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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ NEW DLEHI
Before: SHRI ANIL CHATURVEDI & SHRI N.K. CHOUDHRY
This appeal has been filed by the Assessee against the order dated 05.05.2017, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)-35, New Delhi (in short ‘ld. Commissioner’) u/s. 250(6) of the Income-tax Act, 1961 (in short ‘the Act’).
At the outset, it appears from the case title in the order sheet that the appellant has been shown as “DCIT, Circle 4(2), New Delhi” and the respondent has been shown as “Bharat Light and Power
[2] Pvt. Ltd., New Delhi (Assessee)”. Even in the cause list, the appeal has been shown being filed by the Revenue Department. Whereas, in fact, herein the Assessee is an appellantand the Revenue Department through DCIT, Circle 4(2), New Delhi, is the respondent, therefore we deem it appropriate to clarify that the Assessee be read as ‘Appellant’and the Revenue Department as ‘Respondent’herein.
It appears from the Record that though various notices of hearing were issued to the Assessee and the case was fixed for hearing on many occasions, but the Assessee did not appear, therefore we are constrained to decide this appeal as ex-parte.
Heard the Ld. DR who vehemently supported the orders passed by the authorities below.
In brief, the relevant facts for adjudication of the instant appeal are that theAssessee has claimed expenses of Rs.1,24,25,454/- on account of capital work in progress written off under the head “other expenses” in its Profit & Loss account. The Assessing Officer asked the Assessee to clarify as to why capital WIP written off of Rs.1,24,25,454/- should not be added back in its computation of income being not allowable expenditure, against which the Assessee submitted that the said expenses have been incurred in the normal course of business operations which were accumulated as capital work in progress during the initial time of commencement of business activities and subsequently have been claimed under the provisions of section 37 of the Act being ‘revenue’ in nature.Further, the capital work in progress claimed as expense during the year comprises of the amount that had been [3] incurred by the Assesseefor development of new clients and projects, however, due to certain unavoidable reasons, the Assessee was not able to successfully develop those clients and thus, eventually it had to write such amount as an expense during the year under the relevant provisions of the Act. Since these expenses did not pertain specifically to any tangible asset or substantial expansion of an existing undertaking or setting up of a new undertaking, but consist of routine business expenses and thus the same have been claimed as expenses during the year.
The Assessing Officer, though considered the claim of the Assessee but not found 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, it was not able to successfully develop those clients and thus eventually it had to write such amount as an expense during the year under the relevant provisions of the Income Tax Act, 1961”. The Assessing Officer further observed that the expenditure was not for regular business activities. Thus, the expenses claimed by the Assessee cannot be allowed.
The Assessee being aggrieved, challenged the said addition before the ld. Commissioner, who vide para 4.3 in the impugned order, sought the remand report of the Assessing Officer and thereafter rejoinder by the Assessee and affirmed the addition by dismissing the ground raised by the Assessee, by concluding as under :
“Perusal of these submissions, clearly denotes that the expense of Rs.1,24,25,454/- of capital work in progress pertains to A.Y. 2011-12 and not to the relevant year presently under appeal. This is an expense of A.Y. 2011-12 and as the system of accounting is accrual it should have been debited in last years’ Profit and Loss account. This [4] expenditure cannot be allowed in A.Y. 2012-13, as it does not pertain to the relevant year. Ground No. 2 stands dismissed.”
We have given our thoughtful consideration to the issue in hand and are of the considered view that the conclusions drawn by the ld. Commissioner is correct and based on the logical reasons and even otherwise, 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 Assesseewhich relates to the affirmation of the disallowance of expenses qua ‘Capital WIP written off’, is dismissed.
Now coming to ground No. 2, which pertains to the making of disallowance of Rs.1,20,01,931/- by the Assessing Officer and affirmation by the ld. Commissioner. The Assessing Officer in assessment order dated 22.01.2016 observed that the Assessee has claimed huge expenditure on account of legal and professional charges of Rs.1,20,01,931/- under the head “other expenses” in its profit and loss account. The Assessing Officer sought the reply of the Assessee, against which the Assessee has claimed that “since the company is in the nascent stage of its operations and accordingly, it has taken services of various legal and technical professions to augment its scale of operations significantly. Accordingly, the proportion of such expenses has increased significantly as compared to the previous year”. The Assessee again submitted that the said expenses have been incurred during the routine course of business activities of the company which have been utilized for identification and generation of source of income for the company during the current and subsequent year.
[5]
The Assessing Officer after considering the reply of the Assessee came to the conclusion “that it is amply clear that the said expenditure is incurred for identification and generation of revenue of income, which means that the expenditure is incurred to gain enduring benefits to be received by the company in subsequent years. The AR was given final opportunity to explain the allowability of said expenditure. The AR did not submit any plausible explanation. In view of these facts, expenditure of Rs.1,20,01,931/- incurred as professional fees is disallowed and added to the income of the Assessee.”
