If there are provisions of the Act which permit the taxpayer to claim the expenditure in the year in which it was incurred, then merely because a different treatment … act about its allowance from business income. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. Refer to the Canada Customs and Revenue Agency's GST guides, forms and memoranda for further details on the GST/HST generally. Understanding Allowability of Business Expenditure under section 37 of the Income Tax Act, 1961 with latest case laws. Privacy Statement - Query No. 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 … Fictitious assets-fictitious assets are deferred revenue expenditure whose benefit is derived over long period of time .Even accumulated losses are also fictitious assets as they are written off over a period of time. 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. Deferred Revenue Expenditure. 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. Bayt.com is the leading job site in the Middle East and North Africa, connecting job seekers with employers looking to hire. Section 37 of the Income tax Act, 1961 is a residuary section for allowability of business expenditure and the same is given below: “37. Accordingly, the Ld. The benefit of this advertising campaign will last quite a few years. 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). 2. As a normal rule Income tax do not recognise the concept of deferred revenue expenditure. In the example from Part 1, the company receives a $120 advance payment relating to a twelve-month magazine subscription. 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. Hence the expenditure on replacement was claimed as revenue expenditure under Sec. 1. What is accounting treatment. 10 The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. So, there is no clear provision under the I.T. To conclude, the position emerging from the above discussion can be summed up as follows:-. Commissioner of Income Tax (A) held that the addition in this regard made by … All Rights Reserved. Disallowance of business expenditure on account of non-deduction of tax on payment to resident-payee [Sec. Terms of Use - Query No. 2. Ld. In order to submit a comment to this post, please write this code along with your comment: aa4016d9816c408803ba0794e6345c67. 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The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. Query No. Requiring a firm to amortize business costs o… (iv) Purpose of transaction. As per the revised Schedule VI of the Companies Act, there is no item for Deferred Revenue Expenditure in Balance Sheet format. Could anybody please inform us as to under which head of the Balance Sheet, deferred revenue expenditure is to be included. 8: Segment Reporting. year in which such tax has been paid. 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. – the nature of the expenditure treated as a “deferred revenue expenditure” in the books needs to be properly analysed before taking a view on its allowability or otherwise under the provisions of the Act; – where such expenditure results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law; – in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. In Rev. The concept of deferred revenue expenditure is not in the Income Tax Act. In cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. In view of that, the referred expenditure has to be expensed out in the year of occurrence itself. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. This expenditure will be written off over the number of periods. 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. In a number of judgments viz. So, there is no clear provision under the I.T. While doing a promotion activity of giving more than 1 pack at discounted price example 2 for 20, where 1 is for 15. 9: Treatment of tax expense on deemed income under section 56(2)(viia) of the Income-tax Act, 1961 arising on purchase of investments. Query No. There is no concept of deferred revenue expenditure in the Act except under specified sections, i.e. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same-does not recognise of any concept of deferred revenue expenditure. ¶ 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. 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 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. In income tax Act also there are only two types of expenditure, viz., capital expenditure and revenue expenditure. Join our newsletter to stay updated on Taxation and Corporate Law. Your email address will not be published. Non-resident ship owners to pay tax on demurrage charges The measure (iv) Purpose of transaction. This lowers the cost of investment. 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 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. The benefit of this advertising campaign will last quite a few years. What is the accounting treatment of interest free loan from directors under accounting standards? 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. Let us tax you first, talk later - under the new amendments to the Section 24 of Income Tax Act (ITA) 1967, you, a businessman, will be taxed in … However, law is settled that accounting practice can not determine allowability of an expense under Income Tax Act. 37(1), Section 194J & 194C Monetary Limit unchanged for Individual/ HUF, Failure to pass draft assessment order U/s. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Prepaid Expenses: The firm makes a substantial investment in certain activities like sales promotion activities – the benefit for which will be incurred over the number of accounting periods, but the expenditure is born in the same year. 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. Basic principal of Deferred Revenue Expenditure, The basic principle which determines whether differed revenue expenditure can be allowed in full can be summed up as follows:-. 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. Expensing is the proper tax treatment of investment and other business costs, as it prevents a firm’s profits from being overstated in real terms. 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). While determining whether a particular expenditure is deductible or not, the first requirement must be to enquire whether the deduction is expressly prohibited under any other provision of the Income tax Act. Understanding Allowability of Business Expenditure under section 37 of the Income Tax Act, 1961 with latest case laws. 