Deductibility of expenses

Hi Siddharth,

I want to confirm it, because after reading the fact I THINK WHAT U ARE TRYING TO SAY IS THAT

THERE IS COMPANY WHICH ENTERS INTO AN AGREEMENT FOR PROVIDING SERVICES OVER 30 YEARS AND FOR PROVIDING SERVICES IT IS PAYING RS. 5 CRORES...(AMAZING, COMPANY IS PROVIDING SERVICES AS WELL AS PAYING MONEY - don't mind brother i m not making fun of ur query it's just that somehow it is not making sense or may be i am not getting what u are trying to say)

ANYWAYS, LETS CONCENTRATE OVER THE  MAIN ISSUE THAT WHAT SHOULD BE THE TREATMENT OF ONE TIME EXPENSE FOR 30 YEARS CONTRACT...

I DON'T THINK IT CAN BE TREATED AS "INTANGIBLE ASSET" SINCE THIS PAYMENT IS NOT IN ANYWAY CONFERRING ANY COMMERCIAL RIGHT ON THE COMPANY...

ONE IMPORTANT THING IS THAT EVEN IF CANNOT BE TREATED AS A INTANGIBLE ASSET THAT DOESN'T MEAN THAT IT HAS TO BE CHARGED TO REVENUE IN THE FIRST YEAR..

LET'S TAKE AN EXAMPLE OF PREPAID INSURANCE, THE PREMIUM OF UNEXPIRED PERIOD IS CARRIED AS AN ASSET THAT'S BECAUSE OF ACCOUNTING CONCEPTS..(NEEDLESS TO MENTION THAT IN INCOME TAX ALSO THE SAME TREATMENT IS FOLLOWED)

SIMILARLY, IF THIS ONE TIME PAYMENT OF 5 CRORES HAS SOME RELATION WITH THE TERM OF THE CONTRACT THEN IT CAN BE CHARGED TO REVENUE ON PRO RATA BASIS AND SAME WILL BE ALLOWED UNDER INCOME TAX ALSO..

HOWEVER IF THE SAID PAYMENT IS JUST A KIND OF BROKERAGE/COMISSION FEE FOR ACQISITION OF THE CONTRACT THEN IT SHOULD BE CHARGED TO REVENUE IN THE FIRST YEAR... 

There cannot be a contract without "consideration". Company providing services as well as paying for the services means there is no consideration paid to the company for the services provided. Hence, its an invalid contract.