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The concept of deferred revenue expenditure is not in the Income Tax Act. So, there is no clear provision under the I.T. act about its allowance from business income. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act.
The nature of expenditure such as advertisement or exhibition, sales promotion or fixed deposit etc. 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.
The concept of deferred revenue expenditure is essentially an accounting concept and alien to the 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 on advertisement, sales promotion etc.
However, law is settled that accounting practice can not determine allowability of an expense under Income Tax Act.
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:-
1. 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. 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. 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.
3. 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.
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.
Differed revenue considered as fictitious asset
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. All fictitious assets are intangible but all intangible assets are not fictitious (ex goodwill, patents, trademarks, copyrights are intangible but not fictitious. Following are the examples of fictitious assets are-preliminary expenses, discount on issue on debenture and shares, underwriting commission, miscellaneous expenditure, profit and loss ).
