The Bangalore ITAT recently delivered its judgment in Flipkart’s appeal against the move of the tax authorities to levy tax on the discounts given by the e-commerce giant to its customers as capital expenditure.
Let’s put the argument made by the tax department in graphic form.
The argument as you know didn’t hold.
We thought about looking into our database to see if we could come up with any case law that actively supported the stand taken by the revenue. The thrust of the revenue’s argument seemed to be going towards characterising loss as an expenditure. So we started by looking for cases dealing with ‘loss sustained’ and ‘expenditure’. We got 332 results, which were then narrowed down using a subject filter for ‘definitions’. Within these results, we searched for the term ‘profit foregone’, since the revenue argued that willingly giving up profits was also expenditure.
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This is when we found the case of Investment Corporation of India Ltd. v. Income Tax Officer ITA 464 BOM/1981. This case discusses the concept of ‘negative expenditure’. It draws on the definition of expenditure as found in Indian Molasses Company Ltd. v. Commissioner of Income Tax 37 ITR 66, where the Supreme Court stated that expenditure was something that was paid “out and away” and had “gone irretrievably”. Therefore, any irreversible outflow of money can be considered to be expenditure.
Investment Corporation of India takes the same thought a step further. Negative expenditure includes profit foregone or loss incurred in the ambit of expenditure, and not just something that has gone out from the pocket of the person. So for instance, if an agent of a company, who is entitled to a certain commission, chooses to accept an amount less than what is due to him, it could be regarded as an expenditure for him (See: CIT v. Chandulal Keshavlal & Co. 38 ITR 601). Following the reasoning given in this case, it would seem Flipkart’s practice of incurring losses in order to capture a greater market share perfectly encapsulates the concept of negative expenditure.
The Way Forward
It is extremely likely that the revenue will pursue this case further at the High Court level. The Karnataka High Court has dealt with 91 cases that raise a question on classification of expenditure as capital or revenue. Of these, 62 cases, i.e. about 68% of the cases have been decided in favour of the assessee, while a measly 22% (20 cases) have gone in favour of the revenue. 7 cases had a mixed outcome in favour of both, while 1 case was remanded back the authorities. Interestingly, 64 of these 91 cases were appeals filed by the revenue, which shows a fairly low reversal rate at the High Court level against the assesse. Of course, it remains to be seen whether the revenue will be able to secure an unpredictable reversal in the High Court of Karnataka.