2022 (7) TMI 164 - AT - Income Tax

Addition of capital WIP written off - AO not found claim acceptable on the ground that the said expenses were clearly capital in nature, as the Assessee company has itself admitted the fact that due to certain unavoidable reasons - HELD THAT - We do not find any reason and/or material to controvert the findings of the ld. Commissioner in affirming the addition under challenge. Hence, the ground No. 1 raised by the Assessee which relates to the affirmation of the disallowance of expenses qua Capital WIP written off , is dismissed. Addition of expenditure on account of legal and professional charges under the head other expenses - Commissioner observed that by its own admission, the Assessee has stated that the expenditure has been for services of various legal and technical professionals to augment its scale of operations significantly , thus the expenditure is adjudged as capital expenses - HELD THAT - We have given our thoughtful consideration to the conclusions drawn by the authorities below to the issue in hand and do not find any reason or material to controvert the findings of the authorities below, specifically, the ld. Commissioner in affirming the addition under challenge and therefore, in our considered view, the conclusion drawn by the ld. Commissioner does not require any interference, as the same does not suffer from any perversity, impropriety and /or illegally. Consequently, ground No. 2 also stands dismissed. Appeal of assessee dismissed.

Summary

Issues Involved:
1. Disallowance of expenses related to "Capital Work in Progress (WIP) written off."
2. Disallowance of expenses related to "Legal and Professional Charges."

Issue-wise Detailed Analysis:

1. Disallowance of Expenses Related to "Capital Work in Progress (WIP) Written Off":
- The Assessee claimed expenses of Rs.1,24,25,454/- under "other expenses" in its Profit & Loss account, stating these were incurred in the normal course of business operations and should be considered as revenue expenses under section 37 of the Income-tax Act, 1961.
- The Assessing Officer (AO) rejected this claim, arguing that the expenses were capital in nature, as they were related to the development of new clients and projects that were not successfully developed. The AO concluded that these were not regular business activities and thus could not be allowed as revenue expenses.
- The Assessee appealed to the Commissioner of Income-tax (Appeals), who affirmed the AO's decision, noting that the expense pertained to the previous assessment year (A.Y. 2011-12) and should have been debited in that year's Profit and Loss account, not in A.Y. 2012-13.
- The Tribunal upheld the Commissioner's findings, agreeing that the expenses were correctly classified as capital and not allowable in the relevant assessment year.

2. Disallowance of Expenses Related to "Legal and Professional Charges":
- The Assessee claimed Rs.1,20,01,931/- as legal and professional charges under "other expenses," asserting that these were incurred to augment the scale of operations and were routine business expenses.
- The AO disallowed this claim, concluding that the expenses were for gaining enduring benefits for the company in subsequent years and thus capital in nature.
- The Commissioner upheld the AO's decision, analyzing the provisions of section 37(1) and relevant judicial precedents to distinguish between capital and revenue expenditure. The Commissioner noted that the Assessee was in its nascent stage of business and incurred these expenses for long-term goals, including revenue generation and market expansion. Therefore, the expenses were adjudged as capital.
- The Tribunal agreed with the Commissioner's conclusions, finding no reason or material to interfere with the decision, as the expenses were indeed capital in nature and not revenue.

Conclusion:
The Tribunal dismissed the appeal filed by the Assessee, affirming the disallowances made by the lower authorities on both counts: the "Capital Work in Progress (WIP) written off" and the "Legal and Professional Charges." The Tribunal found the conclusions of the Commissioner to be logical, legally sound, and free from any perversity or impropriety.