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Facts
The Revenue appealed the CIT(A)'s order deleting disallowances of professional fees and project system expenses. The CIT(A) had held these expenses to be revenue in nature, despite the AO's view that they were capital expenditure due to their exhaustive nature and enduring benefit.
Held
The Tribunal affirmed the CIT(A)'s decision regarding professional fees, relying on a Supreme Court precedent. For project system expenses, while the CIT(A) had allowed relief, the Tribunal found that the details were not fully presented to the lower authorities and remitted the issue back to the AO for fresh examination.
Key Issues
Whether the professional fees and project system expenses incurred by the assessee were revenue or capital in nature, and if the lower authorities' findings were legally justified.
Sections Cited
37(1)
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Income Tax Appellate Tribunal, DELHI ‘E’ Bench : NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI VIMAL KUMAR
This appeal by the Revenue is directed against the Order dated 11.12.2017 of Ld. CIT(A)-33, New Delhi relating to assessment year 2014-15 on the following grounds:-
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 5,67,000/- on account of professional fee to M/s Mott Mc Donald for preparing ‘project appraisal report’ by ignoring the fact that the assessee could not discharge its initial onus by not furnishing any detail and documents to prove that the expense incurred was of revenue nature?
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) is legally justified in deleting the disallowance of Rs. 6,30,88,908/- on account of ‘project system expenses’ by ignoring the fact that the assessee could not discharge its initial onus by not furnishing any detail and documents to prove that the expense incurred was of revenue nature?
3. Whether on the facts and circumstances of the case, the ld. CIT(A) is legally justified in allowing relief to the assessee by ignoring the legal position that determination of nature of expenditure, whether capital or revenue u/s. 37(1) of the Income Tax Act, 1961 depends on the duration of benefits of expenses incurred?
2. Apropos Ground No. 1. On this issue AO made the disallowance of professional fee amounting to Rs. 5,67,000/- paid to M/s Mott by treating the same as capital expenditure in the absence of any details furnished. Before the Ld. CIT(A), assessee furnished the details which was remanded back to the AO, but AO was not convinced with the same and in the remand report observed as under:-
“The assessee has submitted project appraisal report issued by Mott Mac Donald in support of professional fee paid. The appraisal report is very exhaustive and has enduring benefit for more than one year. It cannot be ascertained that it pertains to this very particular year and that the objective was limited only to approach banks and financial institution for funding their working capital requirement. Moreover the assessee was given opportunity at the time of assessment to explain which he failed to do so. Making of exhaustive project report has many purposes, which give a long term benefit to the assessee, hence, the same are capital in nature u/s. 37(1). Thus the expenses incurred for preparation of project appraisal report of the assessee company, has rightly been disallowed by the AO.” 2.1 Against the AO’s action, assessee appealed before the Ld. CIT(A), Ld. CIT(A) noted the following submissions :- “During proceedings before me, project appraisal report issued by M/s Mott Mac Donald is submitted. In the remand report, the Assessing Officer has submitted that he went through the appraisal report and found that the same very exhaustive. The AO further pointed out that the report purportedly prepared to approach banks and financial institutions for capital requirement, cannot be said to be limited to the benefit of one financial year. It is submitted before me that the Assessee took the service of M/s Mott Mac Donald to get the funding from banks / financial institution to cater its working capital requirements. The AO does not bring any material or evidence to prove as to how expenditure on such report renders enduring benefits to the appellant. A plea has been taken on behalf of the appellant that no new asset has come into existence and also the expenditure was not incurred to create any fixed capital distinct from circulating capital.” 2.2 Considering the same, Ld. CIT(A) held that it was the project appraisal report and the purpose mentioned therein was to finance current assets of the assessee company and therefore, he held that expenditure for obtaining such report is held to be in the nature of revenue expenditure. This expenditure has not brought any new asset into existence to the terms in capital nature or advantage of enduring nature. Hence, he accepted the contention of the assessee.
Against this order, Revenue is in appeal before us.
