2012 (6) TMI 685 - HC - Income Tax

Professional fees paid to the consultants in relation to cement project - capital expenditure or revenue expenditure? - Held that - As decided in CIT Versus J. K. Chemicals Limited 1992 (10) TMI 18 (HC) where the expenditure is incurred for the project /feasibility report in connection with exploring the feasibility of a new business venture different from the existing line of business then such expenditure is capital expenditure and not revenue expenditure - decided in favour of the Revenue

Summary

Issues:
Interpretation of professional fees as capital or revenue expenditure for an existing business extension.

Analysis:
The judgment pertains to a reference under Section 256(1) of the Income Tax Act, 1961 for the Assessment Year 1979-80. The main issue revolves around determining whether professional fees amounting to Rs.3,44,630 paid for the applicant's cement project should be considered capital or revenue expenditure. The applicant claimed the expenses as revenue expenditure, arguing that the cement project was an extension of its existing business, manufacturing cement machinery. However, the Income Tax Officer, CIT (Appeals), and the Income Tax Appellate Tribunal considered the expenditure as capital in nature. The decision was based on precedents like C.I.T. Vs. J.K. Chemicals Ltd. and Trade Wings Limited Vs. C.I.T., which established that expenses for exploring the feasibility of a new business venture are capital expenditure.

The applicant's advocate contended that the decisions in J.K. Chemicals Ltd. and Trade Wings Limited might not be correct. He argued that if there is a significant interconnection between the existing and new business, the expenditure should be treated as revenue expenditure. To support this argument, he cited various cases like Produce Exchange Corporation Ltd., Standard Refinery and Distillery Ltd., Hindustan Aluminium Corporation Ltd., Kerala State Industrial Development Corporation Ltd., Seshasayee Bros. Pvt. Ltd., and Assam Asbestos Ltd. However, the court held that they are bound by the decisions in J.K. Chemicals and Trade Wings Ltd., as the advocate failed to present any contrary decisions from the same court.

Ultimately, the court ruled in favor of the Revenue and against the Assessee/Applicant, considering the professional fees as capital expenditure. The reference was disposed of with no order as to costs.