2017 (2) TMI 677 - AT - Income Tax

Addition of recruitment expenses to the income of the assessee - Held that - We find merit in the contention of the assessee, made before the authorities below that the recruitment expenses is the one time professional fees paid to the Recruitment Agency. Such expenditure is incurred in the normal course for running the business more professionally and efficiently. Therefore, the same does not fall within ambit of capital expenditure. Hence, there is no justification in disallowing 50% of expenditure incurred on payment of recruitment agency. The Ld. CIT (A) has accordingly, held that the expenditure is revenue in nature. Thus no infirmity in the impugned order. Moreover, it is not the case of the revenue that the assessee has claimed more than the actual expenses incurred. Hence, we uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal of the revenue. Expenditure on compliance of Sarbans Oxley Act, 2002 (SOX) allowance - Held that - As per the assessee the affiliated/associate enterprises of the appellant/assessee were based in United States and therefore, the provisions of SOX were applicable to the assessee during the assessment year under consideration. The assessee accordingly appointed M/s Mahajan & Aibara, Chartered Accountants, Mumbai to carry out SOX compliance audit. In view of the submissions of the assessee made before the authorities below, the Ld. CIT(A) has rightly held that the payment relates to the professional fees paid to M/s. Mahajan & Aibara, who were appointed to conduct SOX compliance at the service provider site of its group companies. The Ld. DR did not produce any case law to substantiate its contention. Hence, we concur with the Ld. CIT (A) and hold that the expenditure on compliance of provisions of SOX does not fall within ambit of capital expenditure. International Share Award Plan (ISAP) expenditure allowance - Held that - The expenditure on ISAP awards incurred by the assessee is akin to salary paid to the employees for their services which cannot be treated as enduring benefit to the assessee. Moreover, the ISPA award is taxed in the hands of the director concerned. Therefore, the ISAP Award paid to Mr. Anupam Kashiv under the head remuneration to directors cannot be treated as capital expenditure. In our opinion the Ld. CIT(A) has rightly held that ISPA award expenditure/expenses are routine expenses of revenue nature.

Summary

Issues involved:
1. Assessment of expenses as capital or revenue in nature.

Detailed analysis:
1. The appeal was filed by the revenue against the order passed by the Ld. CIT (Appeals)-9, Mumbai, for the assessment year 2010-2011. The Ld. CIT(A) had partly allowed the appeal of the assessee against the assessment order passed by the A.O u/s 143(3) of the Income Tax Act, 1961. The additions made by the A.O were challenged by the assessee, leading to the present appeal by the revenue.

2. The assessee company, engaged in Management Consultants business, had filed its return of income declaring a total income of ?57,66,655. The assessment order passed by the A.O under section 143(3) of the Act determined the total income at ?98,50,330 after making various additions, including expenses on recruitment, SOX compliance testing, and ISAP Award. The Ld. CIT (A) deleted all these additions, leading to the current appeal by the revenue.

3. The primary issue in the appeal was whether the expenses incurred by the assessee were of capital or revenue nature. The A.O had disallowed a portion of the expenses based on the benefit of enduring nature created by these expenses, following the case law of M/s. Brooke Bond India Ltd. The Ld. CIT (A), however, after considering the nature, frequency, and quantum of the expenditures, held that the expenses were routine and revenue in nature, not creating any enduring benefit. The Ld. CIT (A) concluded that the expenses did not qualify as capital expenditure and directed the deletions of the additions made by the A.O.

4. The Tribunal, after analyzing the contentions of both parties, upheld the findings of the Ld. CIT (A) and dismissed the revenue's appeal for the assessment year 2010-2011. The Tribunal concurred with the Ld. CIT (A) that the expenses on recruitment, SOX compliance testing, and ISAP awards were revenue in nature and not capital expenditures. The Tribunal found no justification for disallowing these expenses and supported the decision to delete the additions made by the A.O.

5. The Tribunal's decision was based on the understanding that the expenses incurred by the assessee were regular routine expenditures essential for the normal course of business operations, and did not result in any enduring benefit to the assessee. Therefore, the Tribunal concluded that the expenses were revenue in nature and should be allowed, in line with the findings of the Ld. CIT (A). The Tribunal found no infirmity in the order of the Ld. CIT (A) and dismissed the revenue's appeal for the assessment year 2010-2011.