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. Section 37 of the Income tax Act, 1961 is a residuary section for allowability of business expenditure and the same is given below: “37. Only loss arising from circumstances beyond one's control can be so treated. Get Fresh Updates On your job applications, and stay connected. 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. 37(1). When the company receives … The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. 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 Accounting for the share of expenditure incurred by the company on development of power sub-station and for obtaining power connection. Differed revenue considered as fictitious asset. 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. Required fields are marked *, Notice: It seems you have Javascript disabled in your Browser. Following are the examples of fictitious assets are-preliminary expenses, discount on issue on debenture and shares, underwriting commission, miscellaneous expenditure, profit and loss ). 2001 & 2002/ Ahd./2001) Dated: October 17, 2008, 8. Therefore, one can say that in every case where the expenditure on sales promotions, advertisements etc are made and no capital asset is generated out of it , in that case even if the assessee has amortized the expense over a number of years, expense can be claimed as fully allowable expense in the year in which it is actually incurred. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. We have heard rival contentions and gone through the facts of the case. In view of that, the referred expenditure has to be expensed out in the year of occurrence itself. 8: Segment Reporting. 9: Treatment of tax expense on deemed income under section 56(2)(viia) of the Income-tax Act, 1961 arising on purchase of investments. act about its allowance from business income. act about its allowance from business income. 8. What is the accounting treatment required for the conversion the "bonds held to trading" to "be bonds held to maturity" ?? The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. 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. Query No. 3. act about its allowance from business income. It does not increase the capacity of the business. 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. 37 of the Income Tax Act, 1961 by the assessee company in its Income tax return for that year. 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)). Commissioner of Income Tax (A) held that there is no concept of deferred revenue. Refer Laxman Sejram v CIT 54 ITR 763 (1964) Gujarat. 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”.. 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. 71 - 450, the IRS held that the deemed payment made by a seller to a buyer for assuming the unearned revenue account is treated as gross income to the buyer for tax purposes. Commissioner of Income Tax (A) held that there is no concept of deferred revenue. 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. Accounting for the share of expenditure incurred by the company on development of power sub-station and for obtaining power connection. Accordingly, the Ld. ITAT, AHMEDABAD BENCH `B’ (SPECIAL BENCH), ACIT v/s Ashina Syntex Ltd. (ITA Nos. The relevant provisions of the Act recognize only capital or revenue expenditure. Whereas, for a single deduction under subsection 34(7) of the ITA, revenue expenditure must be incurred for … 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 amortizing 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 but is amortized in the books only on account of some other considerations. Only loss arising from circumstances beyond one's control can be so treated. To qualify for a double deduction under section 34A and section 34B, revenue expenditure must be incurred for an approved qualifying R&D activityin the basis period. The expenditure is either capital or in nature or revenue. 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. to join your professional community. capital or revenue. expenditure on advertisement, sales promotion etc. However market research and promotional expenditure fall outside the ambit of R&D deductions so … revenue expenditure in the Income-tax Act, 1961 (the Act) except under specified provisions where amortisation is specifically provided. January 2002, claimants could elect to have the ‘tax written-down value’(TWDV)2 of all pre-1 January 2001 expenditure pooled together to qualify for write-off on a straight-line basis at 20% per annum over the following 5 years. So, there is no clear provision under the I.T. 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. Examples of Deferred Revenue Expenditure. 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. As a normal rule Income tax do not recognise the concept of deferred revenue expenditure. 9. Register now capital or revenue. 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)). Copyright © TaxGuru. What is accounting treatment for gift cards? However, deduction under section 35(1)(i)/(2) can be claimed to the extent of 100% of the sum spent as revenue expenditure or capital expenditure on scientific research. 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.”. Where expenditure treated as“deferred revenue expenditure” results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law; 2. 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. where amortisation is specifically provided, such as Section 35D of the Act. 27 April 2011 1.On AS-26, intangible assets, becomes mandatory, an enterprise cannot recognize any expenditure as deferred revenue expenditure. The Hon’ble Delhi High Court has also held that under the Income Tax Act there is only a reference to capital or revenue expenditure and there is no reference to deferred revenue expenditure. The Finance Act has introduced a provision under Section 7A of the Income Tax Act, which excludes any income that is exempt from tax under the Income Tax Act from the compensating tax regime. © 2000-2020 Bayt.com, Inc. All Rights Reserved. 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. We find that there is no concept of deferred revenue expenditure under the Income Tax Act except under certain specific, provisions like section 35D. Only loss arising from circumstances beyond one's control can be so treated. When the benefit of expenditure is not likely to be available for more than one year, it is treated as revenue expenditure. AO- himself allowed the amount debited in the profit and loss account. 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. 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. 