AI Insights
The case involves Anunta Technologies Management Services Limited (the appellant) appealing against the order of the Learned Commissioner of Income Tax (Appeals)-20, Mumbai, which confirmed certain disallowances made by the Assessing Officer. The disallowances pertained to management fees paid to ATIS and professional fees paid to M/s. Khaitan & Co. and M/s. Tembey & Mhatre for legal and trademark services, respectively. The Tribunal examined whether these expenditures were capital or revenue in nature, impacting their deductibility under the Income Tax Act.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 123151 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 8 month(s) 30 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
05-02-2023
Appeal Filed By
Assessee
Order Result
PartlyAllowed
Bench Allotted
A
Next Hearing Date
13-11-2022
Assessment Year
2013-2014
Appeal Filed On
06-05-2019
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “A”, MUMBAI BEFORE SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, HON'BLE JUDICIAL MEMBER ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited Level 2, Block B6 Nirlon Knowledge Park Off Western Express Highway Goregaon (E), Mumbai- 400063 PAN: AAKCA6159M v. DCIT Circle- 12(1)(1) Room No. 223, 2 nd Floor Aayakar Bhavan, M.K. Road Churchgate, Mumbai- 400020 (Appellant) (Respondent) Assessee Represented by : Shri Vipul Joshi & Ms. Dinkle Haria Department Represented by : Shri S. Anbuselvam Date of Hearing : 14.11.2022 Date of Pronouncement : 06.02.2023 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)-20, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 12.03.2019 for the A.Y.2013-14. 2 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 2. Aggrieved with the above order assessee filed appeal before us raising following grounds in its appeal: - “1. NATURAL JUSTICE 1.1. The Learned Commissioner of Income-tax (Appeals)-20, Mumbai, ["Ld, CIT (A)") erred in not granting proper, sufficient and adequate opportunity of being heard to the Appellant while framing the appellate order. 1.2 It is submitted that, in the facts and the circumstances of the case, and in law, the appellate order so framed be held as bad and illegal, as: (i). The same is framed in breach of the principles of natural justice; and (ii). The same is passed without application of mind to the facts and the submissions brought on record by the Appellant. WITHOUT PREJUDICE TO THE ABOVE 2.1 The Ld. CIT (A) erred in confirming the disallowance made by the A.O. of Rs.44,50,588/-, on account of management fees paid to ATIS. 2.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 2.3 Without prejudice to the above, assuming- but not admitting that some disallowance was called for, it is submitted that the computation of the disallowance made by the A.O. is arbitrary, excessive and not in accordance with the law. WITHOUT FURTHER PREJUDICE TO THE ABOVE 3.1 The Ld. CIT (A) erred in confirming the action of the A.O. in disallowing the following expenses on the ground that the same is capital in nature: (i). M/s. Khaitan & Co. Rs. 10,00,000/- (ii). M/s. Khaitan & Co. Rs. 4,80,000/- (iii). M/s. Tembey & Mhatre Rs. 56,180/- Rs. 15,36,180/- 3 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 3.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. LIBERTY 4. The Appellant craves leave to add, alter, delete or modify all or any the above ground at the time of hearing.” 3. At the outset, with regard to Ground No. 1, Ld. AR of the assessee submitted that assessee is not pressing this grounds of appeal, accordingly, this ground is dismissed as not pressed. 4. With regard to Ground No. 2, the relevant facts of the case are, Assessee is an IT and ITeS company with a specialized focus on Application Delivery as a Service, and designs cloud-based application delivery architectures, provides on-going management of this environment and delivers services on a pay per user billing model. Anunta Tech Infrastructure Services Limited (ATIS) was incorporated on 1 st November, 2010 as a 100% subsidiary of First Source Solutions Limited (FSL-a company listed on the NSE & BSE). FSL, is engaged in the business of providing contact centre, transaction processing and debt collection services including revenue cycle management in the healthcare industry. It has subsidiaries in UK & USA. The purpose of incorporating ATIS was to set up a new line of IT related services business-desktop virtualization services. The in-house desktop virtualization team of FSL, alongwith one 4 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited promoter who was Chief Technology Officer of FSL was transferred to ATIS. ATIS was engaged in the business of providing information technology & IT enabled solutions including desktop virtualization services. ATIS used to conduct its operation from the premises of FSL using FSL's resources for which FSL was charging ATIS. Apart from reimbursement for the incurred by FSL on for the expenses on benefit of ATIS. In other words, ATIS did not have an independent setup from an administrative standpoint. 