2021 (10) TMI 400 - AT - Income Tax

Nature of expenditure - revenue or capital expenditure - professional and legal charges to various law firms for incorporation of company, purchase of share transfer stamps for acquisition of company professional fees paid for drafting investment agreement, structuring various documents, due diligence etc. for investment agreement, sharing of employee cost and provision for equity expenses - HELD THAT - As all these expenses were incurred after commencement of business for expanding business operations of the assessee - expenses did not result in acquisition of any asset nor did they give any enduring benefit to the assessee - expenses incurred relating to carrying on of business more effectively in the ordinary course of business even if, expenses are incurred which are related to capital account cannot be considered as capital in nature, more particularly, when the assessee has incurred said expenditure after commencement of business in the ordinary course of its business activities. This legal position is clarified by CBDT vide Circular No.10 dated 18.06.1964, where it has been clarified that professional charges incurred for running business more effectively cannot be treated as capital in nature. As regards website development expenses, we find that in the case of CIT Vs. India Visit Com Pvt. ltd. 2008 (9) TMI 8 - DELHI HIGH COURT has held that website development expenses is revenue in nature. In this case, if you go through nature of expenses incurred by the assessee including professional fees paid for incorporation of company, purchase of share transfer stamps, consultation fees paid for drafting investment agreement, professional fees paid for structuring various documents and due diligence for investment agreement are definitely in the nature of revenue expenses, which cannot be at any stretch of imagination be considered as capital in nature. The other expenses incurred by the assessee including website expenses and sharing of employee cost are incurred in ordinary course of business and thus, same are in the nature of revenue expenditure - we reverse finding of learned CIT(A) and direct the Assessing Officer to allow deduction claimed towards legal and professional charges.- Decided in favour of assessee.

Summary

Issues:
1. Disallowance of legal and professional charges as capital expenditure.

Analysis:
The appeal was filed against an order passed by the CIT(A)-13 pertaining to the assessment year 2012-13. The assessee had raised multiple grounds of appeal challenging the disallowance of legal and professional charges amounting to ?1,24,56,952 made by the Assessing Officer as capital expenditure. The assessee argued that the expenses were essential for expanding operations and network, did not result in acquisition of any asset, and were incurred for running the business more effectively in the ordinary course. The Assessing Officer, however, considered the expenses as capital in nature, providing enduring benefits, and thus disallowed the deduction.

During the assessment proceedings, it was noted that the assessee had incurred significant legal and professional charges. The Assessing Officer deemed these expenses as capital in nature, leading to the disallowance. The CIT(A) upheld the Assessing Officer's decision, stating that the expenses, including website maintenance costs, were indeed of a capital nature and not allowable under the Act. The assessee contended that the expenses were incurred post the commencement of business and were essential for business operations, emphasizing that they did not result in acquiring any capital asset or provide enduring benefits.

The Tribunal analyzed the nature of the expenses incurred by the assessee and the legal position regarding capital vs. revenue expenditure. It was established that expenses facilitating business operations or enhancing business effectiveness, even if related to capital account, should be considered revenue expenditure if they do not result in acquiring assets or providing enduring benefits. The Tribunal referred to a CBDT Circular and a Delhi High Court case to support the argument that expenses for running the business effectively are revenue in nature. Ultimately, the Tribunal concluded that the legal and professional charges, along with other expenses incurred by the assessee, were revenue expenditures necessary for the ordinary course of business and directed the Assessing Officer to allow the deduction claimed towards these expenses.

In light of the above analysis, the Tribunal allowed the appeal filed by the assessee, reversing the CIT(A)'s decision to disallow the legal and professional charges as capital expenditure. The Tribunal emphasized that the expenses were incurred for the effective running of the business in the ordinary course and should be treated as revenue expenditures, not capital in nature.