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Revenue Expenditure-Year of deductibility

Started by PANKAJ JAIN, August 06, 2008, 02:42:47 PM

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Dear Friends,

A Co.(following accrual system of accounting) has incurred expenditure on software devlopment, which was held to be revenue in nature by the AO. However the expenditure was spread in two years and was claimed as deduction in the year in which the software was operationalised i.e year 2. The AO disallowed the portion of expenditure incurred in year 1 on the ground that the expenditure was not incurred during the relevant previous year.

Can the principle of put to use/available for use be applied in the case of revenue expenditure? ???


Your query is not very clear.

Did the Company claim it in year 1 or year 2?
When did the AO allow it as deduction?

Kindly clarify.


The Co. claimed the full deduction in year 2 as the software was operationalised in this year. The AO allowed the deduction in year two only to the extent the expenditure was incured in the said year i.e.he disallowed the payments made to the vendor in year 1 on the ground that the expenditure has not been incurred during the relevant previous year. I hope this clarifies the case........


There is no concept of deferred revenue expenses in the Income tax act, 1961.
Either you claim it entirely in the first year or you claim it as Capital asset and therefore as depreciation.
If you go for appeal then as an alternative plea do claim it a s a Capital asset.

If you claim it as revenue expenditure then the AO can disallow the claim of the first year expenditure as prior period item.

IThe plea of the year in which the software was operationalised is taken when you want ot capitalise something.
Please tell me your counter-arguements also.

Bhavesh Savla
Keep smiling


I would beg to differ on this point.

Lets take an example where a Company purchases non cancellable air tickets in the month of MArch for the flight scheduled in April. Can the Co. claim the deduction in respect of amounts paid for purchase of tickets in year1?

If this is the case then there cannot be any concept of prepaid expenses.

One distinction whcih should be noted here is the expenditure is not in the nature of deferred revenue expenditure but is Prepaid Expenses. Accordingly the deduction should be allowed in the year in whcih the benifit is derived by the Assessee.

Please let me know your views on this.


Prior period expenses

In a recent ruling, the Delhi high court had an occasion to deal with the tax treatment of prior period expenditure. The court held that the question as to the year in which a deduction is allowable may be material when the rate of tax chargeable is different in different years. The court opined that where tax is levied at a uniform rate, it is immaterial whether the deduction is allowed in one assessment year or another. The tax department is not at loss in any event. The high court also observed that the tax department should restrain itself from raising points which do not affect the taxability of the assessee or the tax that the Department is likely to collect from the assessee in one year or other.

The judgement is here:



sivaiah G

I also found that the concept of prepaid expenses is correct. Just because an amount is paid in advance, it cannot be said that the expenditure is incurred in earlier year. The payment is made in advance. Since the expenditure pertains to the present year, the whole expenditure should be allowed during the current year only.

with regards,


But as per the original message, the expenditure has been spread over 2 years. It has not been kept as an advance in the first year. Therefore if the expenditure is charged off the in the books over a period of two years, then it can be claimed in year 1 on incurrance basis or if it is capital in nature then it can be claimed as part of block under depreciation route. I do not think it is possible not to claim in the expenditure charged off in the books in Year 1 and thereafter claim the full expenditure in Year 2.


I concur with the latest author Ms.bhuvana. Also see Amway India case on ERP reported in 21 SOT 1(SB) DELHI


Also see Tirupathi Microtech 112 ITD 327 on ISO charges.


there is one very old decision of Bombay High Court on this point that is of Nagri mill case  33 ITR 681 was followed by Delhi High Court in the case of Vishnu industrial gases available on lexsite