5. At the time of hearing, Ld. AR submitted as under: - “1.4 During the incubation period. ATIS had several meetings with prospective clients including of FSL during 2011 and early 2012 and many of these prospective clients were impressed with their solution / service and were eager to engage ATIS to provide IT solutions/services to them, as ATIS had developed IT solutions/services that were attractive to the market. ATIS team had already developed a significant Intellectual Property in creating a virtualization solution for the market and was on the brink of signing contracts with many of the prospective clients, as ATIS had IT solutions/services that were market-ready and clients were prepared to sign service agreements. 1.5 During the incubation period, ATIS could not generate much revenue as ATIS's operations were in process of being functional. However, though ATIS developed a virtualization solution for the market and made investment in sales and marketing to try and sell their products in the UK & USA, since this was taking considerable time and since also FSL was incurring losses, FSL decided to exit from the venture, as a part of business strategy. 1.6 As the Assessee is in the business of rendering similar IT related services, this made ATIS an attractive business acquisition for the Assessee to acquire as it would get the benefit of a market- ready solution/service undertaking that would start generating 5 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited revenues immediately, which ultimately the Assessee did get, which is evidenced by the fact that out of the prospective clients that ATIS was engaged with, most of them signed service agreements with the Assessee and continue to be existing customers of the Assessee, including FSL. 1.7 Accordingly, the Assessee entered into an agreement dated 22 nd June 2012 with ATIS to acquire the business undertaking as a going concern on a slump sale basis, which included, principally, intangible assets of ATIS. Since ATIS was in advanced stage of discussions on signing them as client, they requested FSL to sign the Master Services Agreement (MSA) directly with the Assessee as they were selling the business to the Assessee. The most crucial aspect is that the Assessee could enter into MSA, and consequently generate huge revenue, only and solely due to this BTA read with MSA. It was a specific pre-condition in MSA that MSA shall be terminated in the event the slump sale is not completed on or before 31 st December 2012. 1.8 Hence, this was a part of the overall scheme / arrangement to acquire the business of ATIS on a going concern basis as well as to secure future service revenue. For which Resourcing Agreement was also executed by which all the cost changed till then by FSL to ATIS were recovered from the Assessee. In fact, with acquisition of this undertaking, as a part of overall arrangement, the Assessee also secured service contracts of considerable value, securing sizable revenue income for future. Reference is invited to Master Service Agreement (MSA) entered into by the Assessee with FSL, filed before the lower authority. The services to be provided were detailed in a Statement of Work ("SOW"), Considering that the Assessee generated revenue of ₹.4.1 crore in 9 months (July 2012 to March 2013) of billing during F.Y 2012-13 under the MSA, the estimated annual billing was to be approximately ₹.5.5 crore, which was surpassed in the next year itself. The MSA continues to be in force even today and revenue from FSL has grown significantly since. Due to these agreements, the Assessee was able to raise equity from Bessemer Venture Partners Trust in January/February 2013 at a pre- money valuation of ₹.30 crores. As such, what the Assessee acquired were valuable business and it was only because of such acquisition that the Assessee, a new company, was able to raise huge funds from foreign (unknown and unrelated) finance investors, and also the Assessee was able to generate huge turnover from the very first year after this acquisition. 