2011 (2) TMI 1368 - AT - Income Tax

Summary

Issues involved: Assessment years 2005-2006 and 2006-2007; Deletion of disallowance of Referral fee as revenue expenditure; Treatment of website development expenses as revenue expenditure; Addition of exchange fluctuation loss; Deletion of addition of Referral fee as revenue expenditure for 2006-2007.

Assessment Year 2005-2006:

1. Referral Fee Disallowance: The issue pertains to the deletion of disallowance of Referral fee as revenue expenditure. The assessee paid commission to various parties for introducing clients, which was confirmed by the parties directly to the AO. The AO treated the payments as capital expenditure, but the CIT(A) deleted the addition. The Tribunal upheld the CIT(A)'s decision citing the payment facilitated business operations more profitably without affecting fixed capital, following the precedent set by the Hon'ble Supreme Court.

2. Website Development Expenses: The dispute involves treating website development expenses as revenue expenditure. The AO considered it a capital asset, leading to an addition, but the CIT(A) overturned this decision. The Tribunal upheld the CIT(A)'s decision based on the Hon'ble Delhi High Court's ruling that such expenses are revenue expenditure even if they result in enduring benefits, especially since the expenditure was for website upgradation, not initial development.

3. Exchange Fluctuation Loss: The AO made an addition on account of exchange fluctuation loss, treating a portion as contingent liability. The CIT(A) deleted this addition, and the Tribunal agreed. The loss was related to restatement of assets/liabilities other than capital accounts, and the Tribunal found it allowable as deduction for revenue purposes based on a Supreme Court judgement.

Assessment Year 2006-2007:

4. Referral Fee Disallowance: The sole ground in this appeal concerns the deletion of addition of Referral fee as revenue expenditure. The facts were similar to the previous year, and following the decision made for 2005-2006, the Tribunal upheld the deletion of the addition for this year as well.

In conclusion, the Tribunal dismissed both appeals, upholding the decisions regarding the treatment of Referral fees and website development expenses as revenue expenditure, and the allowance of exchange fluctuation loss as deduction based on legal precedents.