2014 (9) TMI 832 - HC - Income Tax

Classification of expenses - Whether the Tribunal was justified in deleting the disallowance of expenditure claimed by the assessee, without appreciating that the expenditure was necessitated due to the coming into existence of the new entity Held that - payment to financial consultants for professional services in connection with the corporation debt restructuring by negotiating with Banks and Financial Institutions - Such expenditure was considered for the purpose of business and allowable in entirety in the year in which it was incurred and it was held to be revenue in nature and not capital - Following the decision in Madras Industrial Investment Corporation Limited v. CIT, 1997 (4) TMI 5 - SUPREME Court - considering the principle of commercial trading, when the question is to be addressed, both the CIT(A) as well as the Tribunal rightly held it to be revenue in nature and the same cannot be said to be capital - It is quite apparent that the fees paid for support for LAN work; providing and upgradation of Internet Bandwidth, or for coordination with BSNL for internet connectivity, etc are not having any enduring benefit - If any consultancy is required for the said purpose, the amount clearly would come under the head of Consultancy and that surely could not be considered as capital in nature - the expenditure made was at the best for continuing the benefit for one year - such payment cannot be categorized as capital in nature as no asset is brought into existence on account of such payment Decided against revenue.

Summary

Issues:
1. Disallowance of expenditure claimed by the assessee
2. Nature of the expenditure - capital or revenue

Issue 1: Disallowance of Expenditure Claimed by the Assessee
The case involved a substantial question of law raised by the Revenue challenging the order of the Income Tax Appellate Tribunal regarding the disallowance of expenditure claimed by the assessee. The Assessing Officer disallowed an expenditure of &8377; 6,60,52,000 claimed under "Legal & Professional Fees" as capital in nature, related to the reorganization of the business due to demerger. The Commissioner of Income Tax [Appeals] ruled in favor of the assessee, stating that the expenses were not capital in nature, leading to the Department appealing to the Tribunal.

Issue 2: Nature of the Expenditure - Capital or Revenue
The Tribunal upheld the decision of the CIT [A], dismissing the appeal of the Department. The expenditure in question included payments for various services such as consultancy, IT system maintenance, legal consultation, and finance consultancy. The Tribunal found that these expenses were revenue in nature and not capital, as they did not result in any enduring benefit or asset creation. The Tribunal referred to previous cases where similar expenditures were considered revenue in nature, emphasizing the commercial expediency principle. The Tribunal concluded that the expenditure was for continuing benefits for one year and did not create any lasting asset, thus not falling under capital expenditure.

In conclusion, the High Court upheld the Tribunal's decision, stating that no interference was warranted, and dismissed the Tax Appeal. The judgment emphasized that the expenditure incurred by the assessee was revenue in nature and not capital, as it did not result in the creation of any enduring asset.