2024 (9) TMI 277 - AT - Income Tax

Professional charges for identifying acquisition targets allowed as revenue expenditure under section 14A

Shiv Nadar and Sanjay Kalra Associates LLP, Versus The Asstt. Commissioner of Income Tax, Circle 1 (2) (2), Bangalore.

The ITAT Bangalore allowed the assessee's appeal regarding professional charges paid to Graymatter Solutions LLC, USA for identifying healthcare ... Nature of expenses - professional charges paid for identifying medical healthcare technology companies with feasible investments, growth potential, strategic value, etc. for the purpose of acquisition by the assessee - Capital or revenue expenditure - HELD THAT:- The amount paid to Graymatter Solutions LLC, USA towards professional charges for acquisition of new business in the area of healthcare technology companies and later on the purpose was not materialised. We also note from the order of AO that such expenses were not incurred in the previous year is not correct. In the financial statements produced before us for the AY 2016-17 the assessee has paid professional charges and it was placed before the AO too and no disallowance was made in the 143(3) assessment. There is no dispute regarding genuineness of transactions for services rendered. As relying on On mobile Global Ltd. [2021 (1) TMI 923 - KARNATAKA HIGH COURT] we hold that the payments made by the assessee are to be treated as revenue expenditure. Disallowance u/s. 14A - We found substance on the submission of the ld. AR that no disallowance u/s 14A of the Income Tax Act can be made if the assessee has not received any exempt income. Appeal by the assessee is allowed. Issues Involved:1. Violation of principles of natural justice.2. Legality of assessment framed in the name of a non-existent LLP.3. Disallowance of professional charges as capital expenditure.4. Disallowance under section 14A of the Income Tax Act.5. Levy of interest under sections 234A, 234B, and 234C.Issue-wise Detailed Analysis:1. Violation of Principles of Natural Justice:The appellant contended that the CIT(A) erred in dismissing the appeal without affording an adequate opportunity of being heard, which is a gross violation of the principles of natural justice. This issue was not specifically addressed in the judgment, suggesting that the tribunal did not find it necessary to delve into this procedural aspect given the substantive findings on other grounds.2. Legality of Assessment Framed in the Name of a Non-Existent LLP:The appellant argued that the assessment was framed in the name of a non-existent LLP, which is illegal and bad in law. The tribunal admitted this additional ground for adjudication following the Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. vs. CIT. However, since the appeal was allowed on other grounds, the tribunal left this legal issue open.3. Disallowance of Professional Charges as Capital Expenditure:The appellant contested the CIT(A)'s decision to confirm the disallowance of Rs. 1,26,31,525/- paid to M/s. Graymatter Solutions LLC, USA, as capital expenditure. The tribunal noted that the professional charges were paid for consultancy services aimed at identifying healthcare technology companies for acquisition. The tribunal found that similar expenses were allowed in the previous assessment year and that the nature of the expenses was revenue, not capital. The tribunal relied on the jurisdictional High Court judgment in CIT v. Onmobile Global Ltd., which held that expenses incurred for acquiring/extending new business should be treated as revenue expenditure. Consequently, the tribunal allowed the ground raised by the appellant on this issue.4. Disallowance Under Section 14A of the Income Tax Act:The appellant argued against the disallowance of Rs. 83,54,360/- under section 14A, contending that no exempt income was earned during the relevant assessment year. The tribunal noted that the financial statements confirmed the absence of exempt income and that the appellant had earned short-term capital gains on mutual funds. The tribunal relied on the jurisdictional High Court judgment in PCIT v. Delhi International Airport P. Ltd., which held that no disallowance under section 14A could be made if no exempt income was earned. Accordingly, the tribunal allowed this ground of appeal, finding the disallowance unjustified.5. Levy of Interest Under Sections 234A, 234B, and 234C:The appellant challenged the levy of interest under sections 234A, 234B, and 234C. The tribunal noted that the levy of interest is consequential in nature and did not provide a detailed analysis, implying that the outcome on this issue would follow the resolution of the substantive grounds of appeal.Conclusion:The tribunal allowed the appeal by the assessee, holding that the professional charges paid were revenue in nature and disallowance under section 14A was not justified in the absence of exempt income. The legal issue regarding the validity of the assessment order was left open. The levy of interest under sections 234A, 234B, and 234C was deemed consequential.