2016 (4) TMI 740 - AT - Income Tax

Disallowance of expenditure incurred in connection with Offshore Fund II - revenue v/s capital expenditure - Held that - We find from the assessee s own arguments that if the desired funds had been raised by the assessee in regard to the said Offshore Fund II launched by the said trust, the assessee would have received advisory fees as well as reimbursement of expenses but this could not happen and therefore these expenses were claimed in the hands of the assessee. From the facts it is clearly established that the Trust called Indiareit Fund was approved by SEBI which was to carry out activity on venture capital to the funds under its different schemes by pulling resources and any finances from institution investors as well as higher network individuals. But that could not happen and the assessee claimed these expenses in the hands of the assessee. In such circumstances, whether the expenses of other entity that also a new entity is allowable in the hands of the assessee, we have raised a query from the bench but the assessee could not answer. The gain or benefit accrual to the assessee for incurring these expenditure in the assessee s own business. We find that the assessee in addition to fees, also received reimbursement of expenses incurred by Offshore Fund-II. Since the Offshore Fund II was not launched, no corpus was received and in the absence of such launch, the assessee company could not claim reimbursement of any such expenses and these were met out of the income of the assessee and claimed the same as deduction. We also find that assessee is engaged in the business of Offshore Fund-I & III and existing fund as an investment advisory and the said expenses are not for the purpose of existing business or profession rather this is expended for new business i.e. setting up of a new offshore fund called Offshore Fund II. In such circumstances, we find that the issue is clearly covered by the decision of Hon ble Bombay High Court in the case of Trade Wings Ltd. (1989 (9) TMI 21 - BOMBAY High Court ). CIT(A) did not erred in confirming the actions of the Ld. AO disallowing expenditure incurred in connection with Offshore Fund II on the alleged ground that the said expenses are capital in nature - Decided against assessee Disallowance of expenditure incurred on services procured from Parimal Enterprises Limited (PEL) - Held that - The assessing authority made a disallowance only on the reason that the assessee has not furnished evidences of the actual services rendered by PEL and moreover the assessee does not derived any tangible direct benefit from the services rendered by the PEL. He also noted that the expenditure is unreasonable having regard to the legitimate need of the business of the assessee. The CIT(A) merely directed the AO to verify the documents furnished by the assessee and then decide the allowability of the claim of the assessee - Decided against revenue

Summary

Issues Involved:
1. Disallowance of expenditure incurred in connection with Offshore Fund II.
2. Direction to the AO to allow the expenditure of ?2.5 crores after verifying documents and evidence.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred in Connection with Offshore Fund II:

The assessee, engaged in providing investment advisory services, claimed expenses totaling ?1,07,48,723 for promoting Offshore Fund II, which included foreign air traveling expenses of ?55,99,987 and foreign lodging and boarding expenses of ?51,48,736. The AO disallowed these expenses, treating them as capital in nature, arguing that they were not related to the assessee's existing business but were intended for the promotion of a new business venture, Offshore Fund II, which was not successfully launched.

The CIT(A) upheld the AO's decision, stating that the expenses were for exploring a new source of income, which did not materialize, and thus should be considered as capital expenditure. The CIT(A) referenced the case of Hyderabad Allwyn Metal Works Ltd. v. CIT [1975] 98 ITR 555 and Trade Wings Ltd. v. CIT [1990] 185 ITR 267 (Bom.) to support this view.

The assessee argued that the expenses were part of its regular business activities, as per the Investment Management Agreement dated 30.6.2006, which required it to assist in launching new schemes and raising capital contributions. However, the tribunal found that the expenses were indeed for a new business venture and not for the existing business, aligning with the CIT(A)'s decision and the precedent set by the Bombay High Court in Trade Wings Ltd. Consequently, the tribunal dismissed the assessee's appeal on this issue.

2. Direction to the AO to Allow the Expenditure of ?2.5 Crores After Verifying Documents and Evidence:

The Revenue challenged the CIT(A)'s direction to the AO to allow the expenditure of ?2.5 crores if the assessee could produce evidence of rendering advisory services by Piramal Enterprises Limited (PEL). The AO had initially disallowed this expenditure, citing a lack of evidence for the actual services rendered and questioning the reasonableness of the payment to a related party under section 40A(2)(a).

The CIT(A) directed the AO to verify the documents and evidence provided by the assessee during the appellate proceedings to establish that advisory services were indeed rendered by PEL. The CIT(A) emphasized that if the services were actually provided, the expenditure should be allowed.

The tribunal found no infirmity in the CIT(A)'s directions, noting that the CIT(A) merely instructed the AO to verify the evidence and decide the claim accordingly. Thus, the tribunal dismissed the Revenue's appeal on this issue.

Conclusion:

Both the assessee's appeal regarding the disallowance of expenditure for Offshore Fund II and the Revenue's appeal concerning the verification and allowance of the ?2.5 crores expenditure were dismissed. The tribunal upheld the decisions of the lower authorities, emphasizing the need for substantiating claims with proper evidence and the distinction between capital and revenue expenditure.