2010 (8) TMI 467 - AT - Income Tax

Disallowance - sharing of expenses - whether the assessee has incurred expenditures for the purpose of his business or not - If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act - The burden of proving, that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business so that the assessee may be entitled to claim deduction is on the assessee - There is no material on record based on which it could be said that the assessee company has asked M/s BPDCL to incur such expenses and the same will be apportioned or shared between them - In the expert report given by the Chartered Accountant, the amount of 11 crores has been bifurcated and part of it has been suggested to be capitalized and the same has been capitalized by the assessee - Since the expenses are in capital nature, the same is not allowable u/s 37(1) of the Act - In the result, the appeal of the assessee is dismissed

Summary

Issues Involved:
1. Disallowance of marketing and business development expenses.
2. Determination of whether the expenses were incurred wholly and exclusively for the assessee's business.
3. Applicability of Section 37(1) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Marketing and Business Development Expenses:
The main contention of the assessee was that the marketing and business development expenses amounting to Rs. 2,04,30,000 reimbursed to Indian Rayon & Industries Ltd. were incurred wholly and exclusively for the purpose of its business. The assessee argued that these expenses were necessary for customer building and business development activities, which included feasibility studies, acquisition processes, and customer identification and introduction.

2. Determination of Whether the Expenses Were Incurred Wholly and Exclusively for the Assessee's Business:
The Assessing Officer (AO) disallowed the expenses on several grounds:
- The change in management during the year meant that the expenses were incurred by Birla Project Development Co. Ltd. (BPDCL) and not by the assessee.
- There was no work allotment letter or agreement between the assessee and BPDCL for the survey.
- The expenses were incurred before the acquisition of the assessee by Indian Rayon & Industries Ltd.
- The expenses were not directly related to the assessee's business but were for the benefit of another company.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the business expenditure of one company cannot be debited in the account of another company. The CIT(A) emphasized that the issue was not whether the expenditure was revenue or capital in nature, but whether it was incurred wholly and exclusively for the assessee's business.

3. Applicability of Section 37(1) of the Income Tax Act:
The Tribunal examined whether the conditions under Section 37(1) were satisfied. Section 37(1) allows for the deduction of any expenditure (not being capital or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession. The Tribunal noted that:
- The expenses were incurred by BPDCL without the consent of the assessee.
- There was no material evidence to show that the assessee had asked BPDCL to incur such expenses.
- The expenses were incurred before the acquisition, and there was no resolution or agreement to share these expenses between the two companies.
- The expenses were thrust upon the assessee after the change in management, and there was no nexus between the services rendered and the payment made.

The Tribunal concluded that the expenses were not incurred wholly and exclusively for the assessee's business and were capital in nature, as they were related to the acquisition of the assessee company. Therefore, the expenses were not allowable under Section 37(1).

Conclusion:
The Tribunal dismissed the appeal of the assessee, confirming the order of the CIT(A) and upholding the disallowance of the marketing and business development expenses. The Tribunal emphasized that the expenses were not incurred wholly and exclusively for the assessee's business and were capital in nature, thus not allowable under Section 37(1) of the Income Tax Act.