TRAFIGURA GLOBAL SERVICES PVT LTD,MUMBAI vs. ACIT, CIRCLE-14(3)(1), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI SHRI PRAHSANT MAHARISHI, ACCOUNTANT MEMBER SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER ITA No. 3632/MUM/2023 (Assessment Year: 2016-17) & ITA No. 3631/MUM/2023 (Assessment Year: 2017-18) Trafigura Global Services Pvt. Ltd., Unit No. 1101, A-Wing, Plot No. C, 66 G Block, One BKC, Bandra Kurla Complex, Mumbai - 400051 [PAN: AABCT0037C] …………. Appellant

Assistant Commissioner of Income Tax, Vs Circle 14(3)(1), Mumbai, 455, 4th Floor, Aaykar Bhavan, M G Road, Mumbai - 400020 Respondent …………. Appearance For the Appellant/Assessee : Shri Mahdur Agarwal Shri Pankaj Jain For the Respondent/Department : Shri P.D. Chougule Date Conclusion of hearing : 27.02.2024 Pronouncement of order : 29.02.2024

O R D E R Per Rahul Chaudhary, Judicial Member: These are 2 appeals pertaining to Assessment Years 2016-17 and 1. 2017-18 preferred by the Assessee against the two separate orders passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter referred to as ‘the CIT(A)’]. Since the appeals involve identical issues the same were heard together and are being disposed by way of a common order.

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) ITA No. 3632/MUM/2023 (Assessment Year: 2016-17) We would first take up appeal for the Assessment Year 2016-17 2. which has been preferred by the Assessee challenging the order, dated 08/09/2023, passed by the CIT(A) for the Assessment Year 2016-17, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 25/11/2019, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

The Assessee has raised the following grounds of appeal: 3. “Ground No. 1 The Commissioner of Income Tax (Appeals) (hereinafter referred to as CIT(A) erred in confirming the Assessing Officer’s stand that business expenditure of Rs. 1,79,02,494/- is not a revenue expenditure. The Appellants submits that the expenditure is revenue in nature and incurred during the year for the purpose of their business operations and therefore the same is allowable as deduction under Section 37(1) of the Act. The Appellant pray that the CIT(A) be directed to allow the deduction of Rs. 61,79,02,494/- claimed by the Appellant pray that the depreciation thereon should be allowed.” Ground No. 2 Without prejudice to above, in case the above expenditure is held to be capital in nature, the Appellants pray that the depreciation thereon should be allowed.” The relevant facts in brief are that the Appellant is a company 4. engaged in the business of providing IT Enabled Services and BPO Services. The Appellant filed return of income for Assessment Year 2016-17 on 30/11/2016 declaring total income of INR 17,11,21,500/-. The case of the Appellant was selected for scrutiny.

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) During the assessment proceedings, the Assessing Officer noted 5. that the Appellant had debited an amount of INR 1,79,02,494/- to the Profit & Loss Account under the head Exceptional Items and Note 25 of the Notes forming part of Accounts reads as under:

"In July 2014, the company entered in to a lease agreement with One India Bulls Properties Private Limited (IPPL), with a lock in period of 36 months, and initiated the process of shifting its office to the One India Bulls Premises during the year 2014-15. An amount of approx. Rs. 44,75,03,737/- was incurred in 2014-15 & further an amount of Rs. 1,79,02,493/- was incurred in 2015-16 towards the leasehold improvements (these expenses are typically in the nature of fit outs, architect's fees, consultancy, rent, legal fees, moving costs etc.)

It was discovered that the One India Bulls did not comply with the Company's standards and as per agreed terms of lease agreements and commitments from the lessor, One India Bulls Properties Private Limited. As a result, the management decided to terminate the lease agreement prematurely effective 13th January 2015 and recover the various expenses incurred from the lessor. However, the lessor had lodged a counter claim against the company in respect of the lease rentals relatable to the lock-in-period of 36 months. Consequently, the matter is now in Arbitration (Refer Note 26)"- [Emphasis Supplied] The Appellant was asked to provide details/explanation in relation 6. to amount of INR 1,79,02,493/- vide letter dated 11/10/2018. In response, the Appellant filed following break-up giving the details of expenses along with supporting documents: Nature of Expenses Amount (INR) Arbitration & Legal expenses 45,88,329 Transportation expenses 65,51,000 Storage cost 55,66,320 Site testing charges 5,63,500 Dismantling of furniture & fit outs 3,33,344 Total 1,79,02,493

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18)

The Appellant explained to the Assessing Officer that the above 7. expenditure were incurred to preserve its legal rights & assets, therefore, the same were allowable as normal business expenditure under Section 37(1) of the Act. The expenditure incurred did not result in generation of any asset and therefore, the same could not be regarded as capital in nature. The Assessing Officer finally concluded that the expenditure was neither revenue expenditure nor capital expenditure. It was in nothing but a loss of capital. Thus, the Assessing Officer made disallowance of INR 1,79,02,494/- and added the same back to the total income of the Appellant.

Being aggrieved, the Appellant preferred appeal before CIT(A) 8. challenging the above disallowance. However, the CIT(A) agreed with the Assessing Officer and dismissed the appeal on this issue vide order, dated 08/09/2023.

Being aggrieved by the above order passed by the CIT(A), the 9. Appellant has preferred the present appeal.

We have heard the rival submissions and perused the material on 10. record.

