AVITEL POST STUDIOZ LIMITED ,MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 6(1)(2), MUMBAI

ITA 5242/MUM/2024

AI Insights

The case involves Avitel Post Studioz Limited, which appealed against the order of the National Faceless Appeal Centre (NFAC), Delhi, which had confirmed the disallowance of legal and professional expenses amounting to Rs.1,58,51,240 for the assessment year 2012-13. The expenses were disallowed by the Assessing Officer (AO) under Section 37(1) of the Income-tax Act, 1961, on the grounds that they were capital in nature, related to the raising of equity capital from HSBC PI Holdings (Mauritius) Ltd. The Tribunal examined each component of the expenditure, considering the nature and purpose of the expenses, and concluded that they were revenue expenditures, thus allowable under the Act.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 712153 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2012-2013
• Other Referred Cases: Empire Jute Co. Ltd. v. CIT, Brook bond India Ltd. v. CIT, CIT v. Ashima Syntex Ltd., CIT v. Shree Capital Services Ltd., Ballimal Naval Kishore v. CIT
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADITYA M. RAI
• Assessee Lawyers: VIMAL PUNMIYA
• Keywords: Capital asset; Revenue expenditure; Reassessment proceedings; Business expenditure; Onus to prove; Capital receipt; Capital expenditure; Tangible material
• Section: 148; 143(3); 37(1)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.5242/Mum/2024 (Assessment Year :2012-13) Avitel Post Studioz Limited A7, 3rd Floor, Vimal Udyog Bhavan Taikalwadi Road Mahim, Mumbai- 400 016 Vs. The DCIT-Circle 6(1)(2), Mumbai- 400 016 PAN/GIR No.AADCA4407D (Appellant) .. (Respondent) Assessee by Shri Vimal Punmiya Revenue by Shri Aditya M.Rai, Sr. DR Date of Hearing 19/06/2025 Date of Pronouncement 24/07/2025 आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 07/08/2024 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) r.w.s. 147 for the A.Y.2012-13. 2. The assessee is merely aggrieved by disallowance of legal and professional expenses aggregating to Rs.1,58,51,240/-. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 2 3. The brief facts are that the assessee, M/s Avitel Post Studioz Ltd., is engaged in the business of providing post- production services for films, including archiving, digital restoration, telexing, editing, visual effects, and related activities. For the assessment year 2012–13, it filed its return of income on 30/11/2012 declaring total income of Rs.7,75,95,470/-.The case was selected for scrutiny and assessment was completed under section 143(3) of the Income-tax Act, 1US1 (―the Act‖) on 13.11.2014 determining the assessed income at Rs7,75,73,080/-. 4. Subsequently, information was received from the office of the Deputy Director of Income Tax (Inv)-2(2), Mumbai, that the assessee had received an amount of Rs. 268.20 crores in May 2011 through its HSBC Bank account located at M.G. Road, Mumbai, from HPEIF Holding 1 Limited, a private equity arm of HSBC, later renamed as HSBC PI Holdings (Mauritius) Ltd. The information was supported by media reports suggesting disputes between the assessee and the said investor concerning the investment in the assessee’s shares. This led the AO to initiate proceedings under section 148 of the Act on 28/03/2019 after obtaining requisite administrative approval. The assessee filed its return in response on 27/05/2019, declaring the same income as originally assessed. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 3 5. Upon seeking reasons recorded for reopening, the assessee filed detailed objections, contending that no fresh tangible material existed and all facts were previously disclosed. However, the objections were disposed of vide a speaking order dated 27/05/2019, and reassessment proceedings were initiated. 6. The summary of the findings of the ld. Assessing Officer for giving the disallowance are as under:- (i) During the course of reassessment proceedings, the assessee was called upon to substantiate the claim of legal and professional expenses aggregating to Rs.1,58,51,240/- by furnishing supporting bills, vouchers, and justifications demonstrating that the said expenditures were revenue in nature and incurred wholly and exclusively for the purposes of business. The assessee submitted multiple invoices and engagement letters in support of its claim. However, upon careful examination, the Assessing Officer found the following: Payment to AZB & Partners – Rs.25,35,803/- (ii) The payment was made towards legal services availed in connection with negotiations and documentation pertaining to investment by HSBC into the assessee company through preference share capital. The invoice explicitly referred to ―HSBC Avitel Funding – Billing‖ and detailed time spent by professionals for such activities. Ld. AO held that the expenditure pertained to Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 4 capital-raising activities and not for regular business operations. Hence, he has disallowed under Section 37(1) of the Act. Payment to KPMG – Rs.9,37,771/- (iii) This included two invoices linked to restructuring of UK operations as per an engagement dated 22nd October, 2010. The assessee failed to submit the said engagement letter or clarify the exact nature of restructuring. Consequently, the AO held that the assessee had not discharged its onus to prove the business nexus or revenue nature of the expenditure, and accordingly disallowed the entire amount under Section 37(1). Payment to Wadia Ghandy & Co. – Rs.14,42,908/- (iv) The payments were supported by three invoices, of which the largest, Rs.10,50,056/-, pertained to advice and documentation related to agreements and certificates concerning HSBC investment. The narration suggested the services were linked to capital-raising and post-investment formalities. Other invoices related to litigation with HSBC and legal advice on auditor appointment. As the expenditure was capital in nature or unrelated to business activities in India (in the case of advice on UAE law), the entire amount was held to be not allowable under Section 37(1). Payment to KPMG India Pvt. Ltd. – Rs.1,00,37,300/- (v) The payment was made for preparation of Information Memorandum and related advisory services under a Letter of Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 5 Engagement dated 14th October, 2010. The assessee failed to produce the engagement letter and admitted that the services were intended to pitch for investors. Since the only investor was HSBC and the funds raised were in the nature of capital, the AO disallowed the amount holding it as capital expenditure. Payment to Nishith Desai & Associates – Rs.8,97,458/- (vi) This amount was claimed to be legal fees pertaining to a litigation issue with the investor. Although the assessee submitted two invoices and a letter of engagement, the AO found the expenditure to be post-investment in nature and arising out of a capital transaction, having no nexus with the assessee’s regular business. Accordingly, it was disallowed under Section 37(1). 7. Before the ld. AO, the assessee had relied on various judicial precedents to support its claim. However, the AO noted that the cited decisions dealt with expenditures relating to bonds or convertible instruments, which involved debt financing. In contrast, the assessee’s expenditure pertained to raising equity capital, which constitutes capital expenditure. Thus, the reliance was held to be misplaced. 8. Thus, the ld. AO held that the entire legal and professional expenditure of Rs.1,58,51,240/- claimed by the assessee was found to be either capital in nature or unrelated to the business Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 6 activities of the assessee, and accordingly disallowed in full under Section 37(1) of the Income Tax Act, 1961. 9. To tabulate nature of payment disallowed is as under:- Sr. No. Name of Party Amount(Rs) Nature of Services 1. AZB& Partners 25,35,803 Legal documentation for CCP issuance 2. KPMG India Pvt.Ltd. 1,00,37,300 Preparation of Information Memorandum 3. KPMG 9,37,771 Consultancy on UK business restructuring 4. Nishith Desai & Associates 8,97,458 Legal representation in investor dispute 5. Wadia Ghandy & Co. 14,42,908 Review of agreements and opinion For subsidiary 10. The ld. CIT (A) has confirmed the addition. By and large, the same reasoning given by the ld. AO qua each of the payment made to the professionals, he held that payment to professional fees are capital in nature and relied upon the judgment of the Hon’ble Supreme Court in the case of Brook bond India Ltd., reported in 225 ITR 798. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 7 11. Before us, ld. Counsel submitted that the disallowance is wholly unwarranted and unsupported by facts or law. Each item of expenditure is demonstrably incurred for legitimate business purposes, wholly and exclusively, without resulting in acquisition of any capital asset or enduring benefit. The details of each expenditure and the assessee’s arguments are summarized below: (i) Payment to KPMG – Rs.9,37,771/- 12. KPMG was appointed as a consultancy firm in 2010 to advise the assessee on restructuring its business operations to explore expansion opportunities in the United Kingdom. The services included strategic advice, organisational structuring, and realignment of operational divisions. This was necessitated by the growing international scope of the assessee’s operations, particularly through its wholly-owned subsidiary in Dubai. 