied upon several decisions.

On the other hand, the Revenue contended that the assessee’s claim was not a legal plea only, it involved substantial factual investigation and that the claim was never made through a revised return.

The Tribunal observed that as per the decision of the Hon’ble Supreme Court, the restriction has been placed on the power of AO for not entertaining any claim of deduction otherwise in absence of revised return. However, this judgement does not lay down that the appellate authority shall have any fetters on its powers in entertaining a claim made without filing a revised return which is otherwise sustainable in law.

The Tribunal further observed that the Hon’ble Supreme Court in National Thermal Power Company has held that Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on tax liability of the assessee notwithstanding the fact that it was not raised before CIT(A). Further, considering the judgement of the Hon’ble Supreme Court in Goetze (India) in juxtaposition to National Thermal Power Company, it becomes quite clear that although the assessee cannot make a claim before AO otherwise than through the return of income, but there are no restrictions on the power of the Tribunal to entertain such claim for examination provided the facts exists on record.

The Tribunal further noted that these are also settled judicial propositions that (i) no tax shall be levied or collected except by authority of law [Article 265 of Constitution] and (ii) the purpose of assessment proceedings is to assess correct tax payable by an assessee in accordance with law [CBDT Circular No. 14-XL(35) dated 11.04.1955]. Therefore, these authorities are clear point that the ITAT can very well admit claim of assessee provided the facts are available on record.

The Tribunal further noted that as per the audited balance sheet of the assessee, the same expenditure appeared in Profit and Loss Account under “other expenses” and in Balance sheet under the head “short term loans and advances”. These both entries were of the same expenditure, the only difference was that the first part had been debited in P&L A/c and claimed as deduction in return of income whereas the second part had been treated as “deferred expenditure” in Balance-Sheet and not claimed as deduction in return of income. Therefore, the claim is very much apparent from records.

The Tribunal further noted that the AO had himself invoked section 40(a)(ia) and made disallowance equivalent to 30% of the very same expenditure on the footing of non-deduction of TDS out of same. Under such a situation, the revenue cannot take a stand that the facts of the issue are not on record.

The Tribunal further observed that the Mumbai ITAT had held that it is settled law that books entries are not determinative factors to deal with the income/expenditure whether taxable or deductible. The provision of law has to be taken In the instant appeal, the assessee had challenged the order of CIT(A) in confirming consideration.

Accordingly, the Tribunal restored the issue to the file of AO to look into the claim of “deferred revenue expenses” made by assessee and grant appropriate deduction after carrying out such exercise as the AO may consider necessary. While doing so, the AO shall also take into account that the assessee has not claimed deduction of impugned expenditure in any subsequent year(s).

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