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) its requirements. Though lease carried a lock-in-period, the lease was terminated since the premises could not be used by the Appellant on account of failure to meet the safety standards and/or requirement of the Appellant. The expenses of site testing, dismantling of fixtures and fit-outs, transportation and storage expenses were incurred for shifting from the said premise to new premise. Whereas, the legal charges were incurred for initiating legal proceedings against the lessor and to defend the counter claim made by the lessor. The Appellant has placed on record copy of Statement of Claim filed before the Arbitral Tribunal.

We note that even the Assessing Officer had not dispute the fact 12. that the expenses under consideration were incurred under normal course of business. The reasoning given by the Assessing Officer for rejecting Appellant’s claim that the expenses under consideration were revenue expenses was that the same were not related to operational income. In our view, the reasoning adopted by the Assessing Officer is flawed. There is no requirement that for allowing deduction for expense incurred as revenue expenses, such expenses must relate to operational income. So long as the expenses incurred by the Appellant were related to business operation carried out by the Appellant during the relevant previous year, the Appellant was entitled to claim the same as revenue expenses irrespective of the fact whether the same result in operational income or not. Further, the Assessing Officer and the CIT(A) have returned concurrent finding that as a result of incurring of the expenditure under consideration no capital asset came into existence. Therefore, in our view, the expenses of INR 1,79,02,494/- are nothing but expenses of revenue nature incurred during the course of regular business of the Appellant. Even if the

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) expenditure under consideration are regarded as sunk cost, the loss arising therefrom would be regarded as a business loss. In either case, the Appellant would be entitled to claim deduction under Section 37(1) of the Act. In view of the aforesaid, we delete the disallowance of INR 1,79,02,494/- and direct the Assessing Officer to allow deduction for the aforesaid amount under Section 37(1) of the Act.

In view of the above, Ground No. 1 raised by the 13. Assessee/Appellant is allowed while Ground No. 2 is dismissed as having been rendered infructuous.

ITA No. 3631/MUM/2023 (Assessment Year: 2017-18) 14. We would now take up appeal for the Assessment Year 2017-18 which has been preferred by the Assessee challenging the order, dated 28/08/2023, passed by the CIT(A) for the Assessment Year 2017-18, whereby the Ld. CIT(A) had dismissed the appeal of the Assessee against the Assessment Order, dated 25/11/2019, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).

The Assessee has raised the following grounds of appeal: 15. ““Ground No. 1 The Commissioner of Income Tax (Appeals) (hereinafter referred to as CIT(A) erred in confirming the Assessing Officer’s stand that business expenditure of Rs. 6,15,03,168/- is not a revenue expenditure. The Appellants submits that the expenditure is revenue in nature and incurred during the year for the purpose of their business operations and therefore the same is allowable as deduction under Section 37(1) of the Act. The Appellant pray that the CIT(A) be directed to allow the

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) deduction of Rs. 6,15,03,168, claimed by the Appellant pray that the depreciation thereon should be allowed.” Ground No. 2 Without prejudice to above, in case the above expenditure is held to be capital in nature, the Appellants pray that the depreciation thereon should be allowed.” For the Assessment Year 2017-18, in facts and circumstances 16. identical to Assessment Year 2016-17, the Assessing Officer disallowed deduction for similar legal & Other Charges aggregating to INR 6,15,03,168/- which were claimed by the Appellant as revenue expenses. Both the sides had agreed that our finding/adjudication in appeal for the Assessment Year 2016-17 shall apply mutatis mutandis to appeal for the Assessment Year 2017-18.

The reasoning given by the Assessing Officer for making the 17. disallowance for the Assessment Year 2017-18 is identical to the reasoning given for the Assessment Year 2016-17. While adjudicating appeal preferred by the Appellant for the Assessment Year 2016-17, we have already rejected the reasoning given by the Assessing Officer for making identical disallowance for the Assessment Year 2016-17. Therefore, in view of our finding/adjudication in paragraph 11 to 13 above, we delete the disallowance of INR 6,15,03,168/- and direct the Assessing Officer to allow deduction for the aforesaid amount under Section 37(1) of the Act. Accordingly, Ground No. 1 raised by the Assessee/Appellant is allowed while Ground No. 2 is dismissed as having been rendered infructuous.

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) In result, both the appeals preferred by the Assessee/Appellant are 18. allowed.

Order pronounced on 29.02.2024.

Sd/- Sd/- (Prashant Maharishi) (Rahul Chaudhary) Accountant Member Judicial Member म ुंबई Mumbai; दिन ुंक Dated : 29.02.2024 Alindra, PS

ITA No.3632//Mum/2023 (Assessment Year 2016-17) ITA No.3631/Mum/2023 (Assessment Year: 2017-18) आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : अपील र्थी / The Appellant 1. 2. प्रत्यर्थी / The Respondent. 3. आयकर आय क्त/ The CIT 4. प्रध न आयकर आय क्त / Pr.CIT 5. दिभ गीय प्रदिदनदध, आयकर अपीलीय अदधकरण, म ुंबई / DR, ITAT, Mumbai 6. ग र्ड फ ईल / Guard file.

आिेश न स र/ BY ORDER, सत्य दपि प्रदि //True Copy// उप/सह यक पुंजीक र /(Dy./Asstt. Registrar) आयकर अपीलीय अदधकरण, म ुंबई / ITAT, Mumbai