13. Ld. Counsel contended that this was a revenue expenditure incurred in the ordinary course of business and was wholly unconnected to any capital raising activity. The NFAC, in appellate proceedings, accepted the assessee’s submission and allowed the same. (ii) Payment to KPMG India Pvt. Ltd. – Rs.1,00,37,300/- 14. KPMG India was appointed in September 2010 to prepare an Information Memorandum aimed at attracting strategic investments for business expansion. The Memorandum comprised detailed information regarding the Company’s Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 8 background, key clients, existing contracts, financials, pipeline projects, technology, and future business plans. The assessee has produced the Board Resolution dated 24.01.2010 authorising the appointment and submitted that the assignment was completed in December 2011. It is the assessee’s case that the preparation of this document was unrelated to the subsequent investment by HSBC PI Holdings. The investor had independently exercised its pre-existing rights to subscribe to further capital and the KPMG-prepared document was never utilized for such transaction. 15. Thus, the expenditure incurred on KPMG India was a preparatory exercise for strategic expansion and does not result in any capital acquisition or enduring benefit. The invoice was raised after the funding merely because the work was completed around that time. He thus submitted that the AO’s inference of capital nexus based solely on the date of invoice is erroneous and lacks evidentiary support. (iii) Payment to AZB & Partners – Rs.25,35,803/- 16. The assessee states that AZB & Partners were appointed at the insistence of HSBC PI Holdings as a condition precedent for documentation related to issuance of Compulsorily Convertible Preference Shares (CCPs). The investor mandated the engagement of AZB to draft, review, and executes legal documentation on its behalf, at the cost of the assessee. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 9 17. The assessee had no role in negotiations or discretion in their selection. Their services were confined to compliance documentation. It is submitted that these costs were not for capital creation but to fulfil contractual obligations imposed by the investor. The expenditure, being compulsory and incidental to the transaction, is squarely allowable as a business expenditure. The AO, it is argued, failed to demonstrate how the said expenditure resulted in any tangible asset or enduring commercial benefit to the assessee. (iv) Payment to Nishith Desai & Associates – Rs.8,07,458/- 18. Following receipt of funds, the assessee faced disputes with the nominee director of the investor entity. Allegations were made, and the assessee engaged Nishith Desai & Associates to defend its position. The legal fees were incurred solely for representation and defense in litigation proceedings before investigating agencies and forums. 19. He submitted that the expenditure was for protecting its commercial reputation and operational integrity. These were post-investment litigation costs unrelated to capital inflow and clearly fall within the domain of allowable expenditure under section 37(1). The NFAC rightly accepted this contention and allowed the deduction. (v) Payment to Wadia Ghandy & Co. – Rs.14,42,008/- 20. Wadia Ghandy & Co. were engaged to provide legal clarity on two aspects: Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 10 (i) Review of agreements and documentation relating to the funding transaction with HSBC PI Holdings. (ii) Legal opinion regarding the appointment of auditors for its wholly-owned subsidiary, Avitel Post Studioz FZ-LLC, Dubai. 21. The Ld. Counsel submitted that both engagements were one- time services of a routine nature. These did not result in creation of any asset or enduring benefit. Legal clarity for subsidiary governance is a standard compliance cost. The NFAC accepted a portion of this expenditure (Rs.3,92,852/-) as revenue in nature, and the balance is contested in this appeal. 22. Ld. Counsel strongly relied upon the principles laid down in Empire Jute Co. Ltd. v. CIT (124 ITR 1, SC), wherein it was held that even where some advantage may endure, if the expenditure facilitates day-to-day operations or enhances efficiency, it retains the character of revenue expenditure. The test of enduring benefit is not determinative unless it leads to creation or enhancement of a capital structure or asset. 23. In sum and substance, he submitted that: • All expenditures were incurred in the course of business; • No new asset or capital structure has come into existence; • Expenses were necessitated by business exigencies, investor terms, litigation or regulatory compliance; • Mere proximity to capital raising or timing of invoices does not convert a business expense into a capital one; • Disallowance of service tax components is per se untenable as Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 11 such tax was paid to the Government and not claimed as deduction. Thus Ld. Counsel concluded that none of the expenses disallowed fall outside the ambit of section 37(1), and the AO has failed to establish the capital nature of these outlays. 