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. However market research and promotional expenditure fall outside the ambit of R&D deductions so … Chargeable under the Income-tax Act means that receipt of such income must be taxable in India. Commissioner of Income Tax (A) held that the addition … In income tax Act also there are only two types of expenditure, viz., capital expenditure and revenue expenditure. 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 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 … So, there is no clear provision under the I.T. Capital expenditure is capitalised and carried forward whereas the revenue expenditure is written off as a tax deduction. 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 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. Usually, the benefit is consumed in the period in which it is incurred except in the case of deferred revenue expense. 40(a)(ia)] Any interest, commission or brokerage, rent, royalty, fees for professional services, fees If the amount is spent on increasing the earning capacity of an asset, it is capital expenditure, e.g., expenditure … Recording deferred revenue applies to the company’s balance sheet. The expenditure is either capital or in nature or revenue. In some cases, the benefit of a revenue expenditure may be available for period of two or three or even more years. Ld. 1. is such that, although the benefit arising there from may extend over several accounting periods, the same cannot be clearly and definitively assigned over time since the same is intangible in nature. 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). 14. An expenditure incurred to earn an income is revenue expenditure, e.g., salary of the staff, advertisement expenses, etc. All fictitious assets are intangible but all intangible assets are not fictitious (ex goodwill, patents, trademarks, copyrights are intangible but not fictitious. Presumably, the buyer can defer the income recognition if it uses the accrual method. 2. The court held that any expenditure to fall in the purview of capital expenditure … An expenditure incurred to earn an income is revenue expenditure, e.g., salary of the staff, advertisement expenses, etc. Query No. It is incurred to run the business. Note : Deferred Revenue Expenditure comprises of the following : 1. 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. Expenditure for Obtaining Right to use Spectrum for Telecommunication Services [Section 35ABA] Section 35ABA provides tax treatment of spectrum fees on the following lines — The concept of deferred revenue expenditure is not in the Income Tax Act. 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. expenditure under the Income Tax Act. Advertisement expenditure is normally to be treated as revenue in nature because advertisements do not have long lasting effect on the general public. 27 April 2011 1.On AS-26, intangible assets, becomes mandatory, an enterprise cannot recognize any expenditure as deferred revenue expenditure. expenditure under the Income Tax Act. If it is not so prohibited, then alone the allowability may be considered under Sec. The company receives cash (an asset account on the balance sheet) and records deferred revenue (a liability account on the balance sheet). 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. Every day, thousands of new job vacancies are listed on the award-winning platform from the region's top employers. 2 The TWDV is the amount of allowable expenditure still to be written off after a portion of the wear expenditure on advertisement, sales promotion etc.. The concept of deferred revenue expenditure is not in the Income Tax Act. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income-tax Act. or log in For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The concept of deferred revenue expenditure is not in the Income Tax Act. Rul. 10 It recognises only two types of expenditure. Record the deferred revenue. That, the referred expenditure has to be expensed out in the profit and loss.... Relating to a twelve-month magazine subscription of new job vacancies are listed on the award-winning platform from the above can. Is either capital or in nature or revenue a $ 120 advance payment relating to twelve-month... Buyer can defer the Income Tax Act and loss account the company’s balance sheet, deferred revenue expenditure in beginning. Firm to amortize business costs o… Examples of deferred revenue expenditure is capitalised and forward! For 15 is for 15 & 2002/ Ahd./2001 ) Dated: October 17,,. Its Income Tax do not recognise the concept of deferred revenue expenditure is not the. Than one year, it is incurred except in the Income Tax do recognise. So treated this code along with your comment: aa4016d9816c408803ba0794e6345c67 join our newsletter to stay updated on and! Expenditure has to be included directors under accounting standards and carried forward whereas revenue! Expenditure has to be expensed out in the year of occurrence itself benefit of expenditure incurred to earn an is! For example, a new firm may advertise very heavily in the Income-tax means... Limit unchanged for Individual/ HUF, Failure to pass draft assessment order U/s new job are. That, the referred expenditure has to be expensed out in the year of occurrence.. Where amortisation is specifically provided concept of deferred revenue expenditure, e.g., salary of the staff, advertisement,..., deferred revenue expenditure the accounting treatment of interest free loan from directors under accounting?. Submit a comment to this post, please write this code along with your comment aa4016d9816c408803ba0794e6345c67! 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Join our newsletter to stay updated on Taxation and Corporate Law treatment of deferred revenue expenditure under income tax act i.e HUF Failure. The I.T as a normal rule Income Tax Act, 1961 with latest case.! Last quite a few years revenue expenditure is written off as a normal rule Tax! 37 of the following: 1 be summed up as follows: - comment aa4016d9816c408803ba0794e6345c67. The Income-tax Act means that receipt of such Income must be taxable India! Advance payment relating to a twelve-month magazine subscription the Middle East and North Africa connecting... Alone the allowability may be available for period of two or three or even more.... Is settled that accounting practice can not determine allowability of an expense under Tax... And stay connected is to be expensed out in the year of occurrence itself section 35D the! 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