6 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 1.9 The below table depicts the revenue generated by the Appellant from FSL in pursuant to the agreement: - Particulars F.Y. 2012-13 F.Y. 2013-14 F.Y. 2014-15 F.Y. 2015-16 F.Y. 2016-17 Appellant’s revenue from FSL 4,20,56,337/- 9,59,85,244/- 18,96,28,351/- 18,14,14,986/ 19,09,30,159/ Further, the Assessee was able to leverage the strong position that ATIS was in and generated substantial revenues from the first day as can be seen from the revenue growth over the years: F.Y. 2012-2013 Rs. 4.89 cr F.Y. 2013-2014 Rs. 14.04 cr F.Y. 2014-2015 Rs. 27.62 cr F.Y. 2015-2016 Rs. 30.67 cr F.Y. 2016-2017 Rs. 40.94 cr F.Y. 2017-2018 Rs. 47.49 cr F.Y. 2018-2019 Rs. 54.51 cr F.Y. 2019-2010 Rs. 64.41 cr F.Y. 2020-2021 Rs. 47.49 cr 1.10 In light of the above, it is evident that the Assessee had tremendously benefited / from acquisition of the business of ATIS. 1.11 Further, from 1 st April 2013, ATIS transferred its obligation under Resource Agreement (signed between ATIS and The Assessee) to FSL, by executing Substitution Agreement on 24.6.2013. This proves that these services provided by ATIS were in addition to those provided by FSL to the Appellant. 2. Accounts and Audit 2.1 The assessee maintains full and complete records about its financial activities. Being a Company, its accounts are subjected to statutory audit every year. Further, its accounts are also subjected to tax audit every year, apart from internal control/ audit. After full verification, both the auditors have certified the accounts as depicting true and fair view of the affairs of the Assessee Company. 2.2 Most importantly, the assessment is framed u/s 143(3), without rejecting the accounts and the book results u/s 145. Further, there was complete and full compliance to the satisfaction of the Assessing Officer during the assessment proceeding and, therefore, no recourse has been taken of section 144 (ex-parte order) or of section 271(1)(b) of the Act for initiating penalty proceeding for non- compliance. 7 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 2.3 Refer Annual Accounts at Pg. 9 to 27 of P.B. 2.3 Refer Independent Auditors' Report at Pg. 4 to 8 of P.B. Refer Tax Audit Report at Pg. 28 to 43 of P.B.” 6. Further, Ld. AR brought to our notice the remand report, which Ld.CIT(A) has reproduced in Page No. 5 & 6 of this order. However, Ld.CIT(A) came to the conclusion as under: - (i). Receipt of services not substantiated (ii). The claim not in conformity of the agreement 7. In this regard, Ld. AR submitted legal propositions as under: - (i) It is a well settled legal position that in the guise of probing alleged substance of the agreement, the department cannot ignore/overlook the rights & obligations arising from the specific terms of a validly executed & legally enforceable agreement. As such, an A.O. cannot refuse to recognize / accord sanctity to a legally valid contract & the terms thereof. [Ref: Legal Note as Annexure -'1'] The AO has relied on the Supreme Court judgment in the case of Vodafone International Holdings B.V. ws. UOI-[(2012) 341 ITR 1 (SC)], stating that this is a classic case of obtaining undue advantage through a subterfuge. It is not clear how the judgment is related to the Appellant's case. In any case, the judgment, if at all, supports the case of the Appellant. The principle laid down by the Supreme Court in this case is that the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. It has been further held that the Revenue or the Court must look at a document or a transaction in the context to which it properly belongs to. To ascertain true legal nature of a transaction, it has to look at the entire transaction as a whole and not to adopt a dissecting approach. [Note: in the present case, there cannot be any slightest intention to avoid any tax, as the corresponding party has fully accounted these payments made by the Appellant and transactions are at arm's length. Further, for the same reason, this agreement can never be regarded as a fiscal nullity.] 8 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited (ii) Corollary to the above principal, another well settled legal principle is that the A.O. cannot sit in the arm-chair of assessee- businessman to question business prudence /commercial expediency of the business transactions / decisions taken by the assessee; specially when, in a case like the present, the business arrangement entered into is a complex and in a dynamic business environment. [Ref: Legal Note as Annexure-2] (iii) Reliance is also placed the on the judicial pronouncements wherein it is held that where expenditure voluntarily was incurred for commercial expediency then it is material if a third party also benefits thereby [Ref: Legal Note as Annexure-3']. (iv) Another important aspect is that it is a well settled legal position under Act that if a transaction is accepted as genuine in hands of the payee / transferor by the department, the very same transaction cannot be brushed aside as non-genuine in the hands of the payee/transferee. Reliance can be placed on the judgment in case of Tribhovandas Bhimji Zaveri v/s. ACIT-[(2001) 247 ITR 727 (Bom)]” 8. On the other hand, Ld. DR submitted that all the companies are related companies. In this regard he brought to our notice Page No. 69 of the Paper Book and submitted that assessee has not submitted any document in support of such claim and accordingly, he relied on the findings of the lower authorities. 