24. Ld. DR relied upon the order of the ld. AO and ld. CIT (A) 25. We have carefully considered the rival submissions, perused the assessment order, the detailed written submissions filed by the assessee, and the appellate order passed by the Ld. Commissioner (Appeals) under the National Faceless Appeal Centre. The issue that falls for our adjudication is whether the expenditure of Rs.1,58,51,240/- incurred by the assessee towards legal, professional, and consultancy charges is to be treated as revenue expenditure allowable under section 37(1) of the Income-tax Act, 1961, or whether the same deserves to be disallowed as capital expenditure, as held by the Assessing Officer and partly confirmed by the CIT(A). 26. At the outset, it is pertinent to observe that there is no dispute either with respect to the genuineness of the payments or the identity of the service providers. The disallowance is solely premised on the alleged capital nature of the expenditure, said to be linked to the infusion of capital in the form of Compulsorily Convertible Preference Shares (CCPs) by HSBC PI Holdings (Mauritius) Ltd., formerly known as HPEIF Holdings 1 Ltd. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 12 27. To appreciate the nature of the expenditure, it becomes imperative to briefly revisit the factual canvas. The assessee, an established player in the post-production space, with expanding operations in the Middle East through its wholly-owned subsidiary in Dubai, was contemplating further expansion in the United Kingdom. In pursuit of this goal, it undertook a restructuring exercise and appointed renowned professional firms—KPMG, KPMG India Pvt. Ltd., AZB & Partners, Nishith Desai & Associates, and Wadia Ghandy & Co. at various points in time, for services spanning business restructuring, preparation of investor-facing material, transaction documentation, legal compliance, and post-funding representation. 28. Now we will deal with each component of the impugned expenditure in detail, in the context of judicially settled principles and the factual substratum. I. Payment to KPMG (Rs.U,37,771) – Business Strategy and Restructuring 29. The first limb of the disallowance pertains to the payment made to KPMG for consultancy services rendered in relation to restructuring the assessee’s business with a view to entering the United Kingdom market. The engagement was initiated in the year 2010, substantially prior to any negotiations with the eventual investor, HSBC PI Holdings. The services rendered involved analysis of the assessee’s international structure, formulation of strategy, and internal realignment of functions. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 13 30. In our considered view, this expenditure was clearly aimed at enhancing operational efficiency and exploring avenues for future business, and was neither related to nor contingent upon the capital infusion. There is no evidence that the restructuring led to creation of a capital asset or yielded any enduring commercial advantage of the nature contemplated in Ballimal Naval Kishore v. CIT (224 ITR 414). The Ld. CIT(A) rightly appreciated this position and allowed the deduction. We affirm the same. II. Payment to KPMG India Pvt. Ltd. (Rs.1,00,37,300) – Preparation of Information Memorandum 31. KPMG India was engaged through a board-approved resolution dated 24.01.2010 for the purpose of preparing an Information Memorandum, a comprehensive document aimed at facilitating discussions with potential strategic or financial investors. The material placed before us, including the timeline of engagement and the scope of work, unequivocally establishes that this document was a general preparatory tool and was not tailored for HSBC PI Holdings. Indeed, the said investor subsequently exercised its contractual right of first refusal, rendering the memorandum otiose for that transaction. 32. The fact that the invoice was raised after the receipt of funds is not determinative. It is trite law that the timing of payment or billing does not ipso facto determine the nature of expenditure. What matters is the underlying purpose. The AO’s inference that the expenditure is capital in nature merely because it relates Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 14 temporally to the funding is untenable in the absence of any demonstrable link or benefit of an enduring nature. 