AGRANI TELECOM LTD, MUMBAI V. ACIT 8(1), MUMBAI

ITA 981/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4978 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 14-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 03-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: O P SINGH
• Assessee Lawyers: SANJIV S SHAH
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI . , , ! ! ! ! '# $% '# $% '# $% '# $% , ,, , & & & & ' ' ' ' BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER . / ITA NO. 981/MUM./2011 ( &) * !+* / ASSESSMENT YEAR : 200607 ) AGRANI TELECOM LIMITED UNIT NO.7, PARADIGM, BWING MINDSPACE, MALAD LINK ROAD MALAD (W), MUMBAI 400 064 .. ,- / APPELLANT ) V/S ASSTT. COMMISSIONER OF INCOME TAX CIRCLE8(1), MUMBAI 400 020 .... ./,- / RESPONDENT , . / PERMANENT ACCOUNT NUMBER AAACE9714A &) *1# 2 3 / ASSESSEE BY : MR. SANJIV S. SHAH 4! 2 3 / REVENUE BY : MR. O.P. SINGH )! 2 # / DATE OF HEARING 14.08.2013 $ 5+ 2 # / DATE OF ORDER 13.09.2013 $ $ $ $ / ORDER '# $% '# $% '# $% '# $% , ,, , & & & & 6 6 6 6 / PER AMIT SHUKLA, J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESS EE, CHALLENGING THE IMPUGNED ORDER DATED 25 TH NOVEMBER 2010, PASSED BY THE LEARNED COMMISSIONER (APPEALS)-XVI, MUMBAI, FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE AGRANI TELECOM LIMITED 2 ACT ) FOR THE ASSESSMENT YEAR 200506, VIDE WHICH, FOLL OWING GROUNDS HAVE BEEN RAISED: 1. THE LD. CIT(A) ERRED IN LAW AND FACTS IN UPHOLD ING DISALLOWANCE OF RS. 42,63,150/OUT OF CONSULTANCY CHARGES AND RS. 10,00, 111/- OUT OF TRAVELING EXPENSES ON THE GROUND THAT EXPENSES ARE OF CAPITAL IN NATURE. THE REASONS GIVEN BY HIM FOR DOING SO ARE WRONG, CONTRARY TO TH E FACTS OF THE CASE, AGAINST THE PROVISIONS OF LAW AND CONTRADICTORY. 2. THE LD. CIT(A) ERRED IN LAW AND FACTS IN UPHOLDI NG EXPENSES INCURRED AFTER SETTING UP THE BUSINESS AND FOR DEVELOPING EXISTING BUSINESS OF THE ASSESSEE AS CAPITAL IN NATURE ON WRONG APPRECIATION OF FACTS . THE DISALLOWANCE OF RS. 52,63,261/- IS REQUIRED TO BE DELETED. 2. FACTS IN BRIEF : THE ASSESSEE COMPANY IS MAINLY ENGAGED IN THE BUSINESS OF TRADING IN TELECOM AND SECURITY EQUIPME NT AND PROVIDING TRANSPORTATION SERVICE. DURING THE COURSE OF ASSESS MENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS PA ID CONSULTANCY CHARGES OF ` 62,17,215. FROM THE DETAILS FURNISHED BY THE ASSES SEE, THE ASSESSING OFFICER FOUND THAT A SUM OF ` 42,63,150, HAS BEEN PAID TO MR. STEPHEN H. CASS, TOWARDS CONSULTANCY CHARGES. IN RESPONSE TO T HE SHOW CAUSE NOTICE WITH REGARD TO THE NATURE OF SERVICE RENDERED BY TH IS PERSON, THE ASSESSEE SUBMITTED AS UNDER: STEVE CASS HAS OVER 30 YEARS OF EXPERIENCE ACROSS A BROAD RANGE OF FUNCTIONS INCLUDING BUSINESS CONSULTING, PRODUCT