2009 (9) TMI 989 - HC - Income Tax

High Court Upholds Tribunal Decision on Income-tax Act Appeal

The High Court upheld the Tribunal's decision in an appeal by a limited company against an assessment order under the Income-tax Act, 1961. The Tribunal ... Consultancy charges paid to Non-Executive Director of the company - As per AO payment was made just to avoid the tax liability and for non-business purposes - Tribunal came to the conclusion that payment was, in fact, made Non executive director for obtaining the consultancy services in the field of Review of Annual Accounts, Audit Review and Review of Internal Controls, etc. Even the applicable Tax at Source was deducted and paid by the company and also accepted the contention of the assessee that corporate governance and related disclosures were made mandatory by the SEBI Guidelines in the year 2001 and for this reason it was thought expedient by the company to avail the services of Mr. Mirza’s expertise in this behalf - HELD THAT:- We are of the opinion that the aforesaid finding of fact is based on cogent material and it cannot be termed as perverse nor such an attempt is made by the learned counsel for the Revenue. Since it is a pure finding of fact arrived at by the Tribunal that consultancy charges were paid by the assessee to Mr. Mirza[Non-Executive Director] against actual services rendered, we are of the opinion that no question of law in this regard arises. Payment for Advisory services in regulatory compliance - Classification of expenditure - According to the assessee, the payment was made as a normal business activity for the aforesaid purpose in order to maintain good and cordial relationship with the shareholders and, at the same time, safeguarding the interests of the existing shareholders - as per AO expenses were incurred for the buyback of the shares, which is directly related to the capital of the assessee. Therefore, he treated it as capital expenditure - Tribunal differed with the Assessing Officer and CIT(A) holding that the expenditure in question was not in relation with the share capital of the assessee-company - HELD THAT:- As decided in EMPIRE JUTE COMPANY LIMITED VERSUS COMMISSIONER OF INCOME-TAX [1980 (5) TMI 1 - SUPREME COURT] When the expense incurred relates to the issue of fresh shares, which leads to an inflow of fresh funds into the company, such expenditure is to be treated as capital expenditure and where no such flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure, as in such a case the company would not acquire benefit or addition of enduring nature. In the present case, consultancy fee for advisory services was paid by the assessee-company for buyback of shares. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not arise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature.. The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a benefit of enduring nature cannot be accepted. The case involves an appeal by a limited company against an assessment order under the Income-tax Act, 1961. The Assessing Officer disallowed a sum of Rs. 3,15,000 for consultancy charges and Rs. 20,40,000 for buyback of shares, adding both amounts to the company's income. The Commissioner of Income-tax (Appeals) dismissed the company's appeal, but the Income-tax Appellate Tribunal (ITAT) later allowed the deductions, prompting the revenue to appeal against the ITAT's decision. The Tribunal found that the consultancy charges were paid for legitimate services rendered by a financial expert and that the buyback of shares did not result in an enduring benefit, thus justifying the expenses as business expenditures. The High Court upheld the Tribunal's decision, concluding that no question of law merited further consideration.