2024 (9) TMI 1063 - HC - Income Tax

Nature of expenses - expenditure incurred towards professional and consultancy charges - HELD THAT - We find from the nature of the services that were provided by the consultant that the expenses were incurred in connection with obtaining benefits that were of an enduring nature. The findings of the Assessing Authority the First Appellate Authority and the Appellate Tribunal relying inter alia on the decision of the Supreme Court in Brooke Bond India Ltd. 1997 (2) TMI 11 - SUPREME COURT and Punjab State Industrial Development Corporation Ltd 1996 (12) TMI 6 - SUPREME COURT therefore do not require any intervention. Claim of expenditure incurred in relation to IPO of shares - The claim for deduction of IPO related expenses also cannot be legally countenanced. We find ourselves unable to accept the submission of the learned counsel for the appellant that an artificial distinction can be made between direct and indirect expenses incurred in connection with the IPO and that although Section 35D permits only the deduction of direct expenses the indirect expenses must nevertheless be permitted as a deduction under Section 37 of the Income Tax Act. In our view there is no distinction to be made between direct and indirect expenses that are eligible for deduction under Section 35D. On the facts of the instant case we find that Section 35D permits only certain capital expenses as deductible and not others. Thus once it is an admitted fact that the appellant has already been granted the benefit of deduction of direct expenses incurred in connection with the IPO he cannot claim deduction of the indirect expenses incurred in connection with the same object as revenue expense because his classification of the expense as direct or indirect does not really alter the nature of the expense itself which continues to remain a capital expense. Disallowance of payments towards employees contribution to PF and ESI before the due date of filing of the Return of Income - HELD THAT - Issue already covered against the appellant by the decision reported in CIT v. Merchem Ltd. 2015 (9) TMI 560 - KERALA HIGH COURT Taking note of the said decision the said question is therefore answered against the assessee and in favour of the revenue. Disallowance of prior period expenses - claim filled in revised return of income within the time limit prescribed u/s 139(5) - cannons of taxation to impose a tax liability on the same amount twice - HELD THAT - Issued have been remanded to the assessing authority by the Appellate Tribunal and in the proceedings that ensued the assessing authority has allowed the claim of the appellant. Taking note of the said development we find that the Questions (e) and (f) do not now arise for consideration in this appeal

Summary

Issues:
- Disallowance of expenditure incurred towards professional and consultancy charges
- Disallowance of payments towards employees' contribution to PF and ESI
- Disallowance of revenue expenditure incurred in relation to the initial Public Offer of shares
- Disallowance of prior period expenditure
- Distinction between direct and indirect expenses for deduction under the Income Tax Act

Analysis:

1. The appellant, a listed company primarily engaged in brokers and securities trading, appealed against the Income Tax Appellate Tribunal's order for the assessment year 2008-2009. The appellant raised substantial questions of law regarding the disallowance of expenditure towards professional and consultancy charges, employees' contribution to PF and ESI, revenue expenditure related to an initial Public Offer of shares, and prior period expenditure.

2. The court noted that certain questions raised were already decided against the appellant or were no longer relevant. The remaining issues concerned the disallowance of revenue expenditure incurred for professional and consultancy charges and the disallowance of expenditure related to the initial Public Offer of shares.

3. The assessing authority and lower appellate authorities found that the consultancy charges were for obtaining long-term benefits, enhancing the capital base of the company, and providing enduring benefits. They concluded that the expenditure could not be treated as revenue but as non-depreciable capital expenditure.

4. Regarding the expenses for the initial Public Offer of shares, the authorities found that Section 35D of the Income Tax Act allowed deduction for expenses related to obtaining a capital asset. They determined that the expenses incurred by the appellant were towards acquiring a capital asset, and only certain direct expenses were deductible under Section 35D.

5. The appellant's counsel argued for a distinction between consultancy fees with a proximate nexus to a capital asset and those without. They contended that the expenses should be treated as revenue expenditure due to a remote connection with the acquisition of a capital asset. The counsel also argued that indirect expenses related to the IPO should be allowed as a revenue deduction.

6. The Income Tax Department's counsel supported the Tribunal's order, stating that the expenses were of enduring nature and capital in nature, justifying their disallowance as revenue expenditure.

7. The court considered the arguments and cited relevant case law. It upheld the disallowance of both the consultancy charges and IPO-related expenses, stating that the expenses were capital in nature and not eligible for deduction as revenue expenditure.

8. The court disposed of the appeal by ruling against the appellant on all relevant questions, upholding the Tribunal's decision on the disallowances. Questions (e) and (f) were not addressed as they were no longer applicable in the case.