CO MPLIANCE TESTING, WIRELESS TELECOMMUNICATIONS, BUSINESS DEVELOPMENT, SALES AS WELL AS COMMAND EXPERIENCE IN THE UNITED STATES ARMY. IN THE FINANCIAL YEAR 2005-06, ATL ENTERED INTO THE BUSINESS OF FLEET MANAGEMENT SERVICES AND PROVIDING SECURITY PRODUCTS AND NETWORKING SOLUTIONS. STEVE CASS WAS BEING HIRED AS A CONSULTA NT- TO PROVIDE ADVISORY SERVICES TO ATL IN ITS EXISTI NG OPERATIONS TO IMPLEMENT STRATEGIC PLANNING SESSION WITH TEAM TO ADDRESS FORMATION OF MARKETING APPROACH. - FACILITATE PERIODIC REVIEW OF NEW BUSINESSES WITH CEO & TEAM TO ASSESS AND ADJUST MARKET APPROACHES WITH EXTERNALLY PROVIDED P RODUCTS. TO PROVIDE SUPPORT IN DEVELOPMENT OF NEW BUSINESS OPPORTUNITIES. IDENTIFY PROSPECTIVE CLIENTS FOR CALL CENTER I BP O BUSINESS & HELP SIGNING UP OUTSOURCING CONTRACTS WITH THEM. TO PROVIDE SUPPORT IN CREATING THE ATL WEBS/TO. AS A CONSULTANT, MR STEVE. HAS CONTRIBUTED TO THE C OMPANY IN IDENTIFYING THE PROSPECTIVE CUSTOMERS I CLIENTS FOR THE FLEET MANAG EMENT OPERATIONS AND HAS ADDED CUSTOMERS LIKE WIPRO, GE CAPITAL, DELLOITE, C ONVERGYS ETC. I-FE HAS AGRANI TELECOM LIMITED 3 DEVELOPED THE VENDORS FOR VARIOUS PRODUCTS OF THE P RODUCT & SECURITY SEGMENT. HE HAS ALSO BEEN INSTRUMENTAL IN PROVIDING SUPPORT & TRAINING TO THE SALES TEAM ALONG WITH THE BUSINESS HEADS. XXXX XXXX XXXX XXXX IN THE PRESENT CASE, THE ASSESSEE HAS HIRED THE SER VICES OF STEPHEN CAS IN ORDER TO BOOST THE BUSINESS OF THE COMPANY. SERVICE S OF THE OCNSULTANT HAS HELPED THE ASSESSEE TO GENERATE BUSINESS AND ALSO P ROVIDED ASSISTANCE IN IDENTIFYING VENDORS FOR SOURCING OF SECURITY PRODUC TS. IN THE SAID SUBMISSION ITSELF, THE ASSESSEE HAS REL IED UPON FOLLOWING DECISIONS ALSO: 1. ASSAM BENGAL CEMENT CO. LTD. V/S CIT, [1955] 27 ITR 34 (SC); 2. BENGAL & ASSAM INVESTORS LTD. V/S CIT, [1983] 142 I TR 156 (CAL.); 3. CIT V/S ISHWAR PRAKASH & BROS. [1986] 159 ITR 843 ( PNJ.); AND 4. CIT V/S ALUMINIUM CORPORATION OF INDIA LTD. [1973] 92 ITR 563 (CAL.) 3. THE ASSESSING OFFICER REJECTED THE ASSESSEES SUBMI SSIONS ON THE GROUND THAT THE CONSULTANCY AGREEMENT WITH MR. STEP HEN H. CASS, WAS TO EXPLORE NEW LINE OF BUSINESS. REGARDING ASSESSEES CONTENTION THAT HE HAS CONTRIBUTED TO THE ASSESSEE COMPANY IN IDENTIFYING PROSPECTIVE CUSTOMERS FOR THE FLEET MANAGEMENT AND HAS ADDED CUSTOMERS LIKE W IPRO G.E. HE DISBELIEVE THE SAME ON THE GROUND THAT THESE COMPAN IES ARE BASED IN INDIA AND THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO P ROVE THAT ON ACCOUNT OF EFFORTS OF MR. STEPHEN H. CASS, THE ASSESSEE GOT TH E NEW CUSTOMERS. HE THUS HELD THAT THESE EXPENSES ARE TO BE CAPITALIZED TILL THE NEW BUSINESS HAS COMMENCED AS THE CONSULTANCY AGREEMENT WAS ONLY FOR EXPLORING NEW BUSINESS. IN COMING TO THIS CONCLUSION, HE