9. Considered the rival submissions and material placed on record, we observe from the record that assessee has acquired the business of ATIS as a going concern basis and acquired all the assets of the business by paying ₹.4.5 crores. Since ATIS is setup to develop IT related services business – desktop virtualization services all the facilities for developing 9 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited IT related services and business of ATIS was conducted from the premise of FSL using FSL resources for which FSL was charging for the same and received from ATIS. 10. Now assessee claiming payment of ₹.44,50,588/- to ATIS as a business expenditure by filing a resource agreement dated 22.06.2012 with ATIS, wherein ATIS agreed to provide certain manpower which will be used by the assessee to supplement its internal workforce for the purpose of enabling the assessee to discharge its obligation to its customer. However, assessee has also filed a master services agreement before us. As per which assessee has taken over the business of ATIS and as per the master services agreement earlier ATIS was serving Firstsource Solutions Limited and with the entering of master services agreement dated 28 th day of June 2012, assessee has taken over the business after evaluating business model and future returns. As per the master services agreement assessee has to provide the services as per the agreed terms in Master Services Agreement to FSL. 11. Now assessee is making a claim that assessee has to reimburse certain resource fees like employee cost for the ATISL Virtualization team, facility cost, AMC cost and center Support costs to ATIS. As noticed from 10 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited the master services agreement the agreement is entered between assessee and FSL and assessee has taken over the business of ATIS as an ongoing concern basis. Therefore, the business of ATIS belongs to the assessee and whatever facility earlier utilized by ATIS is between ATIS and FSL. As per the new agreement assessee has directly entered into service agreement with FSL and business of ATIS also completely acquired by the assessee from ATIS. Therefore, we are not inclined to accept the submissions of the assessee that assessee has to reimburse certain resource fee through ATIS. 12. It is also important to notice that all the three concerns are related concerns, if at all assessee utilized certain resources of FSL it is between FSL and the assessee. Therefore, we are not inclined to accept, at the same time there is no proper documentation was submitted before tax authorities justifying the payment of resources fees to ATIS when the business is completely acquired by the assessee as per the master service agreement. Therefore, we do not find any reason to disturb the findings of the Ld.CIT(A) in this regard. Accordingly, Ground No. 2 raised by the assessee is dismissed. 11 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 13. With regard to Ground No. 3 the relevant facts are assessee has claimed expenses in Profit and Loss Account which include expenses towards professional fee of ₹.10 lakhs paid to M/s. Kaitan & Co., on an enquiry the assessee has submitted that M/s. Kaitan & Co., provided legal services in guiding the assessee in drafting the subscription agreement for issue of equity shares to its promotors M/s. Bessemer Venture Partners Trust, Mauritius in the month of June 2013. After considering the submissions of the assessee Assessing Officer observed that the professional fees paid to M/s. Kaitan & Co., was directly related to increasing he capital base of the assessee. Therefore, the professional fee paid was not an allowable expenditure, accordingly, he disallowed the same. 14. Further, Assessing Officer observed that assessee has paid a sum of ₹.4,80,000/- to M/s. Kaitan & Co., for carrying out trademark search and filing of application for registrations of trademarks in the US and UK as per invoice No. Mum/12-13/A00200 of 2012-13 dated 26.02.2012. Assessing Officer observed from the narration on the bill itself shows that the expenditure was capital in nature and the benefit derived from the transaction was all enduring nature. Accordingly, he disallowed the same u/s. 37(1) of the Act. 12 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 15. Further, Assessing Officer observed that assessee has debited an expenditure of ₹.56,180/- being paid to M/s. Tembey & Mhatre for obtaining a valuation report from M/s. Tembey & Mhatre for issue of equity shares to its promoter M/s. Bessemer Venture Partners Trust, Mauritius in the month of June 2013. The nature of the expenditure is directly related to increasing the capital basis of the assessee, accordingly, he disallowed the same u/s. 37(1) of the Act. 16. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee has submitted as under: - “DISALLOWANCE OF PROFESSIONAL FEES OF RS. 10,00,000/- TO KHAITAN & COMPANY The Appellant had issued the equity shares to its promoter viz. Bessemer Venture Partners Trust, Mauritius in January 2013. The Appellant engaged Khaitan & Company in guiding the Appellant in drafting share subscription agreement. 2. The A.O. alleged that the nature of expenses directly related to increasing the capital base of the Appellant which is capital in nature. Hence the AO disallowed the expenses. 3. In this regards, the Appellant submits that the expenditure were incurred on raising fresh capital for purpose of running the business therefore the same would be in nature of revenue expenses. 4. The Appellant relies on the following judicial pronouncements: (i) CIT v/s. Glaxo Laboratories India Ltd. - [(1990) 181 ITR 59 (Bom)] The Bombay high court held that the Court must look to the object and purpose of the expenditure from the point of view of the businessman. In the instant case, it was established upon the Tribunal's finding that the assessee 13 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited had no need for funds. It was established that it had need of the technical arrangement to run profitably, What, therefore, motivated the businessman in the assessee was the expediency of ensuring the continuance of the technical collaboration arrangement. The object and purpose of the said expenditure, therefore, seen from a businessman's point of view, must be held to be to obtain the approval of the Government to the continuance of the technical collaboration arrangement. That being the object and purpose, the said expenditure was revenue expenditure and an allowable deduction. That an advantage of an enduring characters, namely, the increase in share capital, resulted, could not, in the circumstances, be held to be decisive. Thus, the Tribunal was right in holding that the said expenditure of Rs. 9,32,946 was in the nature of revenue expenditure. (ii) CIT v/s. Godfray Phillips India Ltd.-[(1997) 224 ITR 727 (Bom)] The expenses incurred by assessee on share issue which was to dilute foreign shareholdings to comply with Government direction, could be allowed as business expenditure. 5. In light of the above, it is respectfully submitted that AO erred in disallowing the legal expenses paid to Khaitan & Co. by the Appellant, and hence should be deleted. DISALLOWANCE OF PROFESSIONAL FEES OF RS. 4.80,000/- TO KHAITAN & COMPANY 1. The Appellant engaged Khaitan & Co for carrying out trademark research and filing of application for registration of trademark in the US and UK. The Appellant has made 2 trade mark applications i.e. for ANUNTA (label and logo) and ANUNTA (word). The ANUNTA (label/logo) application is pending examination with the Trade Marks registry whereas the ANUNTA (word) application has proceeded to registration. The AO alleged that the nature of expenditure is in capital nature and disallowed the same [Ref: Pg. No. 88 to 89 of the P.B.). 2. In this regard, the Appellant expenditure was incurred for protection of its running business without generating any new asset, same was to be allowed as deduction. 3. The Appellant relies on the following judgements in support of the said ground: 14 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited (1) CIT v/s. Finlay Mills Ltd.-[(1951) 20 ITR 475 (SC)] The contention of the revenue was fallacious. The machinery which acquires a greater productive capacity by reason of its improvement by inclusion of some new invention naturally becomes a new and altered asset by that process. So long as the machinery lasts, the improvement continues to the advantage of the owner of the machinery. The replacement of a dilapidated roof by a more substantial roof stands on the same footing. The result however of the Trade Marks Act is only two-fold. By registration, the owner is absolved from the obligation to prove his ownership of the trade mark. It is treated as prima facie proved on production of the registration certificate. It thus merely saves him the trouble of leading evidence, in the event of a suit, in a court of law, to prove his title to the trade mark. The registration is in the nature of collateral security furnishing the trader with a cheaper and more direct remedy against infringers. This is neither an asset nor an advantage so as to make payment for its registration a capital expenditure. The advantage derived by the owner of the trade mark by registration falls within class of revenue expenditure. The fact that a trade mark after registration could be separately assigned, and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. (ii) Cadila Healthcare Ltd. v/s. ACIT- [(2012) 21 taxmann.com 483 (Ahd. – Trib.)] Where Appellant, engaged in manufacturing of pharmaceutical products, paid certain amount as trademark and patent registration fee, in view of fact that said expenditure was incurred for protection of its running business without generating any new asset, same was to be allowed as deduction. 15 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited 4. In light of the above, it is respectfully submitted that AO erred in disallowing the legal expenses paid to Khaitan & Co. by the Appellant, and hence the same should be deleted. DISALLOWANCE OF PROFESSIONAL FEES OF RS. 56,180/- TO M/S. TEMBEY & MHATRE The Appellant had issued the equity shares to its promoter viz. Bessemer Venture Partners Trust, Mauritius in January 2013. The Appellant engaged Tembey & Mhatre for conducting the valuation of shares [Ref: Pg. No. 75 to 82 of the P.B.] 2. The AO alleged that the nature of expenses directly related to increasing the capital base of the Appellant which is capital in nature. Hence the AO disallowed the expenses. 3. In this regard, the Appellant place the reliance on the following judicial pronouncements: (i) CIT v/s. Commonwealth Trust Ltd. -[(1979) 120 ITR 491 (Ker)] Expenditure incurred on the valuation of business properties is allowable business expenditure. (ii) CIT v/s. Asiatic Oxygen & Acetylene Co. Ltd. [(1981) 132 ITR 506 (Cal)] In order to find out the distinction between capital and revenue expenditure, it is to be seen whether the expenditure would bring into existence an asset or advantage of enduring benefit to a business. In the instant case, the Appellant did not acquire any new capital asset at all. Only its existing assets were valued afresh and valuation was shown in its books of account at higher figures mainly to display its financial position in a better way to facilitate the carrying on of its business more efficiently. Therefore, impugned expenditure was allowable as revenue expenditure u/s. 10 (2) (xv) of the Act. (iii) CIT v/s. Malayalam Plantations (India) Ltd. - [(1993) 201 ITR 301 (Ker)] Expenditure incurred for the valuation of business allowed as revenue expenditure. 16 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited In light of the above, it is respectfully submitted that AO erred in disallowing the legal expenses paid to Tembey and Mhatre by the Appellant, and hence the same should be deleted.” 8.3 Submissions relating to Ground of Appeal No.5: 8.3.1 In the course of the appellate proceedings, the AR of the appellant submitted as under: "The Appellant engaged Khaitan & Co for carrying out trademark research and filing of application for registration of trademark in the US and UK. The Appellant has made 2 trade mark applications i.e. for ANUNTA (label and logo) and ANUNTA (word). The ANUNTA (label/logo) application is pending examination with the Trade Marks registry whereas the ANUNTA (word) application has proceeded to registration. The AO alleged that the nature of expenditure is in capital nature and disallowed the same. 2. In this regard, the Appellant expenditure was incurred for protection of its running business without generating any new asset, same was to be allowed as deduction. 3. The Appellant relies on the following judgements in support of the said ground: (i) CIT v/s. Finlay Mills Ltd.-[(1951) 20 ITR 475 (SC)] The contention of the revenue was fallacious. The machinery which acquires a greater productive capacity by reason of its improvement by inclusion of some new invention naturally becomes a new and altered asset by that process. So long as the machinery lasts, the improvement continues to the advantage of the owner of the machinery. The replacement of a dilapidated roof by a more substantial roof stands on the same footing. The result however of the Trade Marks Act is only two-fold. By registration, the owner is absolved from the obligation to prove his ownership of the trade mark. It is treated as prima facie proved on production of the registration certificate. It thus merely saves him the trouble of leading evidence, in the event of a suit, in a court of law, to prove 17 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited his title to the trade mark. The registration is in the nature of collateral security furnishing the trader with a cheaper and more direct remedy against infringers. This is neither an asset nor an advantage so as to make payment for its registration a capital expenditure. The advantage derived by the owner of the trade mark by registration falls within class revenue expenditure. The fact that a trade mark after registration could be separately assigned, and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. (ii) Cadila Healthcare Ltd. v/s. ACIT-[(2012) 21 taxmann.com 483 (Ahd. - Trib.)] Where assessee, engaged in manufacturing of pharmaceutical products, paid certain amount as trademark and patent registration fee, in view of fact that said expenditure was incurred for protection of its running business without generating any new asset, same was to be allowed as deduction. 