2017 (11) TMI 1539 - AT - Income Tax

Disallowance relating to the pre-operative expenses and legal and professional fees paid - proof of setting up of business - Held that - In the instant case also, the moment the approval from the SEBI was received, i.e., on September 1, 2008 for commencement of AMS operation, it can be said that the business has been set up. The approval for advisory services is another activity of the assessee. Hence no fault can be found with the action of the assessee in taking the date of setting up of business as September 1, 2008. Hence all the revenue expenses incurred by the assessee after September 1, 2008 for running business enterprise cannot be treated as pre-operative expenses and should be allowable as revenue expenditure. Accordingly, we do not find any infirmity in the decision rendered by the CIT(Appeals) on this issue. Accordingly, we confirm the same. Disallowance of legal and professional fees - Held that - Since we have already held that the business has been set up on September 1, 2008 and further expenses paid to the legal firm were related to drafting of mutual fund schemes etc., which are connected with the routine business activities, we are of the view that the learned Commissioner of Income-tax (Appeals) has rightly held the same to be revenue in nature. Accordingly, we uphold the order passed by the Commissioner of Income-tax (Appeals) on this issue also. Appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance of pre-operative expenses.
2. Disallowance of legal and professional fees.

Issue-wise Detailed Analysis:

1. Disallowance of Pre-operative Expenses:

The Revenue appealed against the decision of the Commissioner of Income-tax (Appeals) [CIT(A)] who deleted the disallowance of ?326.51 lakhs related to pre-operative expenses. The assessee, engaged in asset management and investment advisory services, capitalized expenses before September 1, 2008, and claimed expenses incurred thereafter as revenue expenditure. The Assessing Officer (AO) disallowed the expenses incurred from September 1, 2008, to December 10, 2008, treating them as pre-operative expenses.

The CIT(A) accepted the assessee's contention that the business was set up on September 1, 2008, upon receiving SEBI approval for asset management services (AMS). The CIT(A) relied on several judgments, including Western India Vegetable Products Ltd. v. CIT and CIT v. Saurashtra Cement and Chemical Industries Ltd., to conclude that the business was set up when it was ready to commence operations, even if actual operations were delayed due to external factors like the global financial crisis.

The Tribunal upheld the CIT(A)'s decision, noting that the business was indeed set up on September 1, 2008, when SEBI approval was received. Therefore, expenses incurred after this date were rightly treated as revenue expenditure.

2. Disallowance of Legal and Professional Fees:

The AO disallowed ?237.48 lakhs paid as legal and professional fees, treating them as capital expenditure since the services were related to mutual fund schemes yet to be launched. The CIT(A) partially upheld the disallowance, noting that ?99 lakhs paid to a foreign legal firm (FFHS&J) was not subjected to TDS and thus disallowed under section 40(a)(ia) of the Income-tax Act. However, the CIT(A) allowed the remaining ?137 lakhs paid to an Indian legal firm (AZB), treating it as revenue expenditure.

The Tribunal upheld the CIT(A)'s decision, agreeing that the legal and professional fees were related to routine business activities and thus were revenue in nature. The Tribunal also agreed with the disallowance of ?99 lakhs due to non-compliance with TDS provisions.

Conclusion:

The Tribunal dismissed the Revenue's appeal, confirming the CIT(A)'s decisions on both issues. The expenses incurred after September 1, 2008, were rightly treated as revenue expenditure, and the legal and professional fees were correctly categorized, with appropriate disallowances for non-compliance with TDS provisions.