HAS STRO NGLY RELIED UPON THE DECISION OF THE HON'BLE SUPREME COURT IN CIT V/S DE LHI SAFE DEPOSIT CO. LTD., [1982] 133 ITR 756 (SC). HE ALSO DISALLOWED THE TRA VELING EXPENDITURE OF MR. STEPHEN H. CASS, AGGREGATING TO ` 10,00,111. ACCORDINGLY, THE DISALLOWANCE AGGREGATING TO ` 52,63,261 WAS MADE. 4. THE ASSESSEE, BEFORE THE LEARNED COMMISSIONER (APPE ALS), REITERATED THE SUBMISSIONS AND SUBMITTED THAT THE DECISION OF THE HON'BLE SUPREME COURT IN S DELHI SAFE DEPOSIT CO. LTD. (SUPRA) CANN OT BE RELIED UPON AND WAS DISTINGUISHED ON FACTS AND ALSO ON THE RATIO LAID D OWN BY THE HON'BLE AGRANI TELECOM LIMITED 4 SUPREME COURT. IT WAS FURTHER SUBMITTED THAT THE AS SESSEE WAS MAINLY ENGAGED IN THE SERVICE INDUSTRIES AND THE FIXED ASS ETS WAS ONLY TO THE TUNE OF ` 29.34 LAKHS WHICH FOR BASIC ASSETS ONLY AND WAS NO T HAVING ANY PLANT AND MACHINERY FOR THE PURPOSE OF MANUFACTURING INDUSTRI ES AS HELD BY THE ASSESSING OFFICER. HENCE, CAPITALIZATION OF EXPENDI TURE TO THE TUNE OF ` 52.63 LAKHS TO THE FIXED ASSETS OF ` 29.33 LAKHS IS NOT POSSIBLE. THUS, THE ASSESSING OFFICER HAS COMPLETELY MISUNDERSTOOD THE FACTS. IT WAS FURTHER CONTENDED THAT THE ASSESSEE HAS INCURRED THE SAID EXPENDITURE ONLY AFTER SETTING UP OF THE BUSINESS AND FOR DEVELOPING THE EXISTING BUSINE SS, WHICH WAS IN THE SERVICE INDUSTRY. IN SERVICE INDUSTRY, A LOT OF GRO UND WORK IS REQUIRED TO ATTRACT PROSPECTIVE CUSTOMER AND THERE IS NO REQUIR EMENT OF ESTABLISHING ANY INDUSTRY AND MAKE LOT OF PURCHASES WHICH ARE MAINLY FOR MANUFACTURING BUSINESS. IN SERVICE INDUSTRY, COMMERCIAL OPERATION S START IMMEDIATELY AFTER THE INCORPORATION OF THE COMPANY BY WAY OF BUSINESS DEVELOPMENT OR WHEN THE DECISION IS MADE. THE PROSPECTIVE CUSTOMERS MAY TAKE SOME TIME. THERE CAN ALWAYS BE A GAP BETWEEN RENDERING OF ACTUAL SER VICE PARTICULARLY IN THE FIRST YEAR, IN CASE OF SERVICE INDUSTRY. EXAMPLES O F PROFESSIONALS LIKE CHARTERED ACCOUNTANTS, DOCTORS, AND ENGINEERS WERE CITED. THUS, ONCE THE GENUINENESS OF THE PAYMENT HAS NOT BEEN DOUBTED, IT CANNOT BE HELD THAT THE CONSULTANCY CHARGES PAID TO MR. STEPHEN H. CASS , IS CAPITAL EXPENDITURE WHICH NEEDS TO BE CAPITALIZED, BUT HAS TO BE ALLOWE D AS REVENUE EXPENDITURE. 5. THE LEARNED COMMISSIONER (APPEALS) REJECTED THE ENT IRE CONTENTION OF THE ASSESSEE ON A SLIGHTLY DIFFERENT GROUND AS TAKE N BY THE ASSESSING OFFICER. HE TOOK NOTE OF NOTES AND ACCOUNTS, WHEREIN, IT WAS MENTIONED THAT SALE OF GOODS ARE FOR ` 96,00,016 AND OTHER INCOME WHICH IS PRIMARILY FROM HIRING CAR RENTAL WAS OF ` 2,63,06,155. THE INCOME FROM SERVICE WERE ONLY FOR ` 55,572. FROM THIS, HE CAME TO THE CONCLUSION THAT T HE ASSESSEES INCOME IS MAINLY FROM RENTAL CARS AND PURCHASE AND SALE OF GO ODS. HE HELD THAT CONSULTANCY