2022 (7) TMI 32 - AT - Income Tax

Revenue expenditure or capital expenditure - Allowability of expenses on acquisition of clientele and technical human resource i.e., employees to execute the contract - assessee has claimed 1/5th on account of amortization of business acquisition expenses - HELD THAT - DR could not controvert the fact situation that the assessee has practically acquired business contracts of these three US companies with their clients for software development along with the technical resources including employees to execute contracts. We noted that from the facts, it is not emerging that the assessee has acquired either complete business i.e., the profit apparatus or any capital asset. In such case, the expenses incurred are to be allowed as revenue and assessee has only amortized these expenses in 5 years and the same are allowable as revenue expenditure u/s.37 of the Act. We find no infirmity in the order of CIT(A) and hence, the appeal of Revenue is dismissed.

Summary

Issues:
1. Restoration of issue regarding amortization of capital expenditure by the Income Tax Appellate Tribunal.
2. Disallowance of amortization expenses by the Assessing Officer.
3. Allowability of expenses on acquisition of business facilities.
4. Appeal by Revenue against the decision of the Commissioner of Income-tax (Appeals).

Issue 1: Restoration of issue regarding amortization of capital expenditure by the Income Tax Appellate Tribunal

The Hon'ble Madras High Court set aside the issue of amortization of capital expenditure to the Income Tax Appellate Tribunal for fresh adjudication. The Tribunal had earlier remitted the matter back to the Assessing Officer based on a Special Bench decision, which was found to be unnecessary as the issue was not before the Special Bench. The High Court directed the Tribunal to decide the issue on its merits and in accordance with the law after giving an opportunity to both sides.

Issue 2: Disallowance of amortization expenses by the Assessing Officer

The Assessing Officer disallowed the claim of amortization expenses amounting to Rs. 3,08,08,785/- by the assessee. The AO noted that the assessee had acquired business contracts of two companies and amortized the expenses over a period of five years. However, the CIT(A) allowed the claim of the assessee, stating that the expenses were in the nature of revenue expenditure as the assessee had acquired ongoing business contracts without acquiring any capital assets. The Tribunal upheld the decision of the CIT(A) and dismissed the Revenue's appeal.

Issue 3: Allowability of expenses on acquisition of business facilities

The issue pertained to the allowability of expenses on the acquisition of business facilities by the assessee. The CIT(A) allowed the claim of the assessee, emphasizing that the expenses were incurred for the expansion of business and acquisition of business contracts along with employees and technical resources. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal for both assessment years.

Issue 4: Appeal by Revenue against the decision of the Commissioner of Income-tax (Appeals)

The Revenue appealed against the decision of the CIT(A) regarding the disallowance of amortization expenses and the allowability of expenses on the acquisition of business facilities. The Tribunal, after considering the facts and circumstances of the case, upheld the CIT(A)'s decision, stating that the expenses were revenue in nature and allowable under section 37 of the Income Tax Act. Consequently, the appeals filed by the Revenue were dismissed.

In conclusion, the Tribunal's decision to restore the issue of amortization of capital expenditure for fresh adjudication, the allowance of expenses on the acquisition of business facilities by the CIT(A), and the dismissal of the Revenue's appeals highlight the intricate legal analysis and application of tax laws in this case.