2015 (2) TMI 498 - AT - Income Tax

Expenditure incurred for obtaining research report - capital v/s revenue nature - CIT(A) upheld AO s view that as the expenditure incurred by the assessee company was for expansion of business by means of acquisition of research reports, it is of capital nature - Held that - The expenditure incurred in respect of same business, is allowable as revenue expenditure, even if it is for expansion of the business. In the instant case here too admittedly the expenditure even as per the revenue is for expansion of business and therefore such expenditure on research reports obtained in the course of advisory services is revenue expenditure. The assessee has declared income from advisory services after obtaining report of ₹ 1,06,47,974/- which is in excess to the expenditure incurred. Mere fact that part of the expenditure was incurred for marketing does not change the nature of expenditure. - Decided in favour of assessee.

Summary

Issues Involved:
1. Nature of expenditure incurred for obtaining research reports: Capital or Revenue.
2. Treatment of expenditure as capital leading to disallowance.
3. Levy of interest under sections 234B and 234D of the Income Tax Act.

Issue 1: Nature of Expenditure Incurred for Obtaining Research Reports: Capital or Revenue

The primary issue for determination is whether the expenditure of Rs. 1,01,54,665/- incurred by the assessee for obtaining research reports from Zensar Technologies Ltd. should be classified as capital expenditure or revenue expenditure. The assessee argued that the expenditure was incurred to facilitate business operations and not for acquiring any capital asset. The reports were used during the year itself, evidenced by sales aggregating to Rs. 1,06,47,974/-. The reports were customized and used for marketing and further business advisory services, rendering them perishable and of no enduring benefit. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held the expenditure to be capital in nature, asserting it was for the acquisition of intangible assets, thus allowing depreciation and disallowing the balance.

Issue 2: Treatment of Expenditure as Capital Leading to Disallowance

The AO treated the expenditure as capital, allowing depreciation at 12.5% and disallowing Rs. 88,85,332/-. The CIT(A) upheld this view, stating the expenditure was for business expansion, thus capital in nature. The assessee contended this treatment was unjustified, as the reports were integral to their regular business operations and not for acquiring any enduring benefit.

Issue 3: Levy of Interest Under Sections 234B and 234D of the Income Tax Act

The assessee also contested the levy of interest under sections 234B and 234D, arguing that the entire exercise of disturbing the year of allowability of expenditure was revenue neutral.

Detailed Analysis:

Nature of Expenditure:

The Tribunal analyzed the nature of the expenditure in light of the business operations of the assessee, who is engaged in providing business advisory services. The reports obtained were used for marketing and further advisory services, customized by the assessee's team. The Tribunal referred to the Delhi High Court's judgment in CIT Vs. Priya Road Show Ltd., which held that expenditure incurred for the same business, even if for expansion, is revenue expenditure. The essential purpose of the expenditure was to facilitate ongoing business operations, not to acquire a new asset of enduring benefit.

Treatment as Capital Expenditure:

The Tribunal found that the AO and CIT(A) erred in treating the expenditure as capital. The reports were used within the year, and the income generated from advisory services exceeded the expenditure. The Tribunal noted that the expenditure was for the same business and did not result in the creation of a new asset. Therefore, it should be treated as revenue expenditure.

Levy of Interest:

Given the Tribunal's finding that the expenditure was revenue in nature, the levy of interest under sections 234B and 234D was also deemed inappropriate, as the disallowance itself was incorrect.

Conclusion:

The Tribunal allowed the appeal, holding that the expenditure incurred for obtaining research reports was revenue in nature and should be allowed as such. The disallowance made by treating it as capital expenditure was reversed, and the levy of interest under sections 234B and 234D was also set aside.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 04.02.2015.