FEES PAID TO MR. STEPHEN H. CASS, IS FO R THE PURPOSE OF NEW LINE OF BUSINESS WHICH HAS NOT YET COMMENCED. HE HELD TH AT SUCH A CONSULTING FEE CAN NEITHER BE CAPITALIZED NOR ALLOWED AS REVEN UE EXPENDITURE. IT IS CLEAR AGRANI TELECOM LIMITED 5 CUT CASE OF CAPITAL EXPENDITURE NOT ALLOWABLE UNDER SECTION 37(1). IN SUPPORT OF HIS CONCLUSION, HE HAS STRONGLY RELIED AND REFER RED TO THE DECISION OF ANDHRA PRADESH HIGH COURT IN VAZIR SULTAN TOBACCO C O. LTD. V/S CIT, [1989] 175 ITR 55 (AP) AND THE DECISION OF GUJARAT HIGH CU ORT IN CIT V/S SHRI DIGVIJAY CEMENT CO. LTD., [1986] 159 ITR 253 (GUJ.) . 6. WE HAVE HEARD THE RIVAL CONTENTION, PERUSED THE REL EVANT FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) AS WELL AS THE MATERIAL AVAILABLE ON RECORD. THE MAIN CONTENTION O F THE LEARNED COUNSEL BEFORE US HAD BEEN THAT THE ASSESSEE HAD ENTERED IN TO THE BUSINESS OF FLEET MANAGEMENT SERVICE AND PROVIDING SECURITY PRODUCTS AND NETWORKING SOLUTION. FOR SUCH RENDERING OF SERVICE, THE ASSESS EE HAS HIRED A CONSULTANT MR. STEPHEN H. CASS, WHO HAS PROVIDED VARIOUS KIND OF ADVISORY SERVICES AND HAS ALSO CONTRIBUTED IN IDENTIFYING PROSPECTIVE CUS TOMERS LIKE WIPRO G.E. CAPITAL, DELLOITE, ETC. ONCE THE SERVICES HAVE BEEN STARTED IN THIS YEAR, THE PAYMENT MADE UNDER CONSULTANCY AGREEMENT HAS TO BE ALLOWED AS REVENUE EXPENDITURE WHEN THE GENUINENESS OF THE PAYMENT HAS NOT BEEN DOUBTED. THE ASSESSEE WAS ALREADY IN THE BUSINESS AND IN THI S YEAR THE ASSESSEE HAS STARTED A NEW LINE OF BUSINESS IN THE SERVICE INDUS TRIES, THEREFORE, SUCH AN EXPENDITURE HAS TO BE ALLOWED AS REVENUE AND CANNOT BE HELD AS CAPITAL EXPENDITURE OR CAN BE CAPITALIZED IN THE BOOKS OF A CCOUNT. HE HAS STRONGLY RELIED UPON THE DECISION OF DELHI HIGH COURT IN IND ORAMA SYNTHETICS INDIA LTD. V/S CIT, [2011] 333 ITR 18 (DEL.). ON THE OTHE R HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY RELIED UPON ON THE FINDINGS AND OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS). 7. FROM THE RECORDS, IT IS SEEN THAT THE ASSESSEE WAS ALREADY IN THE BUSINESS OF TRADING AND TRANSPORTATION SERVICE FOR WHICH IT HAS SHOWN RECEIPTS AND OFFERED INCOME THEREFROM. IN THIS YEAR, THE ASS ESSEE HAD VENTURED INTO SERVICE INDUSTRIES IN FLEET MANAGEMENT SERVICE AND PROVIDING SECURITY PRODUCTS AND NETWORKING SOLUTIONS. FOR THE PURPOSE OF THIS SERVICE INDUSTRY, THE ASSESSEE HAS ENTERED INTO A CONSULTANCY AGREEME NT. IT IS NOT A CASE OF AGRANI TELECOM LIMITED 6 THE DEPARTMENT THAT THERE IS NO CONTINUITY OF BUSIN ESS WITH COMMON MANAGEMENT AND FUND. IF THERE IS CONTINUITY OF BUSI NESS WITH COMMON MANAGEMENT AND FUND, THEN EVEN IF THE ASSESSEE HAS STARTED A NEW LINE OF BUSINESS IN THIS YEAR, THE PAYMENT MADE FOR CARRYIN G OUT SUCH RUNNING