2017 (2) TMI 677 - AT - Income Tax

Expense classification: Revenue vs. Capital for 2010-2011 assessment year

The Tribunal upheld the Ld. CIT (A)'s decision that expenses on recruitment, SOX compliance testing, and ISAP awards were revenue, not capital ... Capital expenditure vs. revenue expenditure - enduring benefit test - allowability of professional/recruitment expenses - allowability of compliance audit expenses - taxation of employee awards as remuneration - inapplicability of Brook Bond India Ltd. ratioCapital expenditure vs. revenue expenditure - allowability of professional/recruitment expenses - enduring benefit test - Recruitment agency fees are revenue expenditure and not capital in nature. - HELD THAT: - The Tribunal upheld the finding of the CIT(A) that the one time professional fees paid to a recruitment agency were incurred in the normal course of running the business to recruit staff and to make operations more efficient. Such expenditure was routine and did not confer a benefit of enduring nature or result in expansion of the capital base; therefore the test for capitalisation was not satisfied. The revenue made no contention that the claimed amount exceeded actual expenses. Consequently the AO's disallowance of 50% of the recruitment expenses under the Brook Bond principle was not justified and was rightly deleted by the CIT(A). [Paras 7]Addition disallowing recruitment expenses is deleted; expenditure treated as revenue in nature.Capital expenditure vs. revenue expenditure - allowability of compliance audit expenses - enduring benefit test - Expenses incurred for SOX compliance testing are revenue expenditure and not capital in nature. - HELD THAT: - The Tribunal agreed with the CIT(A) that the payments to chartered accountants for conducting SOX compliance at the service provider site of group companies represented professional fees for compliance work. The expenditure related to regular compliance obligations arising from the assessee's affiliation with US based enterprises and did not create a lasting capital asset or enduring benefit to the assessee. The revenue failed to produce authorities to show these payments should be capitalised; accordingly the AO's full disallowance was set aside. [Paras 7]SOX compliance testing expenses allowed as revenue expenditure; addition deleted.Capital expenditure vs. revenue expenditure - taxation of employee awards as remuneration - inapplicability of Brook Bond India Ltd. ratio - ISAP awards paid to a director are revenue expenditure (remuneration) and not capital expenditure. - HELD THAT: - The Tribunal recorded that the ISAP award expenditure was akin to salary paid to employees and was disclosed as taxable income in the hands of the director. The actual amount was stated to be lower than that inadvertently mentioned in the assessment order. The awards did not yield an enduring benefit or create capital assets for the company; therefore the Brook Bond ratio was inapplicable. The CIT(A)'s conclusion treating the ISAP awards as routine revenue expenses was affirmed. [Paras 8]ISAP award expenses treated as revenue (remuneration) and allowed; addition deleted.Final Conclusion: The Tribunal dismissed the revenue's appeal for Assessment Year 2010-2011 and upheld the CIT(A)'s deletion of additions: recruitment fees, SOX compliance testing expenses and ISAP awards were held to be revenue expenditures and not capital in nature. Issues involved:1. Assessment of expenses as capital or revenue in nature.Detailed analysis:1. The appeal was filed by the revenue against the order passed by the Ld. CIT (Appeals)-9, Mumbai, for the assessment year 2010-2011. The Ld. CIT(A) had partly allowed the appeal of the assessee against the assessment order passed by the A.O u/s 143(3) of the Income Tax Act, 1961. The additions made by the A.O were challenged by the assessee, leading to the present appeal by the revenue.2. The assessee company, engaged in Management Consultants business, had filed its return of income declaring a total income of Rs. 57,66,655. The assessment order passed by the A.O under section 143(3) of the Act determined the total income at Rs. 98,50,330 after making various additions, including expenses on recruitment, SOX compliance testing, and ISAP Award. The Ld. CIT (A) deleted all these additions, leading to the current appeal by the revenue.3. The primary issue in the appeal was whether the expenses incurred by the assessee were of capital or revenue nature. The A.O had disallowed a portion of the expenses based on the benefit of enduring nature created by these expenses, following the case law of M/s. Brooke Bond India Ltd. The Ld. CIT (A), however, after considering the nature, frequency, and quantum of the expenditures, held that the expenses were routine and revenue in nature, not creating any enduring benefit. The Ld. CIT (A) concluded that the expenses did not qualify as capital expenditure and directed the deletions of the additions made by the A.O.4. The Tribunal, after analyzing the contentions of both parties, upheld the findings of the Ld. CIT (A) and dismissed the revenue's appeal for the assessment year 2010-2011. The Tribunal concurred with the Ld. CIT (A) that the expenses on recruitment, SOX compliance testing, and ISAP awards were revenue in nature and not capital expenditures. The Tribunal found no justification for disallowing these expenses and supported the decision to delete the additions made by the A.O.5. The Tribunal's decision was based on the understanding that the expenses incurred by the assessee were regular routine expenditures essential for the normal course of business operations, and did not result in any enduring benefit to the assessee. Therefore, the Tribunal concluded that the expenses were revenue in nature and should be allowed, in line with the findings of the Ld. CIT (A). The Tribunal found no infirmity in the order of the Ld. CIT (A) and dismissed the revenue's appeal for the assessment year 2010-2011.