2012 (4) TMI 762 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on revenue expenditures, remands Kinetic Finance Ltd. payment issue. Assessee's appeals partly allowed.

The Tribunal largely upheld the CIT(A)'s decisions, allowing various expenditures as revenue in nature and dismissing the Revenue's appeals. The matter ... - Issues Involved:1. Disallowance of Payment to Kinetic Finance Ltd.2. Disallowance of Realignment Expenses3. Capitalization of Advertisement Expenses4. Capitalization of Leasehold Improvement Expenses5. Disallowance of Direct Selling Agent (DSA) Commission6. Disallowance of Loss on Sale of Repossessed Assets7. Disallowance of Extra Depreciation on Computer Peripherals8. Disallowance of Expenditure on Non-Convertible Debentures (NCD) and Commercial Paper9. Disallowance of Loan Acquisition CostsSummary:1. Disallowance of Payment to Kinetic Finance Ltd.The assessee paid Rs. 5 crores to Kinetic Finance Ltd. (KFL) for access to their database and infrastructure. The AO disallowed this amount, treating it as capital expenditure providing enduring benefit. The CIT(A) upheld this view, citing that the expenditure resulted in an enduring advantage. However, the Tribunal set aside the order and remanded the matter back to the CIT(A) for a fresh decision, emphasizing the need to analyze the terms of the agreement and the actual benefits derived.2. Disallowance of Realignment ExpensesThe AO disallowed Rs. 29,76,461 for AY 2003-04, Rs. 1,05,94,000 for AY 2004-05, and Rs. 1,04,03,761 for AY 2005-06, treating them as capital expenditure. The CIT(A) upheld these disallowances, considering the expenses provided enduring benefits. The Tribunal, however, allowed these expenses as revenue expenditure, citing various judicial precedents that such expenses are necessary for business operations and do not create a capital asset.3. Capitalization of Advertisement ExpensesThe AO disallowed a portion of advertisement expenses, treating them as capital expenditure with enduring benefits. The CIT(A) allowed the entire expenditure as revenue, following the ITAT's decision in the assessee's own case for previous years. The Tribunal upheld the CIT(A)'s decision, referring to the jurisdictional High Court's ruling that such expenses are to be allowed in full in the year incurred.4. Capitalization of Leasehold Improvement ExpensesThe AO treated leasehold improvement expenses as capital expenditure. The CIT(A) allowed these expenses as revenue, following the ITAT's decision in the assessee's own case for previous years. The Tribunal upheld the CIT(A)'s decision, referring to the jurisdictional High Court's ruling that such expenses are revenue in nature.5. Disallowance of Direct Selling Agent (DSA) CommissionThe AO disallowed a portion of DSA commission, amortizing it over three years. The CIT(A) allowed the entire expenditure as revenue, following the ITAT's decision in the assessee's own case for previous years. The Tribunal upheld the CIT(A)'s decision, referring to the jurisdictional High Court's ruling that such expenses are to be allowed in full in the year incurred.6. Disallowance of Loss on Sale of Repossessed AssetsThe AO disallowed the loss on sale of repossessed assets, treating it as capital loss. The CIT(A) allowed the loss as revenue expenditure, following the ITAT's decision in the assessee's own case for previous years. The Tribunal upheld the CIT(A)'s decision, referring to the jurisdictional High Court's ruling that such losses are allowable as revenue expenditure.7. Disallowance of Extra Depreciation on Computer PeripheralsThe AO allowed depreciation on computer peripherals at 25% instead of 60%. The CIT(A) allowed depreciation at 60%, following various judicial precedents. The Tribunal upheld the CIT(A)'s decision, referring to the jurisdictional High Court's ruling that computer peripherals are eligible for 60% depreciation.8. Disallowance of Expenditure on Non-Convertible Debentures (NCD) and Commercial PaperThe AO treated NCD and commercial paper issue expenses as deferred revenue expenditure, allowing only 1/5th of the expenditure. The CIT(A) allowed the entire expenditure as revenue, following the Supreme Court's decision in India Cements Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the concept of deferred revenue expenditure is alien to the Act.9. Disallowance of Loan Acquisition CostsThe AO amortized loan acquisition costs over three years, allowing only 1/3rd of the expenditure. The CIT(A) allowed the entire expenditure as revenue, stating that the AO cannot take a different stand on income and expenditure on the same issue. The Tribunal upheld the CIT(A)'s decision, emphasizing that revenue expenditure must be allowed in the year incurred.Conclusion:The Tribunal largely upheld the CIT(A)'s decisions, allowing various expenditures as revenue in nature and dismissing the Revenue's appeals. The matter regarding the payment to Kinetic Finance Ltd. was remanded back to the CIT(A) for a fresh decision. The appeals of the assessee for the AYs 2004-05 and 2005-06 were allowed, while the appeal for AY 2003-04 was partly allowed for statistical purposes.