The Ahmedabad Bench of Income Tax Appellate Tribunal ( ITAT ) allowed Sun Pharma Laboratories Ltd. to claim an immediate revenue deduction of ₹89.39 lakh for expenses related to an Apple iPad care protection plan.
In the appeal for the Assessment Year (AY) 2015-16, the revenue-appellant, representing the tax authorities, contested the order of the Commissioner of Income Tax (Appeals) [CIT(A)], dated 28.02.2019, which ruled in favor of Sun Pharma Laboratories Ltd., the respondent-assessee.
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The primary issue in the appeal concerned the CIT(A)’s decision to delete an addition of ₹89,39,883, which the Assessing Officer (AO) had disallowed as prepaid expenditure for a care protection plan for Apple iPads.
The AO argued that the expenditure should have been classified as prepaid, given that the plan was valid for a period of 12 to 24 months. On the other hand, the respondent-assessee contended that under the mercantile system of accounting, a prepaid expenditure referred to a payment made before any liability arose.
The respondent argued that the expenditure had been incurred for business purposes and should be allowed in full.
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The CIT(A) examined the arguments and relevant documentation, including the purchase invoice for the care protection plan. In para 16.2.1 of the order, the CIT(A) observed that the liability had arisen fully once the agreement for the protection plan had been entered into. The expenditure was categorized as ‘deferred revenue expenditure,’ comparable to advertising or staff training costs, which yield benefits over an extended period.
The CIT(A) ruled that the expenditure was not capital in nature and instructed the AO to allow the entire amount under Section 37(1) of the Act.
During the appeal proceedings, the Departmental Representative (DR) for the revenue failed to demonstrate any errors in the CIT(A)’s findings. The respondent’s counsel supported the CIT(A)’s ruling, citing a Jurisdictional High Court judgment which confirmed that such expenditures should be treated as revenue in nature.
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The two member bench comprising T.R.Senthil Kumar (Judicial Member) and Annapurna Gupta (Accountant Member) dismissed the revenue’s appeal, upholding the CIT(A)’s decision to allow the deduction for the care protection plan.
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