2023 (10) TMI 1036 - AT - Income Tax

Tribunal Reverses Disallowance: Due Diligence Costs for Acquisition Are Revenue Expenditure, Not Capital. AO to Allow Deduction.

Shrimp Improvement Systems India (P) Ltd, C/o. Lall & Company Versus DCIT, Circle-23 (1), New Delhi

The Tribunal in ITA No. 6265/Del/2019 for AY 2016-17 reversed the disallowance of Rs. 1,00,89,351/- as capital expenditure by the Assessing Officer and ... Nature of expenses - due diligence expenses under the head “exceptional items” - revenue or Capital expenditure - HELD THAT:- We find that this issue is no longer res integra in view of the decision of Onmobile Global Ltd [2021 (1) TMI 923 - KARNATAKA HIGH COURT] wherein, it was held that the expenditure incurred by the assessee for conducting due diligence of a company which was eventually acquired by the company to be allowable as revenue expenditure. Further, we find that in the case of PCIT Vs. Vaibhav Global Ltd [2021 (12) TMI 1407 - RAJASTHAN HIGH COURT] had also held under similar circumstances, the expenses incurred thereon to be revenue expenditure u/s 37 - Decided in favour of assessee. Issues involved:The only issue in this case is whether the Commissioner of Income Tax (Appeals) was justified in confirming the disallowance of Rs. 1,00,89,351/- as capital expenditure.Summary:Issue 1: Disallowance of capital expenditureThe appeal in ITA No. 6265/Del/2019 for AY 2016-17 concerned the disallowance of Rs. 1,00,89,351/- as capital expenditure. The assessee, engaged in aquaculture and fisheries business, had claimed this amount as due diligence expenses under 'exceptional items.' The expenditure was related to the acquisition of another company, Samudra Hatcheries Pvt. Ltd, to increase production and supply of shrimps in the local market. The Assessing Officer disallowed the claim, considering it as capital expenditure. This decision was upheld by the Commissioner of Income Tax (Appeals).The Tribunal referred to a decision by the Hon'ble Karnataka High Court in a similar case, where it was held that expenditure incurred for conducting due diligence of a company, eventually acquired by the assessee, should be treated as revenue expenditure. The Tribunal also cited a decision by the Hon'ble Rajasthan High Court supporting the treatment of such expenses as revenue expenditure under section 37 of the Income-tax Act, 1961. While the Revenue pointed out a decision by the Hon'ble Supreme Court, the Tribunal noted that the decision of the Hon'ble Rajasthan High Court, which favored the assessee, had not been stayed. Therefore, the Tribunal directed the Assessing Officer to allow the deduction for the due diligence fees paid to the professional amounting to Rs. 1,00,89,351/-.In conclusion, the Tribunal allowed the appeal of the assessee, directing the Assessing Officer to grant the deduction for the due diligence fees paid.