Deferred revenue expenditure allowed in year of incurring; Loss on sale of subsidiaries’ shares allowed as business loss – ITAT Cochin

Apollo Tyres Ltd. v ACIT (ITA No. 223/Coch/2015 dated 10.01.2017)

Deferred revenue expenditure allowed in year of incurring


  •  During the year, the assessee had claimed prepaid expenses amounting to Rs. 5,15,34,726 which comprises of
    – Insurance expense of Rs. 96,12,402/-,
    – Interest expenses of Rs. 1,54,19,700,
    – Rent expenses of Rs. 1,83,501/- and
    – General expenses of Rs. 2,63,19,123/- in the nature of employee mediclaim and other expenses.
  • According to the A.O, the said expenses were not related to the income earned during the year under consideration and were therefore, disallowed. The DRP concurred with the findings of the Draft Assessment Order and held that the claim of deduction which does not pertain to the relevant accounting year distorts the income of that year.
  • The assessee argued that the expenses included under the head prepaid expenses are revenue in nature. The said expenditure has not resulted in acquisition of a capital asset to the assessee and therefore, is an allowable deduction.


  • Even if an expenditure incurred in a particular year gives a benefit which accrues over a period exceeding that financial year, such expenditure is deductible from the business income of the assessee.
  • The said expenditure does not in any way create any new asset on the capital side. Reliance was placed on the Delhi Tribunal ruling in the case of Modi Olivetti Ltd. Vs. JCIT ( 4 SOT 859) and Jodhpur Tribunal in the case of Tirupati Microtech (P) Ltd. Vs. ACIT (112 ITD 328)
  • It was held that although the said expenditure results into a benefit which accrues to the assessee over a period exceeding the accounting year, such benefit does not accrue to the assessee in the capital field but the same accrues only in the revenue filed.
  • When any expenditure is treated as a ‘deferred revenue expenditure’, it presupposes that the concerned expenditure, creating benefit in the revenue field, 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.
  • There was no justification for making disallowance for the expenditure incurred in the year notwithstanding the fact that in the books of account a different treatment had been given. If the expenditure is of revenue nature, the same would call for deduction in the year in which it is incurred.

Loss on sale of subsidiaries’ shares allowed as business loss


  • During the year under consideration, the assessee incurred loss of Rs. 4,07,24,151 on the sale its 100% share holding in Apollo Tyres A.G., Switzerland (ATAG) to Apollo Tyres Cyprus Pvt. Ltd. (ATC). ATAG was set up in 2007 as 100% subsidiary of the assessee company with an objective of undertaking sales and marketing of the products of the brand of the appellant company and the investment was made in the subsidiary company as a measure of commercial expediency. The said loss was claimed as business expenditure.
  • The AO in the draft assessment order held that the said investment in shares cannot be held as business activity as the appellant was itself showing the said shares under the head investment. The DRP confirmed the draft assessment order in this regard.


  • The assessee has submitted during the course of assessment proceedings, that the objective of ATAG was undertaking sales and marketing related activities for the brand of the appellant in Singapore. The said factual assertion has not been rebutted by the AO in the impugned assessment order.
  • There is nothing on record to show that the said subsidiary company was doing any activity completely independent and unrelated to the activities carried out by the appellant company.
  • Thus, the claim of the appellant that the investment was made for commercial purposes and not for purpose of accretion of investment cannot be rejected.
  • The only thing that was required to be examine in the present case was whether the expenditure was made as a prudent businessman for the purpose of business. Reliance is placed on the decision of S.A. Builders Vs. CIT, 288 ITR 1 (Supreme Court)
  • The unity of objectives of the appellant company and the subsidiary company clearly shows that the investment was in the nature of a trade investment only. The decision to invest in the subsidiary was not such that a prudent business man would not have made it.
  • Reliance is placed on similar decision in the case of DCIT Vs. Gujarat Small Industries Corporation (4 SOT 239) (ITAT Ahmedabad Bench).

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