OF NEW BUSINESS, IS NOTHING BUT A BUSINESS EXPENDITURE WHICH HAS TO BE ALLOWED IN THE YEAR IN WHICH IT HAS BEEN INCURRED. THE EXPE NDITURE INCURRED IN THE FORM OF CONSULTANCY CHARGES THOUGH MAY BE FOR ENDUR ING BENEFIT OF SERVICE INDUSTRY STARTED BY THE ASSESSEE, HOWEVER, FALLS IN REVENUE FIELD AND CANNOT BE HELD TO BE CAPITAL IN NATURE. FOR DECIDING THE I SSUE WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IN NATURE, THE CO NCEPT OF ENDURING BENEFIT IS QUITE A PARAMOUNT FACTOR BUT SUCH TEST OF ENDURI NG BENEFIT AT TIMES GETS FAILED AS NOT EACH AND EVERY ADVANTAGE OF ENDURING NATURE CAN BE OF CAPITAL FIELD. THERE MAY BE A CASE WHERE EXPENDITURE HAVE B EEN INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT BUT NONETHE LESS THEY MAY BE ON REVENUE ACCOUNT. WHAT HAS TO BE SEEN THE NATURE OF ADVANTAGE IN A COMMERCIAL SENSE WHETHER IT IS IN THE CAPITAL FIELD OR FOR THE RUNNING OF THE BUSINESS. IF THE ADVANTAGE IS NECESSITATING THE BUS INESS OPERATIONS FOR ENABLING THE ASSESSEE TO DO BUSINESS FOR EARNING SO ME PROFIT WITHOUT HAVING IMPACT ON FIXED CAPITAL, THEN SUCH EXPENDITURE HAS TO BE RECKONED ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDU RE IN FUTURE. THUS THE TEST OF ENDURING BENEFIT CANNOT BE HELD TO BE CONCL USIVE. IN THE PRESENT CASE, THERE IS NO AUGMENTATION OF ASSET TO THE ASSESSEE B UT HAS HELPED THE ASSESSEE TO DEVELOP A PROPER GUIDANCE FOR RUNNING T HE NEW LINE OF SERVICE INDUSTRIES. THUS, IN OUR OPINION, THE PAYMENT FOR C ONSULTANCY CHARGES IS ON ACCOUNT OF REVENUE FIELD ONLY AND HAS TO BE ALLOWED AS REVENUE EXPENDITURE UNDER SECTION 37(1) AS IT IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. OUR VIEW IS ALSO SUPPORTED BY THE DECISIO N OF THE HON'BLE SUPREME COURT IN EMPIRE JUNE CO. LTD. V/S CIT, [1980] 124 I TR 001 (SC). WE, THUS, SET ASIDE THE IMPUGNED ORDER PASSED BY THE LEARNED COMMISSIONER (APPEALS) AND TREAT THE GROUND RAISED BY THE ASSESSEE IS TREA TED AS ALLOWED. AGRANI TELECOM LIMITED 7 8. 1 #7 &) *1# 2 !# 8 ) 4# 9: ; 8. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS A LLOWED. $ 2 5+ < =)7 13 TH SEPTEMBER 2013 2 > ; ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH SEPTEMBER 2013 SD/- . .. . B. RAMAKOTAIAH ACCOUNTANT MEMBER SD/- '# '# '# '# $% $% $% $% & & & & AMIT SHUKLA JUDICIAL MEMBER MUMBAI, =) =) =) =) DATED : 13 TH SEPTEMBER 2013 $ 2 .&#'? @?+# / COPY OF THE ORDER FORWARDED TO : (1) &) *1# / THE ASSESSEE; (2) 4! / THE REVENUE; (3) A () / THE CIT(A); (4) A / THE CIT, MUMBAI CITY CONCERNED; (5) ?!D> .&#&) , , / THE DR, ITAT, MUMBAI; (6) >E* F / GUARD FILE. /?# .&# / TRUE COPY $) / BY ORDER . 4. GH / PRADEEP J. CHOWDHURY !1I &)4 G! / SR. PRIVATE SECRETARY J / 9 4 / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI