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Deductibility of one-time payments

QUESTION: When vehicle tax was payable annually, we in our business were claiming the same as and when such amount was due to be paid. Now the system is for collection of one-time payment for life. Our system of accounting was to capitalise the payment, claim the first year's tax and claim subsequent years' taxes on revenue account in relevant years. I would like to be advised, whether the one-time life tax now paid will be allowable as revenue expenditure or will it be required to be capitalised with right to depreciation?

ANSWER: Vehicle tax is a tax and not the actual cost of the vehicle. The only condition that is required as regards such tax is that it should be actually paid and not merely due, even if assessee maintains mercantile system of accounting, because of the requirement of Sec. 43B. Hence the life tax though paid only once should be allowable in the year of payment, because it also has the character of revenue expenditure notwithstanding the fact that it is collected as one-time payment. Probably the practice of capitalising first year's tax even for accounting purposes is also not correct, because the first year's tax cannot have a different character than the annual tax for later years. If for any reason, it is disallowed as a capital expenditure, it has necessarily to be treated as part of actual cost entitled to depreciation, but there appears to be no reason for such disallowance in computation of taxable income. There is no need for capitalising the same even for accounting purposes, since it is not refundable.

S. Rajaratnam

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