4. In light of the above, it is respectfully submitted that AO erred in disallowing the legal expenses paid to Khaitan & Co. by the Appellant, and hence the same should be deleted." 17. After considering the submissions of the assessee Ld.CIT(A) held that the expenditure incurred by the assessee are capital in nature accordingly, sustained the additions made by the Assessing Officer. Aggrieved assessee is in appeal before us. 18. At the time of hearing, Ld. AR brought to our notice Page No. 121 of the Paper Book which is the same submissions submitted before the 18 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited Ld.CIT(A) and also brought to our notice Page No. 6 of the Assessment Order in which he brought to our notice findings of the Assessing Officer. In this regard he relied on the following case law: - (i). CIT v/s. Glaxo Laboratories India Ltd. - [(1990) 181 ITR 59 (Bom)] (ii). CIT v/s. Godfray Phillips India Ltd.-[(1997) 224 ITR 727 (Bom)] (iii). Cadila Healthcare Ltd. v/s. ACIT- [(2012) 21 taxmann.com 483 (Ahd. – Trib.)] 19. On the other hand, Ld. DR submitted that the expenditure incurred by the assessee on issue of equity shares, registration expenses are capital in nature, therefore these expenditures cannot be allowed u/s.37(1) of the Act. Ld. DR submitted that in order to verify the above expenditure in detail the bench may remit this ground back to the file of the Assessing Officer. 20. Considered the rival submissions and material placed on record, with regard to share issue expenses, we observe that the assessee has engaged the services of Khaitan & Co., in guiding in drafting share subscription agreement to issue shares to its promotors. This is clearly the expenses incurred to increase the capital base of the assessee. The assessee made a plea that this is allowable expenditure under Income- tax Act by relying on CIT v. Glaxo Laboratories India Ltd., (supra), the facts in this case are distinguishable to the present case. Further it relied 19 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited on Goldfray Philips India Ltd., (supra) in this case the expenditures were incurred to dilute the foreign share holdings, the courts have held that the expenditure incurred to dilute the shareholding is allowable expenditure. However, in the present case, the assessee incurred the expenditure to issue the share to its promotors. Therefore, here also facts are distinguishable. Therefore, we are inclined to sustain this addition made by Assessing Officer. 21. With regard to expenditure incurred to carryout trade mark registration in US and UK. These are not capital expenditure, as held in the case of Cadila Healthcare Ltd. v. ACIT (supra), the expenditure incurred for protection of its running business without generating any new asset, is an allowable expenditure. Therefore, we are inclined to delete the addition made by the Assessing Officer. 22. With regard to professional fees to M/s. Tembey & Mhatre, even though it is partly related to issue of equity shares to its promotors, it is only relating to valuation of share, the valuation of shares can be undertaken any point of time, it does not increase any benefit enduring in nature. Therefore, this expenditure cannot be considered as capital in nature. Therefore, we are inclined to delete the addition made by the 20 ITA NO.2946/MUM/2019(A.Y: 2013-14) Anunta Technologies Management Services Limited Assessing Officer. In the result, the grounds raised by the assessee are partly allowed. 23. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 06 th February, 2023 Sd/- Sd/- (SANDEEP SINGH KARHAIL) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 06/02/2023 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Assessee 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum
Other Referred Cases
CIT v/s. Glaxo Laboratories India Ltd., CIT v/s. Godfray Phillips India Ltd., Cadila Healthcare Ltd. v/s. ACIT
Laws Referred To
Income-tax Act
Tax Holiday Secrets for Startups
₹0
1:1 Consultation on Tax Litigation
₹1
1:1 Consultation on Salary Structuring
₹1
Letter of Indemnity - Registering as Representative Assessee for Deceased
Mehul₹0
Declaration of Gift
Mehul₹500
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