2024 (6) TMI 217 - AT - Income Tax

Legal expenses for investment evaluation deemed revenue expenditure, interest on mortgaged property loans allowed as business deduction

Bigway Marketing Private Limited Versus ACIT, Circle-5 (1), New Delhi

ITAT Delhi allowed the assessee's appeal on two grounds. First, legal and professional expenses incurred for evaluating potential investment in shares ... Nature of expenses - Professional Fee Disallowance - HELD THAT:- Tax authorities have failed to appreciate the nature of expenditure under the head ‘legal and professional expenses’ which were made as a preliminary step to make a conclusive decision as to perspective investment in the said company, should be made or not. In the present case, the actual action on the part of assessee was to purchase 2700 shares but to arrive at a decision, if any, expenditure is made, same would be revenue expenditure. AO had fallen in error to hold that these legal and professional expenses have been solely undertaken to solicit help for acquiring capital assets and to treat it as capital expenditure. The reliance placed by learned AR on the judgment of Om Prakash Behl [1979 (9) TMI 16 - PUNJAB AND HARYANA HIGH COURT] is relevant wherein held that whether the claim in question is permissible under the provisions of Section 37 of the Act, we have to take the facts as they are. It is not open in law to investigate the motive of the assessee. We are concerned with the actual action on the part of the assessee and not the action which the assessee should have taken under the circumstances. It is not permissible in law, as the Tribunal has done, to bring in suppositions and then to find out whether the claim is allowable or not. As in the case of CIT vs. Karnataka State Industrial & Investment Development Corporation [1986 (2) TMI 16 - KARNATAKA HIGH COURT] held that expenditure in preparation of the object and feasibility report is revenue expenditure. Similar is the view of Sintex Industrial Ltd. [2017 (6) TMI 601 - GUJARAT HIGH COURT] - Thus, we are inclined to allow this ground. Disallowing interest expenses on loan against property - HELD THAT:- We are of the considered view that learned tax authorities had fallen in error in not taking into account the fact that investment of securities was one of the objects of the incorporation of the company. The rental income during the year was 3.09 crores, and the income from trading in securities was Rs. 100.36 crores. The loan taken against the mortgaged properties was used for the business purposes of the assessee for the purpose of trading securities. The same was allowable expense in the P & L account. Learned tax authorities had fallen in error and disallowed the same so ground no.2.1 is allowed in favour of the assessee. Issues involved: Appeal against order of Commissioner of Income-Tax (Appeals) regarding disallowance of professional fee and interest expenses u/s 143(3) of Income-Tax Act, 1961.Professional Fee Disallowance:The Assessee appealed against disallowance of professional fee for market research and acquisition expenses. The expenditure was incurred to decide on investment in a company, not for acquiring capital assets. Legal precedents were cited to support revenue expenditure treatment. The Tribunal allowed this ground based on the purpose of the expenditure and legal principles.Interest Expenses Disallowance:The Assessee challenged the disallowance of interest expenses on a loan against property used for investment in shares. Lack of evidence was cited as the reason for disallowance. However, the Assessee provided bank statements and other documents showing the loan was used for share investments. The Tribunal found the loan was used for business purposes related to trading in securities, making it an allowable expense. The appeal was allowed, and the additions were deleted.*Separate Judgment by Judges:*The judgment was delivered by Shri Anubhav Sharma, Judicial Member.