2010 (8) TMI 19 - HC - Income Tax

Capital versus revenue expenditure - consultancy charges paid to various authorities for obtaining study reports in Bitumen - an enduring advantage Held that - the consultancy expenditure in the present case amounted to revenue expenditure, as by virtue of the consultancy the respondent-assessee had neither acquired an income earning asset nor did it obtain any enduring advantage. Moreover, the aforesaid expenses are clearly relatable to the business of the respondent-assessee.

Summary

Issues:
Challenge to ITAT order on consultancy charges for study reports in Bitumen as capital expenditure.

Analysis:
The appeal under Section 260A of the Income Tax Act, 1961 challenges the ITAT order related to consultancy charges for study reports in Bitumen. The Revenue argued that the consultancy charges provided an enduring advantage to the assessee and should be treated as capital expenditure. Citing the Assessing Officer's order, it was contended that the expenditure on Bitumen study reports constituted capital expenditure. The Revenue also relied on a judgment in Commissioner of Income Tax Vs. Gujarat Guardian Ltd. (2008) to support their argument.

Upon review, the Court found that the consultancy expenditure should be treated as revenue expenditure as it did not result in the acquisition of an income-earning asset or enduring advantage for the assessee. The expenses were deemed related to the business activities of the assessee. The Court noted that the Assessing Officer did not provide sufficient reasoning to classify the consultancy charges as capital expenditure.

The Court referred to the Supreme Court judgment in Commissioner of Income Tax Vs. Madras Auto Service (P.) Ltd. (1998) to establish the principles for distinguishing between capital and revenue expenditure. Additionally, a Division Bench ruling in Hindustan Times Ltd. Vs. Commissioner of Income Tax highlighted the significance of the term "enduring" in determining the nature of the advantage gained from an expenditure.

The Court concluded that the consultancy report did not impact the fixed capital of the assessee and therefore, the expenditure should be considered as revenue in nature. The judgment cited by the Revenue was deemed irrelevant to the present case as it did not address the specific issue of consultancy charges as capital or revenue expenditure. Consequently, the appeal was dismissed as lacking merit.

The judgment was delivered by Justice Manmohan and the Chief Justice on August 11, 2010.