2014 (2) TMI 178 - HC - Income Tax

Deductibility of Licence fee - Whether the Tribunal was right in holding that the licence fee paid to M/s. RPG Enterprises Ltd. can be deducted as business expenditure Held that - Assessee by availing of service benefits from the group resource company availed of valuable benefit, for their business operations and that the payment of licence fee to M/s. RPG Enterprise Ltd. by the respondent-assessee was towards their share of actual expenses incurred by M/s. RPG Enterprises Ltd. - the expenditure incurred by the respondent-assessee towards the licence fee payment to M/s. RPG Enterprises Ltd. were relatable to the business expediency and profits of the respondent-assessee and that the benefits availed of by the assessee from the service of the group resource company was tangible and justified - The decision in CIT v. Shambhu Investment Pvt. Ltd. 2001 (3) TMI 77 - CALCUTTA High Court followed - It is settled law in so far as the scope, power and ambit of the High Court in exercise of jurisdiction under section 260A of the Income-tax Act - a transaction or an arrangement which is perfectly permissible and which may have the effect of reduction of tax burden need not be seen with tainted disfavor Decided against Revenue. Nature of Expenses - Whether the expenditure is to be allowed as a deduction from business income as it is incurred in connection with lease of property, income from which is assessed under the head 'Income from house property and the legal expenses incurred in connection with obtaining a security deposit from a client can be treated as business expenditure merely because such deposit amount was utilised for business purposes Held that - There was a direct and proximate nexus between the legal expenses incurred and the business carried on by the assessee The decision Orient Beverages Ltd. v. Asst. CIT 1993 (9) TMI 151 - ITAT CALCUTTA-E followed - the legal charges and other expenses incurred by the assessees for their property division was allowable as a deduction in computing the profits and gains of business as the expenses resulted in substantial savings in business expenses of the assessee. The assessee has derived income under various heads of income and one of the income was on account of development of property - The expenses incurred to obtain deposits from the tenants by initiation of legal action was only in furtherance of the said business objective and, therefore, the expenditure would also be relatable to the same - The Revenue has not placed any material on record to persuade to come to a different conclusion - there is no infirmity or illegality in the orders and there exists no substantial question much less any question of law on the issue Decided against Revenue.

Summary

Issues Involved:
1. Deductibility of the license fee paid to M/s. RPG Enterprises Ltd. as a business expenditure.
2. Deductibility of legal expenses, retainer fee, and consultancy charges as business expenses when incurred in connection with property leasing.
3. Classification of legal expenses incurred in obtaining a security deposit from a client as business expenditure.

Issue-wise Detailed Analysis:

Substantial Question of Law No. 1:
The primary issue was whether the license fee paid to M/s. RPG Enterprises Ltd. could be deducted as a business expenditure. The Revenue argued that the assessee did not provide sufficient evidence to support their claim that the license fee was incurred wholly and exclusively for business purposes. They contended that the payment was a mere reimbursement for expenses incurred by RPG Enterprises Ltd. for their own activities, not for the assessee's business activities. The Revenue cited several cases to support their argument, including CIT v. Calcutta Agency Ltd., Amritlal and Co. Pvt. Ltd. v. CIT, and Andrew Yule and Co Ltd v. CIT, emphasizing that the burden of proof was on the assessee to justify the expenditure.

On the other hand, the assessee argued that the license fee was for availing of valuable services from RPG Enterprises Ltd., which provided centralized resources and business expertise beneficial for the assessee's operations. They cited examples of similar arrangements in other business groups and decisions such as Britannia Industries Ltd. v. State of Tamil Nadu and Union of India v. Azadi Bachao Andolan to support their claim.

The court found that the Commissioner of Income-tax (Appeals) and the Tribunal had correctly determined that the license fee was a business expenditure incurred wholly and exclusively for business purposes. The court noted that the assessee had benefited from the services provided by RPG Enterprises Ltd., leading to cost savings and better business operations. The court upheld the findings of the lower authorities and ruled in favor of the assessee, confirming that the license fee was a deductible business expenditure.

Substantial Questions of Law No. 2 and 3:
The second and third issues concerned the deductibility of legal expenses, retainer fee, and consultancy charges. The Revenue argued that these expenses were related to property leasing and should be assessed under "Income from house property" rather than as business expenses. They relied on the Supreme Court decision in East India Housing and Land Development Trust Ltd. v. CIT and the Madras High Court decision in CIT v. Ideal Garden Complex P. Ltd., which held that income from property leasing should be assessed as "Income from house property."

The assessee countered that the legal expenses and other charges were directly related to their business operations and should be deductible as business expenses. They argued that these expenses resulted in substantial savings and were necessary for their business activities.

The court found that the legal expenses and other charges were indeed business expenditures incurred wholly and exclusively for business purposes. The appellate authority and the Tribunal had correctly determined that these expenses were necessary for the assessee's business operations, particularly in obtaining security deposits from tenants, which benefited the business. The court distinguished the present case from the cases cited by the Revenue, noting that the assessee's income was derived from various sources, including property development, and the expenses were incurred in furtherance of business objectives.

Conclusion:
The court dismissed the appeal filed by the Revenue, confirming that the license fee paid to M/s. RPG Enterprises Ltd., as well as the legal expenses, retainer fee, and consultancy charges, were deductible as business expenditures. The court upheld the findings of the Commissioner of Income-tax (Appeals) and the Tribunal, ruling in favor of the assessee on all substantial questions of law.