2013 (12) TMI 955 - AT - Income Tax

Whether consultancy charges and travelling expenses are capital in nature - Held that - The assessee has paid consulatncy fee for rendering services of fleet management service and providing security products and networking solution - The payment made under consultancy agreement has to be allowed as revenue expenditure when the genuineness of the payment has not been doubted - The assessee has started a new line of business in the service industries - Such an expenditure has to be allowed as revenue and cannot be held as capital expenditure or can be capitalized in the books of account - Following Empire Jute Co. Ltd. v. CIT 1980 (5) TMI 1 - SUPREME Court - If there is continuity of business with common management and fund, then even if the assessee has started a new line of business in this year, the payment made for carrying out such running of new business, is nothing but a business expenditure which has to be allowed in the year in which it has been incurred - There is no augmentation of asset to the assessee but has helped the assessee to develop a proper guidance for running the new line of service industries - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of consultancy charges and traveling expenses as capital expenditure.
2. Disallowance of expenses incurred after setting up the business and for developing existing business as capital in nature.

Analysis:
Issue 1: Disallowance of Consultancy Charges and Traveling Expenses
The assessee challenged the disallowance of consultancy charges and traveling expenses as capital expenditure. The Assessing Officer rejected the submissions, stating that the consultancy agreement was for exploring a new business line. The assessee argued that the consultancy services were essential for attracting prospective customers and developing the business. The Assessing Officer relied on the decision in CIT v. Delhi Safe Deposit Co. Ltd. to support the disallowance. The Commissioner (Appeals) upheld the disallowance, emphasizing that the consultancy fees were for a business line not yet operational. The Commissioner referred to legal precedents like Vazir Sultan Tobacco Co. Ltd. v. CIT to support the decision.

Issue 2: Expenses Incurred After Setting Up Business
The assessee contended that the expenses incurred after setting up the business and for developing the existing business should not be treated as capital expenditure. The Commissioner (Appeals) noted that the majority of the assessee's income came from rental cars and goods sales, not services. The Commissioner held that the consultancy fees were for a business line not yet operational and could not be capitalized. The assessee argued that the consultancy charges were revenue expenditure necessary for the service industry. The Tribunal observed that the consultancy charges were for business guidance and fell under revenue expenditure. The Tribunal referred to the decision in Empire Jute Co. Ltd. v. CIT to support the allowance of the consultancy charges as revenue expenditure.

In conclusion, the Tribunal allowed the assessee's appeal, overturning the disallowance of consultancy charges and treating them as revenue expenditure.