2016 (9) TMI 104 - AT - Income Tax

Disallowance of consultancy charges paid to the legal advisor firm - whether the said amount was not incurred for the purpose of business as the same was incurred prior to commencement of business of the assessee - Held that - The business can be set-up when the company is ready to discharge the function for which it is incorporated. It was also held that expenditure incurred after the setting up of business is deductible as revenue expenditure. It is also brought to our notice that one of the objects for which the company was incorporated was to make investment in other companies, and the assessee company had received funds in the form of share capital or other sources before 11-10-2006 and it had started making due diligence for potential investee companies immediately after getting NBFC registration certificate on 11-10-2006, then it can be said that assessee company was ready to commence its business and thus its business was set-up on 11-10-2006. Thus, we find that in principle, the expenses incurred after 11-10-2006 having been incurred after setting up of business are deductible as revenue expenditure. Expenses incurred on account of due diligence of a proposed investment - Held that - It is clear that expenses incurred on account of due diligence of a proposed investment is clearly made as part of the business activities of the assessee and, therefore, the impugned expenses are expenses incurred in the ordinary course of its business. The other reasoning given by the Ld. CIT(A) was that no investment was made during the year under consideration and funds were parked in the bank. On this aspect also, we differ with the reasoning given by the Ld. CIT(A). Though, clear facts are not before us with respect to the making of investment in this year or next year, but even if investments were not made during the year under consideration, it cannot be said that these expenses were not incurred for the purpose of business. It is well settled law that results of the business activities or fruits of efforts to a business organisation may yield in the concerned year or in subsequent years or never. But that would not mean that the expenses incurred would not be expenses incurred during the course of business. Thus, we find that approach of the lower authorities in disallowing these expenses was contrary to law and facts.

Issues Involved:
1. Disallowance of consultancy charges paid to Amarchand & Mangaldas & Suresh A Shroff & Co (AMS) amounting to ?1,02,01,400.
2. Determination of the stage at which business expenses can be allowed for a company.
3. Assessment of whether the business was 'set-up' or 'commenced'.
4. Classification of expenses as revenue or capital expenditure.

Detailed Analysis:

1. Disallowance of Consultancy Charges:
The primary issue in this appeal was the disallowance of ?1,02,01,400 paid as consultancy charges to the legal advisor firm AMS. The Assessing Officer (AO) disallowed these charges on the grounds that they were not incurred for the purpose of business but were pre-commencement expenses. The assessee argued that these expenses were for due diligence related to investment purposes and should be allowed under section 37(1) of the Income-tax Act, 1961 as they were neither capital expenditure nor personal in nature.

2. Determination of the Stage at Which Business Expenses Can Be Allowed:
The Tribunal examined the provisions of section 3 of the Income-tax Act, 1961, which defines the "previous year" and stipulates that in the case of a newly set-up business, the previous year begins from the date the business is set up. The Tribunal emphasized that for expenses to be allowable, the business must be 'set-up' rather than 'commenced'. The Tribunal referred to the 'Notes to the Computation Sheet' attached with the return of income, which stated that the business was set-up on October 11, 2006, the date on which the company received its NBFC registration certificate from RBI.

3. Assessment of Whether the Business Was 'Set-Up' or 'Commenced':
The Tribunal clarified that the term "setting up" means the business is ready to commence operations, and actual commencement is not necessary for expenses to be allowed. The Tribunal cited several judgments, including Western India Vegetable Products Ltd v CIT (26 ITR 151)(BOM) and DHL Express (I) Ltd vs ACIT (154 TTJ 108 (Mum)), which supported the view that expenses incurred after the business is set-up are deductible as revenue expenses.

4. Classification of Expenses as Revenue or Capital Expenditure:
The Tribunal examined the nature of the expenses in question. It was noted that a sum of ?4,21,400 and ?1,60,000 were incurred for the purchase of stamp paper, for which no details were available. These were disallowed as they were not substantiated. However, the remaining ?1 crore paid to AMS for due diligence was considered a business expense. The Tribunal disagreed with the CIT(A)'s reasoning that these expenses were not for business purposes because no investment was made during the year. The Tribunal held that the expenses were incurred as part of the business activities and should be allowed as revenue expenses, regardless of whether the investments were made in the same year or later.

Conclusion:
The Tribunal partly allowed the appeal. The disallowance was confirmed for ?2,01,400 due to lack of details, but the balance disallowance of ?1 crore was deleted. The Tribunal held that the expenses incurred after the business was set-up (October 11, 2006) were allowable as revenue expenses, and the consultancy charges paid for due diligence were incurred in the ordinary course of business.

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