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2017 (1) TMI 956 - AT - Income TaxTreatment to consultancy expenditure - capital expenditure or revenue expenditure - Held that - The expenditure on development of new product in the line of business being carried out by the assessee is an expenditure related to such business and benefit to the assessee is in the revenue field inasmuch as it seeks to improve the profitability of the assessee and the enduring benefit cannot be regarded to be in the capital field. The parity of reasoning laid down by the Hon ble Apex Court in the case of Empire Jute Co Ltd (1980 (5) TMI 1 - SUPREME Court) as extracted above clearly supports the stand of the assessee inasmuch as the expenditure in question merely results in development of new products by the assessee in its existing line of business. Even otherwise it is noteworthy that none of the expenditures in question are of capital nature and in fact the expenditure which has been referred to by us in the earlier paragraph clearly are such expenditure which are incurred in the course of carrying on of business. - Decided in favour of assessee Disallowance of one-third of directors foreign travel and conveyance expenses - Held that - The details were furnished by the assessee company before the AO. In Seshasayee Brothers Ltd. vs. CIT (1960 (3) TMI 50 - MADRAS HIGH COURT) and Cooper Engineering Ltd. vs. CIT (1981 (3) TMI 49 - BOMBAY High Court) it has been held that where the details are not furnished by the assessee the claim can be disallowed on the ground that the assessee had not established that the amount in question was expenditure laid out wholly and exclusively for the purposes of the business. If the object of the undertaken tour is commercial in nature the expenditure would qualify for deduction. We find that the disallowance made by the AO of the directors expenses is bereft of sound reasoning. Therefore the disallowance made by the AO is deleted.- Decided in favour of assessee
Issues Involved:
1. Treatment of consultancy expenditure as capital or revenue expenditure. 2. Disallowance of directors' foreign travel and conveyance expenses. 3. Levy of penalty under section 234B. 4. Initiation of penalty proceedings under section 271(1)(c). 5. Revenue's appeal regarding the nature of certain expenses as revenue or capital. Issue-wise Detailed Analysis: 1. Treatment of Consultancy Expenditure as Capital or Revenue Expenditure: The assessee filed a return declaring a loss, and the AO treated consultancy expenditure for software development as a capital expenditure, allowing depreciation at 25%. The CIT(A) partly agreed, treating certain invoices as capital and others as revenue expenditures. The assessee contended that the consultancy charges were for revenue purposes, citing agreements indicating that intellectual property rights belonged to the assessee. The Tribunal referenced a similar case (Opus Software Solutions (P) Ltd. vs. ACIT) where software development expenses were treated as revenue expenditure due to the nature of the business involving fast technological changes. The Tribunal concluded that the expenditure facilitated the assessee's trading operations, thus allowing the appeal on this ground. 2. Disallowance of Directors' Foreign Travel and Conveyance Expenses: The AO disallowed a portion of the directors' foreign travel expenses, reasoning that the sales were not to new clients and prolonged visits were unnecessary. The CIT(A) upheld this disallowance. The assessee argued that the expenses were for maintaining and developing business relationships and were wholly for business purposes. The Tribunal found the AO's ad-hoc disallowance lacked sound reasoning and deleted the disallowance of ?11,72,587, allowing the appeal on this ground. 3. Levy of Penalty under Section 234B: The assessee's appeal on the levy of penalty under section 234B was dismissed as the levy is mandatory and consequential. 4. Initiation of Penalty Proceedings under Section 271(1)(c): The appeal on the initiation of penalty proceedings under section 271(1)(c) was dismissed as premature since only initiation and not imposition of penalty was in question. 5. Revenue's Appeal Regarding the Nature of Certain Expenses as Revenue or Capital: The revenue contested the CIT(A)'s decision to treat certain invoices as revenue expenditure. The Tribunal found that the CIT(A) had provided specific reasons for treating expenses related to security checks, tax consultation, and marketing services as revenue in nature. The Tribunal upheld the CIT(A)'s decision and dismissed the revenue's appeal. Conclusion: The assessee's appeal was partly allowed, and the revenue's appeal was dismissed. The Tribunal pronounced the order on 16/01/2017.
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