It observed that the entries in the books did not clinch the issue either way and they did not determine the allowability or otherwise of the expenditure. The Supreme Court in the Madras Industrial Investments case was distinguished on the ground that the period for which the assessee had secured benefit in that case (that is, the debenture life) was specified. However, in the facts of the present case, the assessee had launched a new product and the period for which the assessee could be said to have secured the benefit by incurring the expenditure could not be reasonably estimated since the new product launched may fail to take off or may have a long life as a product.

As the number of years for which benefit can be said to have been derived could not be estimated, the “matching concept” also failed in the case. Thus the entire expenditure was held to be deductible in the first year.

The Bombay High Court in CIT vs Bhor Industries Ltd (264 ITR 180) had held that the entire expenditure incurred under a VRS scheme was allowable in the year in which it was incurred and could not be spread over the years in which it had been deferred by the assessee in its books of account.

The court distinguished its earlier decision in the Taparia Tools case on the basis that there was a finding in that case indicating distortion of profits and in that case the “matching concept” was required to be applied since there was an income stream over the life of the debentures.

The court held that in the present case VRS payments were made for making future savings in expenses and were not referable to any income-yielding asset. Implicitly therefore the “matching concept” could not be applied in the case in the absence of any revenue stream.

An assessee may not be able to rely upon this decision of the Bombay High Court for claiming a deduction for expenditure which is deferred in the books since the principles laid down by the Supreme Court were not found to be applicable in the facts of the case. VRS payments in any case are now allowable under Section 35DDA over a period of five years after the introduction of this section by the Finance Act, 2001 w.e.f. April 1, 2001.

Recent High Court ruling

Recently, the Madras High Court, in CIT vs Brilliant Tutorials Pvt. Ltd (292 ITR 399), gave a ruling on this issue. The assessee in this case had incurred advertisement expenditure, purportedly for courses which were offered by it. The fees which were collected in advance by the assessee were accounted and offered for tax over the duration of the course.

The advertisement expenditure had however been claimed in its entirety in the first year for tax purposes by the assessee, a claim which was not accepted by the assessing officer. It appears that the entire expenditure was also accounted as such in the first year and had not been deferred in the books of account by the assessee.

The Tribunal in its decision had negatived the contention raised by the department that the expenditure should be allowable over the period in which the receipts had been accounted in accordance with the “matching concept”.

It had distinguished the decision in Madras Industrial Investments case, cited by the department, on the basis that though the benefit of the expenditure would be available for a long period, the same could not be defined by any method.

The High Court, while affirming the decision of the Tribunal, further held that once the expenditure is of a revenue nature and incurred wholly and exclusively for business purposes, a further enquiry as to whether income has flowed thereon from the expenditure would not be a justifiable ground for rejection of the assessee’s claim and the entire expenditure was, therefore, deductible upfront under Section 37 of the I-T Act.

It may be noted that in this case the assessee had accounted and offered for tax the fees received by it over the duration of the course, a fact which apparently was not considered relevant by the court while allowing deduction of the expenditure.

The matter will reach finality only after the Supreme Court delivers a ruling on the issue. Till then an assessee could, by relying upon the aforesaid decisions, distinguish the Supreme Court ruling in the Madras Industrial Investments case and claim deduction of the entire expenditure in the first year in cases where it can be shown that the benefits, if quantifiable, cannot be estimated with reasonable certainty or that the period over which the benefits would be derived is incapable of any precise determination.