M/S IFMR RURAL RURAL CHANNELS & SERVICES PVT LTD,CHENNAI vs. DCIT CORPORATE CIRCLE 2 (2), CHENNAI

The assessee has raised following grounds of appeal:-

1) The order of the Learned CIT (A) - 13 is contrary to the facts of the case and is therefore unsustainable. 2) The Learned C.I.T (A)- 13 ought not to have sustained the addition of Rs. 1,24,56,952/- made by the Assessing Officer as capital expenditure.

Brief facts of the case are that the assessee company is engaged in the business of rural financing filed its return of income for assessment year 2012-13 on 25.09.2012 declaring loss of Rs.4,82,53,278/-. The case has been taken up for scrutiny and during the course of assessment proceedings, the Assessing Officer noticed that the assessee has incurred huge professional and legal charges and hence, called upon the assessee to file nature of expenses incurred under the head ‘legal and professional charges’. In response, the assessee has filed details of expenses, which includes professional fees paid for incorporation and incidental expenses, ROC fees, purchase of share transfer stamps, charges for drafting investment agreement, website maintenance expenses, provision for equity raising expenses & employee sharing cost and claimed that all these expenses are incurred in the course of business of the assessee for raising capital to expand its operations. The Assessing Officer, however, was not convinced with the explanation furnished by the assessee and according to him, expenses incurred by the assessee is in nature of capital expenses, which gives enduring benefit and thus, cannot be allowed as deduction and hence, made addition of Rs.1,24,56,952/-.

Being aggrieved by the assessment order, the assessee preferred an appeal before CIT(A). Before the learned CIT(A), the assessee has reiterated its arguments taken before the Assessing Officer and submitted that legal and professional charges incurred after commencement of business, even if expenses are incurred which related to capital assets, needs to be allowed as deduction, because while incurring said expenses the assessee does not acquire any capital asset and further expenses incurred does not give enduring benefit. The learned CIT(A), after considering relevant submissions of the assessee and also taken note of various facts brought out by the Assessing Officer observed that professional and legal charges incurred by the assessee, including website maintenance expenses is in the nature of capital expenditure and not allowable under the Act. Aggrieved by the learned CIT(A) order, the assessee is in appeal before us.

The learned A.R for the assessee submitted that the learned CIT(A) has erred in sustaining additions made by the Assessing Officer towards legal and professional charges incurred as capital expenditure, without appreciating fact that said expenditure was incurred after commencement of business and for business operations of the assessee. The AR further submitted that though expenditure was incurred to raise capital, but such capital was raised to enhance business operations of the assessee which cannot be considered as acquisition of any capital asset or expenses incurred gives enduring benefit to the assessee.

The learned DR, on the other hand, supporting orders of the Assessing Officer as well as learned CIT(A) submitted that it is an admitted fact by nature of expenses incurred by the assessee that all expenses are incurred for raising capital which is in the nature of capital expenditure which gives enduring benefit to the assessee and thus, same cannot be allowed as deduction. The learned CIT(A) after considering relevant facts has rightly affirmed addition made by the Assessing Officer and his order should be upheld.

We have heard both the parties, perused material available on record and gone through orders of the authorities below. It is an accepted position of law that an expenditure which confers benefit to the business for a long period is considered to be capital expenditure. Further, it has been clarified by the Courts that benefits to the business should not be transitory, but should be of an enduring nature. If this advantage obtained as a result of incurring expenditure consists merely of facilitating business operation or enabling management or conduct of business to be carried on more effectively, then expenditure has to be considered as revenue expenditure. If you examine nature of expenses incurred by the assessee in light of above legal position, one has to understand whether by incurring said expenditure the assessee has acquired any capital asset or it gives any enduring benefit to the assessee. In this case, the assessee has paid professional and legal charges to various law firms for incorporation of company, purchase of share transfer stamps for acquisition of company professional fees paid for drafting investment agreement, structuring various documents, due diligence etc. for investment agreement, sharing of employee cost and provision for equity expenses and said expenditure cannot be considered as capital in nature which gives enduring benefit to the assessee. Further, all these expenses were incurred after commencement of business for expanding business operations of the assessee. Further, expenses did not result in acquisition of any asset nor did they give any enduring benefit to the assessee. Therefore, we are of the considered view that expenses incurred relating to carrying on of business more effectively in the ordinary course of business even if, expenses are incurred which are related to capital account cannot be considered as capital in nature, more particularly, when the assessee has incurred said expenditure after commencement of business in the ordinary course of its business activities.

In this view of the matter, and considering facts and circumstances of this case, we are of the considered view that the learned CIT(A) has erred in sustaining addition made by the Assessing Officer towards disallowance of legal and professional charges as capital in nature. Hence, we reverse finding of learned CIT(A) and direct the Assessing Officer to allow deduction claimed towards legal and professional charges.

In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 29th September, 2021