2008 (6) TMI 616 - HC - Income Tax

Claim made on amount towards professional fees for assessment of market attractiveness of business - Claimed deduction u/s 36(1)(iii). Claim made on amount towards professional fees for assessment of market attractiveness of business - gaining global market reputise on dealing with global markets evaluation of business ability to compete analysis of business s future growth trend development detailed business strategies to grow in the dynamic business environment - revenue or capital Expenditure ? - Whether the Tribunal was right in law in deleting the addition in respect of payments made to M/s. McKinsey Co. management consultant and the same should be allowed as revenue expenditure is valid in law? - Expenditure incurred as interest paid on capital borrowed - AO added the entire interest to the cost of the fixed asset by rejecting the claim of the assessee that the expenditure is revenue in nature. HELD THAT - It is well-settled that it is not only permissible but is also necessary for any business to update its own knowledge and adopt better ways of organising its business if it is to survive in the market. The expenditure incurred for such purpose cannot be regarded as capital expenditure and it is only a revenue expenditure. The fees paid to the consultant was disallowed by the revenue officials as capital expenditure on the premise that the benefits derived from such consultancies would enure to the future years also. According to the ld counsel for the assessee this question of law is covered against the revenue by the decision of this Court in the case of CIT v. Crompton Engineering Co. Ltd. 1998 (6) TMI 23 - MADRAS HIGH COURT - Hence the first question of law is covered against the assessee (sic - revenue). Claimed deduction u/s 36(1)(iii) - Whether the Tribunal was right in law in deleting the addition made towards interest paid on borrowed capital is valid? - HELD THAT - Assessee borrowed money for the expansion project and claimed deduction u/s 36(1)(iii). In respect of the AY 1994-95 in assessee s own case the issue has been decided in favour of the assessee by a Division Bench of this Court in the case of Carborandum Universal Ltd. 2006 (2) TMI 649 - MADRAS HIGH COURT . This factum has also been brought to the knowledge of the Court by the learned counsel for the assessee. Therefore the appeals are dismissed as the questions of law raised in the present appeals are covered against the revenue.

Summary

Issues:
1. Whether payments made to a management consultant should be considered revenue expenditure?
2. Whether interest paid on borrowed capital should be allowed as a deduction?

Analysis:

Issue 1:
The case involved appeals by the revenue challenging the Tribunal's order regarding the treatment of payments made to a management consultant, M/s. McKinsey & Co., by the assessee company engaged in industrial ceramics. The revenue contended that the amount paid should be considered capital expenditure due to potential long-term benefits. The Assessing Officer allowed only a portion of the claimed amount, adding the rest to the income. The CIT(A) upheld this decision, leading to an appeal by the assessee to the Tribunal. The Tribunal ruled in favor of the assessee, stating that the consultancy services received were for business restructuring, not for starting a new business, and hence, should be treated as revenue expenditure. The High Court agreed with the Tribunal's decision, citing precedents that expenses for updating business knowledge and improving organization are revenue expenditures. The Court referenced a previous ruling to support the position that obtaining a consultant's report does not necessarily constitute capital expenditure, especially if it is not for starting a new business line. Therefore, the first issue was decided in favor of the assessee.

Issue 2:
Regarding the second issue of interest paid on borrowed capital, the revenue argued that the entire interest should be added to the cost of fixed assets, while the assessee claimed it as a revenue expenditure for business expansion. The Assessing Officer and CIT(A) supported the revenue's position, but the Tribunal overturned their decision based on a previous case involving the same assessee. The Tribunal, following the precedent set in the case of CIT v. Carborandum Universal Ltd., ruled in favor of the assessee, stating that the interest paid on borrowed capital should be treated as revenue expenditure. The High Court upheld the Tribunal's decision, dismissing the revenue's appeal as the questions of law raised were already settled against the revenue in previous rulings. Therefore, the second issue was also decided in favor of the assessee.

In conclusion, the High Court upheld the Tribunal's decision in both issues, ruling in favor of the assessee regarding the treatment of payments to a management consultant as revenue expenditure and allowing the deduction of interest paid on borrowed capital as a revenue expenditure for business expansion.