33. The Information Memorandum did not bring into existence any new asset, nor did it alter the fixed capital structure of the assessee. It was an exercise in business facilitation, squarely falling within the operational domain. Applying the principles enunciated by the Hon’ble Supreme Court in Empire Jute Co. Ltd. v. CIT [124 ITR 1 (SC)], we find that the said expenditure is revenue in nature. Accordingly, the disallowance of Rs.1,00,37,300 is directed to be deleted. III. Payment to AZB & Partners (Rs.25,35,803) – Transactional Legal Documentation 34. AZB & Partners were engaged by the assessee to handle legal documentation in relation to the issuance of CCPs to HSBC PI Holdings. However, what emerges clearly from the record is that the appointment of the said law firm was not at the volition of the assessee but was a mandatory pre-condition imposed by the investor. The assessee had no discretion in the matter; the role of AZB & Partners was confined to documentation and compliance. 35. In our considered view, legal fees incurred in the course of facilitating investor-mandated compliance, particularly when the service provider is dictated by the counterparty, cannot be regarded as capital expenditure. The assessee neither acquired any asset nor did the expenditure confer upon it any enduring advantage. The transaction may have resulted in capital receipt, Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 15 but the costs associated with it, especially when they are ministerial and documentation-related, have been judicially held to be allowable as revenue expenditure. Reference may be drawn to CIT v. Ashima Syntex Ltd. (251 ITR 133) (Guj.) and CIT v. Shree Capital Services Ltd. (310 ITR 420) (Cal.). 36. We thus hold that the expenditure of Rs.25,35,803 was incurred wholly and exclusively for the purposes of business and is allowable under section 37(1). IV. Payment to Nishith Desai & Associates (Rs.8,07,458) – Legal Defence in Post-Investment Dispute 37. Subsequent to the receipt of investment, disputes arose between the assessee and the nominee director of HSBC PI Holdings. The assessee engaged Nishith Desai & Associates, a leading law firm, to defend itself in legal proceedings arising out of those disputes. The services included representation before investigating agencies and rendering legal advice. 38. We find considerable merit in the assessee’s submission that these were litigation expenses incurred to protect the interests of the company, its management, and its reputation. Such expenses have been consistently held to be allowable, even where they arise in the context of capital transactions, if the object is to defend or protect the existing business. Accordingly, the payment made is allowed. V. Payment to Wadia Ghandy & Co. (Rs.14,42,008) – Legal Compliance and Subsidiary Governance Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 16 39. The engagement of Wadia Ghandy & Co. was two-fold: first, to review transaction documents and render legal advice relating to the CCP issue, and second, to provide legal opinion on the appointment of statutory auditors for the assessee’s wholly- owned subsidiary in Dubai. The Ld. CIT(A) allowed part of this expenditure relating to the latter activity and disallowed the balance. 40. We are of the view that even the legal documentation work carried out by Wadia Ghandy & Co. does not result in any acquisition of asset or enduring advantage. It was a standard professional service availed for ensuring legal compliance. The judicial distinction between facilitative expenditure and capital acquisition must be preserved. The review of legal agreements is part of any well-governed business transaction and is not in the nature of capital outlay. 41. Hence, we direct that the balance disallowance of Rs.10,50,056/- also be deleted. 42. Thus, we hold that none of the components of the impugned expenditure can be said to result in creation of a capital asset, nor do they confer any enduring benefit within the meaning attributed by judicial pronouncements. The expenses were incurred in the ordinary course of business, either in preparation for expansion, to comply with investor-imposed conditions, or to defend the company’s position in legal proceedings. Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 17 43. The AO has not demonstrated any nexus between the expenditure and capital creation, and has instead proceeded on generalised assumptions unsupported by evidence. It is equally pertinent that the AO disallowed even the service tax components paid to the Government, without invoking any of the specific disallowance provisions such as section 40(a) or section 43B. 44. In light of the foregoing discussion, and applying the principles laid down by the Hon’ble Supreme Court and various High Courts, we hold that the entire expenditure of Rs.1,58,51,240/- is allowable as revenue expenditure under section 37(1) of the Act. 45. The appeal of the assessee is accordingly allowed. Order pronounced on 24th July, 2025. Sd/- (GIRISH AGRAWAL) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 24/07/2025 KARUNA, sr.ps Printed from counselvise.com ITA No.5242/Mum/2024 Avital Post Studioz Limited 18 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// Printed from counselvise.com "