2022 (5) TMI 44 - AT - Income Tax

Legal Charges as Revenue Expenditure: Tribunal Allows Appeal

The Tribunal overturned the Commissioner's decision and allowed the appeal, determining that the legal and professional charges incurred should be ... Legal and professional charges - disallowance of expenses as no services have been rendered by the professionals - Assessee argued that the appellant company had made payment to reputed professionals to assist it in entering into negotiations with M/s Garnett Specialty Papers Ltd. for firstly commencing of purchase of paper from the supplier of paper thereafter takeover of the supplier company - HELD THAT:- CIT(A) has confirmed the addition by stretching too far the rules of prudence. AO himself observed in the order that the services engaged were from top most legal professionals. If that was the view of Ld. Tax Authorities then it was not justified to discredit the bills raised by them for services holding that assessee failed to provide substantive evidence and it could not succeed in getting supply of paper during the year or even failed to take over the company. The business uncertainties are infinite and to discredit any professional service on basis that concerned business activity having failed inspite of professional service, is not prudent approach. The very purpose of availin such services of professionals is to ensure that the entrepreneur understands well the SWOT analysis of prospective business activity. Entrepreneur’s own experience is not a ground for tax authorities to question the wisdom of assessee to have engaged the expert. While factually otherwise also, in the next year, assessee had purchased paper worth from M/s. Garnett Specialty papers Ltd. as is evident from the details of invoices given. So there is evidence which shows that having failed to take over the said company in relevant year, material was still purchased from it in next year. Next, Ld. CIT(A) has also fallen in error in observing that as expenses were incurred for acquiring or taking over of the company they could not be revenue in nature and not allowable as claimed by the appellant. Backward or forward integration of the activities of a manufacturing business cannot be considered to be establishment of a new enterprises to consider such legal and professional expenses to be for acquiring new assets and to not treat them revenue expenditure. Hon’ble Delhi High Court in Commissioner of Income Tax vs. Priya Village Roadshows Ltd. [2009 (8) TMI 765 - DELHI HIGH COURT] has held that expenses incurred in preparation of feasibility report in the same line of business has to be treated as revenue expenditure. In this judgment itself Hon’ble High Court has also taken into consideration that if the project is shelved that does not make the expenditure made upon feasibility study to be disallowed as business expenditure u/s 37. In Krishak Bharati Cooperative ltd. vs. Jt. Commissioner of Income Tax [2014 (9) TMI 99 - ITAT DELHI] had held that the expenditure which were made by the said assessee to obtain consulting report/ feasibility study on connected business activity, which was ultimately abandoned can be debit under the head “legal and professional charges” as a revenue expenditure. - Decided in favour of assessee. Issues:Disallowance of legal and professional charges by the Assessing Officer.Analysis:The appeal was filed against the order passed by the Commissioner of Income Tax (Appeal)-34 for the assessment year 2013-14. The appellant, a non-banking financial company engaged in investments and financing activities, had filed a return declaring an income of Rs. 2,36,44,670/-. The Assessing Officer completed the assessment under section 143(3) after making disallowances on account of merger expenses and legal and professional expenses. The Commissioner partly allowed the appeal but confirmed the addition related to legal and professional charges paid to specific firms. The appellant contended that the expenses were incurred to explore a new business opportunity and should be allowed as legitimate business expenses.The appellant argued that the professional services were crucial in initiating negotiations for purchasing paper and considering taking over a company. Despite facing business restrictions, the appellant purchased paper worth Rs. 3,20,99,547/- from the same company in the subsequent year. The appellant emphasized that the Tax Authorities wrongly assumed that the services were not availed, questioning the need for external assistance. The appellant cited various judgments to support the claim that expenses of a similar nature have been allowed even if a project could not be undertaken.The Tribunal considered the arguments and observed that the Commissioner had stretched the rules of prudence in confirming the addition. The Tribunal noted that the purpose of engaging professional services is to understand the business landscape better and that failure in a specific business activity does not invalidate the need for such services. Additionally, the Tribunal highlighted that the expenses incurred for acquiring or taking over a company should be treated as revenue expenditure. Citing relevant case laws, the Tribunal concluded that the legal and professional charges should be allowed as revenue expenditure.In light of the above analysis, the Tribunal held that the Commissioner erred in confirming the disallowance of legal and professional charges made by the Assessing Officer. Therefore, the appeal of the assessee was allowed, and the disallowance was set aside.Conclusion:The Tribunal overturned the decision of the Commissioner and allowed the appeal, stating that the legal and professional charges incurred by the appellant should be considered as revenue expenditure. The Tribunal emphasized the importance of engaging professional services in business activities and highlighted that failure in a specific venture does not negate the legitimacy of such expenses.