We have heard both the parties and perused the records. We find that ld. CIT(A) has taken a correct view of the matter that expenditure for obtaining such report cannot be considered as capital expenditure, hence, this view of the Ld. CIT(A) deserves to be affirmed. In this regard, we place reliance upon the decision of the Apex Court in the case of India Cements Ltd. vs. CIT [1966] 60 ITR 52 (SC) for the following proposition : “Section 37(1), read with section 256 of the Income Tax Act, 1961 (Corresponding to section 10(2)(xv), read with section 66, of Indian Income Tax Act, 1922) – Business expenditure - Allowability of - Assessment year 1950-51 – Assessee company obtained loan which was secured by a charge on its fixed assets of company – Assessee company, for availing loan, incurred expenditure on stamps, registration fees, etc. and claimed it as business expenditure – ITO disallowed claim for deduction of said expenditure on ground that it was incurred in obtaining capital – Whether a loan obtained cannot be treated as an asset or an advantage for enduring benefit of business assesses and a loan is liability and has to be repaid and a liability cannot be considered as an asset or an advantage – Held, yes – Whether nature of expenditure incurred in raising a loan does not depend upon nature and purpose of loan – Held, yes – Whether therefore, expenditure incurred by assessee was revenue expenditure liable to be allowed _ Held, yes.”
4.1 Respectfully, following the aforesaid precedent, we do not find any infirmity in the order of the Ld. CIT(A), hence, we affirm the same and accordingly, the ground no. 1 is rejected.
Apropos Ground No.
On this issue AO noted that assessee has debited Rs. 6,30,88,908/- as project system expense. AO treated the same to be capital expenditure in the absence of details/ submissions in this regard. Before the ld. CIT(A) assessee submitted some details which was remanded to the AO. The AO in his remand report has observed as under:- “Assessee has informed that it is in the business of installation & commissioning of solar plants for various client. Its business model is of EPC (Erection, Purchase and Commissioning) contract in which they install a solar plant for its client and hereafter transfer it to client and the same is therefore revenue expenditure as no asset for assessee is created. In this client of the assessee treat the cost of solar plant installation charges as capital expenditure. Therefore, client may be claiming depreciation on this cost of solar plants. In support of his contention the assessee has just furnished copies of few sale bills in support of its claim which is not sufficient to justify or prove that the claim of project systems expenses of Rs. 6.30 crore are revenue in nature. The assessee has not given details of the nature of expenses debited under the head therefore the same cannot be treated as revenue expenditure.” 5.1 Ld. CIT(A) noted the submissions of the assessee as under:- “During present appeal proceedings, the appellant explained that during the year under reference it was in the business of installation and commissioning of solar plants for various clients. The business model undertaken by the appellant was EPC (Erection, Purchase and Commissioning) in which solar plants for the clients are installed and, thereafter, transferred. It was also claimed that in the process of installation of solar plants, expenses had to be incurred and such expenses are 5
recoverable from the clients included in the sale bills. Such expenses are debited under the head ‘Project System Expenses’. The Assessing Officer has, in the remand report, considered the merit of the contention raised in the present proceedings. The Assessing Officer has disputed the contention of the Appellant stating that it was claiming depreciation on the solar plants. The appellant has argued that the AO considered the sale bills to support its contention that project cost was recovered from the clients but he rejected the same on the ground that some of the bills furnished did not justify or prove that the claims were in the nature of revenue.”
5.2 Considering the above, Ld. CIT(A) was of the opinion that expenditure whereof are revenue in nature, hence, he decided the issue in favour of the Assessee. Ld. CIT(A)’s findings in this regard are reproduced as under:- “I have considered the observation of the Assessing Officer, submission of the appellant, the remand report of the Assessing Officer and the rejoinder by the appellant. After considering the facts and evidences, I am in agreement with the contention of the appellant that such project system expenses were, in fact, recoverable cost from the clients as part of core activity i.e. installing solar plants. After considering the sample sale bills, the AO has not disputed that project system expenses were recovered as revenue through those bills. The question of the expenses whether of capital or revenue in nature, is not relevant, when the expenses on the project were shown as current assets of the appellant. Hence, the claim of the appellant deserves to be allowed and the assessee gets relief of Rs. 6,30,88,908/-.”
Against the aforesaid action of the Ld. CIT(A), Revenue is in appeal before us.
We have heard both the parties and perused the records. We find that assessee has not submitted the detailed submissions, bills, reports and papers