9. The ld. Commissioner on appeal, affirmed the said disallowance by concluding as under:
4.5. Ground no. 4: is with respect to claim of expense of Rs. 1,20,01,931/- on account of Legal or Profession charges. ……………………………………………………………………………… ……………………………………………………………………………… 4.5.1……………………………………………………………………… ……………………………………………………………………………… 4.5.2……………………………………………………………………… ……………………………………………………………………………… 4.5.3. Before proceedings further it would be necessary to first analyse the provision of the Act with respect to Capital and Revenue Expenditure Considering the provision of section 37(1) as well as the judgments passed by the Hon'ble Supreme Court of India, and various High Courts, the Ld. Income Tax Appellate Tribunal Kolkata (Special Bench) in case of Pearless Securities Ltd. Vs Joint CIT (2005) 94 ITD 89 (KOL) (SB) outlined certain general principles for making the distinction between the "Capital Expenditure" and "Revenue Expenditure" which are briefly explained here below:- i. When an expenditure is made with a view to bring into existence an asset or an advantage for the enduring benefit of a trade, there is good reason (in the absence of special circumstances leading to the opposite conclusion) for treating such an expenditure as properly
[6] attributable not to the Revenue but to Capital Expenditure. ii. If the payment is made in the course of and for the purpose carrying on business or trading activity would be Revenue expenditure even though the payment is of large amount. It is true nature of expenditure that is relevant and not the name and description given to it. iii. Outgoings on account of Capital or Revenue depend effectively on practical and business point of view rather than upon juristic classification of the legal rights, e.g., secured, employed or exhausted in the process, and the question must be viewed in the larger context of business necessity or expediency. iv. What is Capital expenditure and what is Revenue are not eternal varieties but need to be flexible so as to respond to the changing economic realities of business.\ v. Though the expenditure has been incurred for purpose of acquiring an asset or advantage is for running of the business or for working out that asset with a view to produce profit it would be Revenue expenditure.\ vi. If the outgoing is so related to the carrying on or the conduct of the business that it may be regarded as an integral part of the profit-earning process or operation and not for the acquisition of an asset of a permanent character, the possession of which is a condition precedent for the running of the business, then it would be expenditure of Revenue nature. vii. If the expenditure is recurring and is incurred during the course of business or manufacture, it would be Revenue expenditure. viii. It is the true nature of the expenditure that is relevant and not the name or description or treatment given to it by the Assessee in his books of account or other documents. 4.5.4. Further, one of the conditions for allowing deductions u/s 37 or losses u/s 28 is that such expenditure should not be [7] of capital expenditure or such loss should not be of capital expenditure or capital loss in nature. However, the Act neither defines the term nor prescribes as to when an expenditure or loss would be characterized as capital in nature. Ordinarily, 'capital' means an asset which has an element of permanency about it and which is capable of being a source for generating income. Capital expenditure, must, therefore, generally mean an acquisition of an asset and the asset must be intended to be of lasting value as held in Jagat Bus Service, Saharanpur V. CIT (1950) 18 ITR 13 (All). In CIT V. Ashok Leyland Ltd. (1972) 86 ITR 549 (SC), it was held that the word 'capital' connotes permanency. Therefore, capital expenditure is akin to the concept of securing some tangible or intangible property or corporeal or incorporeal right to that they can be of lasting or enduring benefit to the enterprise. Similarly, in Assam Bengal Cement Co. Ltd. V. CIT (1955) 27 ITR 34 (SC), it was held that the expenditure incurred for acquiring or for bringing into existence an asset or advantage of enduring nature of the business is properly attributable to capital and is capital in nature. However, to determine the nature of expenditure, all the facts of a particular case have to be analyzed. 4.5.5. Perusal of various submissions of the appellant reveals that the appellant company is in its nascent stage of business, the company become operational in A.Y. 2011-12 and is in the 2nd year of business, which is also the relevant A.Y. In this year the company is exploring ways and means of revenue generation and to augment its resources. 4.5.6. It follows thereof that incurring of huge expense of Rs.1,20,01,931/- on account of legal & professional charges which is not only for auditors fees or legal opinion, has a larger and wider purpose of obtaining expert opinion for long term goals of revenue generation and expansion of markets. By its own admission, the appellant 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 of Rs. 1,20,01,931/- is adjudged as capital expenses. Considering thus the totality of circumstances facts of case and the legal provisions as discussed in the preceding paras, I uphold
[8] the finding of AO in this regard. Ground no. 4 is dismissed.
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We observe that the ld. Commissioner while affirming the disallowance under challenge categorically observed that the appellant company as per various submissions, is in its nascent stage of business and is exploring ways and means of revenue generation and to augment its resources and incurring of huge expenditure of Rs.1,20,01,931/- on account of legal and professional charges which is not only for auditors fees or legal opinion, has a larger and wider purpose of obtaining expert opinion for long term goals of revenue generation and expansion of markets. The Ld. Commissioner further 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 of Rs.1,20,01,931/- is adjudged as capital expenses.
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.
[9]
In the result, the appeal filed by the Assessee stands dismissed.
Order pronounced in open Court on 27/06/2022.