Partial Success in Appeal for Consultancy Charges; Lack of Details Disallowed Portion, Rest Allowed as Revenue Expense

The Tribunal partially allowed the appeal regarding disallowance of consultancy charges paid to a legal advisor firm. The disallowance of Rs. 2,01,400 was confirmed due to lack of details, but the balance of Rs. 1 crore was allowed as a revenue expense. The Tribunal emphasized that expenses incurred after the business was set-up were allowable, regardless of when investments were made. The consultancy charges for due diligence were considered part of ordinary business activities and were allowed as revenue expenses.

---

---

Issues Involved:
1. Disallowance of consultancy charges paid to Amarchand & Mangaldas & Suresh A Shroff & Co (AMS) amounting to Rs. 1,02,01,400.
2. Determination of the stage at which business expenses can be allowed for a company.
3. Assessment of whether the business was 'set-up' or 'commenced'.
4. Classification of expenses as revenue or capital expenditure.

Detailed Analysis:

1. Disallowance of Consultancy Charges:
The primary issue in this appeal was the disallowance of Rs. 1,02,01,400 paid as consultancy charges to the legal advisor firm AMS. The Assessing Officer (AO) disallowed these charges on the grounds that they were not incurred for the purpose of business but were pre-commencement expenses. The assessee argued that these expenses were for due diligence related to investment purposes and should be allowed under section 37(1) of the Income-tax Act, 1961 as they were neither capital expenditure nor personal in nature.

2. Determination of the Stage at Which Business Expenses Can Be Allowed:
The Tribunal examined the provisions of section 3 of the Income-tax Act, 1961, which defines the "previous year" and stipulates that in the case of a newly set-up business, the previous year begins from the date the business is set up. The Tribunal emphasized that for expenses to be allowable, the business must be 'set-up' rather than 'commenced'. The Tribunal referred to the 'Notes to the Computation Sheet' attached with the return of income, which stated that the business was set-up on October 11, 2006, the date on which the company received its NBFC registration certificate from RBI.

3. Assessment of Whether the Business Was 'Set-Up' or 'Commenced':
The Tribunal clarified that the term "setting up" means the business is ready to commence operations, and actual commencement is not necessary for expenses to be allowed. The Tribunal cited several judgments, including Western India Vegetable Products Ltd v CIT (26 ITR 151)(BOM) and DHL Express (I) Ltd vs ACIT (154 TTJ 108 (Mum)), which supported the view that expenses incurred after the business is set-up are deductible as revenue expenses.

4. Classification of Expenses as Revenue or Capital Expenditure:
The Tribunal examined the nature of the expenses in question. It was noted that a sum of Rs. 4,21,400 and Rs. 1,60,000 were incurred for the purchase of stamp paper, for which no details were available. These were disallowed as they were not substantiated. However, the remaining Rs. 1 crore paid to AMS for due diligence was considered a business expense. The Tribunal disagreed with the CIT(A)'s reasoning that these expenses were not for business purposes because no investment was made during the year. The Tribunal held that the expenses were incurred as part of the business activities and should be allowed as revenue expenses, regardless of whether the investments were made in the same year or later.

Conclusion:
The Tribunal partly allowed the appeal. The disallowance was confirmed for Rs. 2,01,400 due to lack of details, but the balance disallowance of Rs. 1 crore was deleted. The Tribunal held that the expenses incurred after the business was set-up (October 11, 2006) were allowable as revenue expenses, and the consultancy charges paid for due diligence were incurred in the ordinary course of business.

---