2014 (7) TMI 838 - AT - Income Tax

Acquisition of brand - Payment made for Legal and professional fees revenue expenses or capital expenses Held that - The brand expenditure incurred by the assessee has been treated as capital expenditure - The expenditure incurred on the feasibility report paid to M/s J Sagar Associates constitutes legal expenses incurred by the assessee to ensure about the proper acquisition of the Brand - This is in the nature of consultancy - assessee is already in the line of chain of restaurants and food joints - The acquisition relating to brand of M/s Blue Foods Pvt Ltd is also with respect to food chain, is expenditure is incurred by the assessee in the existing line of its business - the expenditure incurred on consultancy have been held in COMMISSIONER OF INCOME TAX Versus M/s. SHELL BITUMEN INDIA (P) LTD. 2010 (8) TMI 19 - DELHI HIGH COURT on account of revenue expenditure there was no infirmity in the order of CIT(A) which it has been held that the expenditure were in the nature of revenue and could not be disallowed as capital expenditure Decided against Revenue.

Summary

Issues:
1. Treatment of legal and professional fees as revenue expenditure.
2. Disallowance of a portion of the legal and professional fees as capital expenditure.
3. Interpretation of feasibility report expenditure in connection with the acquisition of a brand.

Analysis:
1. The Revenue challenged the order of the ld. CIT(A) regarding the treatment of a payment made to a legal firm as revenue expenditure. The AO initially treated the amount as capital expenditure since the assessee had capitalized the acquisition of a brand. The Revenue contended that the payment should also be capitalized. The ld. CIT(A) allowed the claim, stating that the expenditure was connected to the existing business and was in the nature of revenue. The decision was supported by citing precedents like CIT V/s Kerala State Industrial Development Corporation.

2. The Revenue further argued that the decision cited by the ld. CIT(A) was distinguishable and that the disallowance made by the AO should be upheld. However, the ld. AR for the assessee maintained that the expenditure was for obtaining a feasibility report related to the brand acquisition and was rightly treated as revenue. The AR also referenced the decision in CIT V/s M/s Shell Bitumen India (P) Ltd to support the claim that such consultancy expenses are revenue in nature. The Tribunal agreed with the ld. CIT(A) and dismissed the Revenue's appeal, emphasizing that the expenditure was incurred in the existing line of business and was akin to consultancy services, which are typically considered revenue expenses.

3. The Tribunal's analysis focused on the nature of the expenditure incurred by the assessee for the feasibility report in connection with the brand acquisition. It was established that the expenditure was akin to consultancy services, essential for ensuring the proper acquisition of the brand. Drawing from the decision in the case of M/s Shell Bitumen India (P) Ltd, the Tribunal concluded that such expenses were revenue in nature and aligned with the assessee's existing business activities. Consequently, the Tribunal upheld the ld. CIT(A)'s decision to treat the expenditure as revenue and dismissed the Revenue's appeal.

In conclusion, the Tribunal affirmed the ld. CIT(A)'s ruling that the legal and professional fees incurred by the assessee for obtaining a feasibility report related to the acquisition of a brand should be treated as revenue expenditure, given its connection to the existing business operations. The decision was supported by legal precedents and upheld the principle that consultancy expenses of this nature are typically considered revenue expenses.