2021 (5) TMI 144 - AT - Income Tax

Nature of expenditure - expenditure on design charges for T3 Airport construction - revenue or capital expenditure - HELD THAT - From the records, we find that the amount has been paid by the assessee to M/ s Corus to prepare a detail lay out, drawing of the ceiling for which the assessee was the executor. The payment was made for designing and detailing services for roofing system in respect of T3 terminal at IGAI, Delhi for which DIAL is the concessionaire. The amount has been paid for obtaining technical support, drawings designs. The designs are specific to the Airport and cannot be replicated for any other structure or industrial establishment other than the RGAI.The assessee has not obtained any capital asset by the way of payment made to M/s Corus for designs. There may be cases where expenditure though referable to or in connection with fixed capital is nevertheless allowable as revenue expenditure e.g. expenditure incurred in preserving or maintaining capital assets. This test is therefore clearly not one of universal application. It is true that if disbursement is made for acquisition of a source of profit or income, it would ordinarily be in the nature of capital expenditure. The source of profit or income was the profit making apparatus and this remained untouched and unaltered. There was no enlargement of the permanent structure of which the income would be the produce or fruit. When dealing with cases where the question is whether expenditure incurred by an assesses is capital or revenue expenditure, the question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an internal part of the profit- earning process and not for acquisition of an asset or a right of a permanent character. The possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Relying on the above propositions considered by the Hon ble Supreme Court in the case of M/ s Empire Jute Company Ltd. 1980 (5) TMI 1 - SUPREME COURT we hold that the ld. CIT (A) has rightly allowed the deduction. Long Term Capital Gains - AO doubted the sale value of the flat sold by the assessee and referred the matter to the DVO to determine the share market value - difference in value determined by DVO as against the sale value shown by the assessee - HELD THAT - On going through the provision of Section 50C , we hereby hold that the value determined by the stamp duty authorities or consideration so received or accruing as a result of the transfer to the assessee whichever is more, shall be the value of the property. Hence, the authorities are hereby directed to compute the capital gains taken into consideration, the sale value of ₹ 1,05,00,000/-. The AO may re- verify the value of the property from the registration authorities to confirm the value as submitted by the assessee of ₹ 73,00,000 /- and take action only if found contra. Deduction u/s 40A(2)(b) - payments made to Mr. Arvind Nanda, with regard to the vehicle purchase, payment made to M/ s Intertec on account of job work and the rental payments has been examined - CIT-A deleted the addition - HELD THAT - On going through the entire factum of the case, we find that the disallowances are purely hypothetical without bringing any tangible material to prove that the payments are over and above the market rates. Hence, we hereby decline to interfere with the order of the ld. CIT (A). Revenue appeal dismissed.

Summary

Issues Involved:
1. Design Charges
2. Long Term Capital Gains
3. Deduction under Section 40A(2)(b)

Issue-wise Detailed Analysis:

1. Design Charges:
The revenue appealed against the decision of CIT(A) regarding the treatment of design charges paid by the assessee. The assessee paid ?10.02 Cr. for design services related to T3 Airport construction, which the AO classified as capital expenditure, while the assessee claimed it as revenue expenditure. CIT(A) deleted the addition, stating that the expenditure did not provide an enduring benefit. The Tribunal examined the nature of the payment, which was for specific design and detailing services for the T3 terminal, and concluded that the designs could not be used for any other structure. The Tribunal referred to established tests for determining capital vs. revenue expenditure, including the test of enduring benefit and the distinction between fixed and circulating capital. It cited the Supreme Court’s decision in Empire Jute Company Ltd., emphasizing that the expenditure facilitated trading operations without acquiring a capital asset. The Tribunal upheld CIT(A)’s decision, allowing the deduction as revenue expenditure.

2. Long Term Capital Gains:
The AO questioned the sale value of a flat sold by the assessee and referred the matter to the DVO, who valued the property at ?2,06,46,000 against the assessee’s declared sale value of ?1,05,00,000. CIT(A) deleted the addition, noting that the stamp duty value at the time of sale was ?73,00,000, and the assessee sold it for ?1,05,00,000. The Tribunal reviewed Section 50C, which mandates that the value adopted by the stamp valuation authority or the actual sale consideration, whichever is higher, should be considered for capital gains computation. The Tribunal directed the authorities to compute capital gains based on the sale value of ?1,05,00,000 and allowed the assessee’s appeal on this ground, instructing the AO to verify the stamp duty value and take action accordingly.

3. Deduction under Section 40A(2)(b):
The AO disallowed certain payments made to related persons under Section 40A(2)(b), totaling ?13.86 lakhs. CIT(A) examined the disallowances, including vehicle purchase payments, job work payments to M/s Intertec, and rental payments. CIT(A) found the AO’s observations vague and unsupported by evidence. It concluded that the payments were not unreasonable or excessive, citing that both the assessee and the related parties were taxed at the maximum marginal rate, eliminating tax avoidance concerns. The Tribunal agreed with CIT(A), noting the lack of tangible evidence to prove the payments were above market rates. It upheld CIT(A)’s order, dismissing the revenue’s appeal.

Conclusion:
The Tribunal dismissed both appeals filed by the revenue, upholding CIT(A)’s decisions on all grounds. The Tribunal found the design charges to be revenue expenditure, directed the computation of capital gains based on the actual sale consideration, and rejected the disallowances under Section 40A(2)(b) due to lack of evidence. The order was pronounced in the open court on 26/04/2021.