2016 (1) TMI 784 - HC - Income Tax

Expenses for setting off new business and fee paid - ITAT treated as as revenue in nature - Held that - The expenditure in dispute incurred by the assessee as revenue in nature and allowable as deduction because the assessee has incurred the aforesaid expenses on different businesses owned by the assessee including health care business which constituted one business only. As regards the payment made to McKinsey & Company the expenditure incurred was commensurate with the services rendered specially as it happened to be a world renowned firm. The learned first appellate authority has rightly held that the observations of the A.O. that agreement had been entered by the MTVL with McKinsey & Company and not the assessee was incorrect as MTVL is a subsidiary company and was not carrying on any business activities. The bill was raised by McKinsey & Co. in the name of the assessee. The payment was made by the assessee only. The CIT(A) had held that in so far as genuineness of this payment is concerned, there was no controversy that it was actually paid to Mckinsey & Co. After appreciating the material, it was further recorded that this expenditure was revenue in nature. - Decided against revenue Depreciation worked out with reference to the written down value computed as a result of order passed under Section 250(6) of the Act for the assessment year 1998-99 - Held that - Since the order of CIT(A) in the case of the assessee for the assessment year 1998-99 had resulted in higher WDV of the asset, and the said order was affirmed by the tribunal in appeal, the depreciation for the assessment year 1999- 2000 had thus been rightly directed to be worked out with reference to the WDV computed as a result of order passed under Section 250(6) of the Act for the assessment year 1998-99. No error could be pointed out in the approach adopted by the CIT(A) as well as the Tribunal for taking the higher WDV of the asset of the assessee for the assessment year 1999-2000 - Decided against revenue

Summary

Issues:
1. Whether the different business/ventures carried on by the assessee constituted one business or separate businesses?
2. Whether the expenditure of Rs. 6,70,78,483/- was revenue or capital in nature?
3. Whether the admissible depreciation had to be worked out with reference to the written down value computed as a result of the order passed under Section 250(6) of the Act for the assessment year 1998-99?

Analysis:

Issue 1:
The High Court examined whether the various businesses, including healthcare, carried on by the assessee constituted the same business or separate businesses. Referring to legal precedents, the court emphasized the importance of common management, organization, administration, fund, and place of business in determining whether different ventures are part of the same business. The CIT(A) and Tribunal found that the businesses, including healthcare, formed one business entity based on these criteria. The court upheld this conclusion as the revenue failed to show any error in the decision.

Issue 2:
Regarding the nature of the expenditure of Rs. 6,70,78,483/-, the court analyzed the components of the amount, noting that most expenses were revenue in nature. However, a portion was professional fees paid to a renowned firm, Mckinsey & Co. The revenue argued that this payment was capital in nature. The CIT(A) and Tribunal found that the expenditure was revenue in nature, especially considering the services rendered and the business context. The court affirmed this decision, as the revenue failed to provide legal grounds for interference.

Issue 3:
The court addressed the calculation of depreciation based on the written down value (WDV) determined in the preceding assessment year under Section 250(6) of the Act. The CIT(A) had directed the assessing officer to consider the revised WDV for the current assessment year, 1999-2000. The court found no error in this approach, as the higher WDV resulted from a previous order that was upheld by the tribunal. Therefore, the depreciation for the current year was rightly calculated based on the revised WDV. The court dismissed the appeal, finding no merit in the revenue's arguments.

In conclusion, the High Court dismissed the appeal by the revenue, upholding the decisions of the CIT(A) and Tribunal on all three issues raised in the case.