Amount paid to Consulting firm for sourcing a strategic investor

[Raam Srinivasan Swaminathan Kalpathi]

One of my clients have paid around Rs. 250 lakhs, lumpsum, to a consulting firm for sourcing a strategic investor for his business. The project was a success and the company has settled the bill of the consulting firm. The consulting firm invoice only states 'Project - success fees' with HSN/ SAC 998311. TDS was applied at 10% u/s.194J. My query to the learned panelists are: Can I claim this sum as a deduction for Income-tax purposes u/s.37? Thanks

[Padmanathan KV]

I do not see any restriction on claiming the consulting fee as deduction for Income Tax purpose. Any specific reason for the query?

[Raam Srinivasan Swaminathan Kalpathi]

The Income-tax auditors have opined that since the expenditure has been incurred for purposes of raising capital the same cannot be claimed as revenue expenditure.  Thanks

[Padmanathan KV]

The view of the Income Tax Auditors are supported by M/s. Inditrade Capital ltd v The ADCIT, Kochi - 2019 (3) TMI 2062 - ITAT COCHIN dtd. 01-03-2019, wherein it has been held:

We have heard the rival contentions and perused the record. In the present case, the assessee had incurred total expenditure of Rs.1,85,70,000/- for consultancy charges towards identifying suitable investor for the Company and this amount was paid to M/s. Veda Corporate Advisors Pvt. Ltd. in connection with whose efforts, M/s. Duckworth Limited had consequently invested Rs.49.83 crores in equity share capital and Rs. 6.4 crores approx. in convertible warrants invested in assessee's company. Out of Rs.1,85,70,000/-, the assessee apportioned Rs.1.10 crores to a Group company. Thus, the assessee claimed expenditure of professional and consultancy charges of Rs.75,70,000/- as revenue expenditure in the hands of the assessee. Consequent to incurring this expenditure, assessee's capital was enhanced from Rs.24 crores to Rs.80.50 crores. The claim of the assessee that the entire expenditure incurred towards consultancy charges which resulted in enhancement of share capital is of revenue nature, is devoid of merit. In our considered opinion, expenses which are incurred in connection with increase in share capital base of the company, are obviously capital in nature. This view of ours is fortified by the judgment of the Supreme Court in the case of Brooke Bond India Ltd. vs. CIT (225 ITR 798) (SC) wherein it was held that any expenditure incurred by a company in connection with the issue of shares with a view to increase in share capital is directly related to the expansion of the capital base of the company, and in profit making. The order of the CIT(A) is in conformity with the judgment of the Supreme Court in the case of Brooke Bond India Ltd. cited supra. Hence, we do not find any infirmity in the order of the CIT(A) and the same I.T.A. Nos. 356&357/Coch/2017 & C.O. No. 03/Coch/2018 is confirmed. This ground of appeal of the assessee is dismissed. The appeal of the assessee in ITA No. 357/Coch/2017 is dismissed.

Herein the Hon'ble Tribunal has extended the ratio of Brooke Bond India Ltd. judgement even to consultancy charges for identifying suitable investors.

[Raam Srinivasan Swaminathan Kalpathi]

Thank you Sri.Padmanathan.  Grateful and most obliged.

AI Summary

Capital vs revenue classification: consultancy fees for sourcing investors treated as capital, therefore not deductible under tax law. Consultancy fees paid as a success fee for sourcing a strategic investor are contested as revenue deductions; auditors and a tribunal applying the Brooke Bond principle treat expenses incurred to increase share capital as capital in nature. Accordingly, fees paid to identify investors are regarded as capital raising costs and are not allowable as revenue deductions, despite invoice coding and withholding under professional fees.