TMI Blog2010 (8) TMI 467X X X X Extracts X X X X X X X X Extracts X X X X ..... PER A.L. GEHLOT, A.M.: This appeal filed by the assessee is directed against the order of CIT(A)-XXIX, Mumbai, passed on 26.02.2008 for the assessment year 2004-05 wherein the assessee has raised the following grounds of appeal:- I. On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) XXIX ( the CIT(A) ) erred in upholding the action of the Assistant Commissioner of Income Tax, Range 8(3), Mumbai ( the AO ) in disallowing the marketing and business development expenses of Rs. 2,04,30,000, reimbursed to Indian Rayon Industries Ltd., on the alleged ground that the said expenses were not incurred wholly and exclusively for the purpose of the appellant s business. 2. The appellant prays that the said expenses were wholly and exclusively for the purpose of the business and, therefore, the AO be directed to allow the said expenses. 2. Briefly the facts of the case are that the assessee company is engaged in the business of information technology enabled services called call centre services. While going through the P L A/c, the AO noticed that the assessee had debited an amount of Rs. 2,12,28,726 as business promotion ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and viability of potential services for off-sharing Develop market entry strategy Building the business through customer needs Acquisition of BPO company mainly involved Detailed evaluation of all potential targets Advanced stage negotiation Final execution of MoU Customer building process mainly involved Client Identification and introduction Identification of processes of client to be outsourced Assessment of prospective client Client/Partner scoping and value proposition. Business Development Customer Building Process, for the purposes of this study was divided into two parts. The first one mainly carried out at the time when the main study of BPO business was taken up. The main study also required type and the nature of services which could be off-shored and for this purpose, it was even necessary to consider an evaluation of Customer operations. Accordingly, expenses in connection with Customer Building, which were under the first part, have been considered as being akin to the feasibility study and have been considered on the same lines that of the feasibility study. In the second part, the study of Customer Building process wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been not done by the assessee. What the assessee is doing is just accepting the debit note from M/s Birla Project Development Co. Ltd. and claiming the expenses on the basis of the said debit note. 4.3 Since the work was not given by the assessee company and the bills are not raised by Mc Kinsey Co. in the name of M/s Transworks Information, the expenditure as claimed by the assessee amounting to Rs. 2,04,30,000 cannot be allowed and the same is disallowed and added to the income of the assessee. Penalty proceedings u/s 271(1)(C) of the IT Act are initiated separately for furnishing inaccurate particulars of income and thereby concealing the income. 4. The AO held that the work was not given by Assessee Company and the bills were not raised by Mc Kinsey Co. in the name of M/s Transworks Information, i.e. the assessee, therefore, the expenses are not allowed. 4.1. The CIT(A) confirmed the order of AO after considering the decisions cited before him by observing that the business expenditure companies cannot be debited in the account of another company. While distinguishing the cases, on which reliance placed by the assessee, the CIT(A) observed that in those cases the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , relied upon the orders of revenue authorities and submitted that the basic question to be seen in this case is the scope of the contract with McKensey and Co. and the assessee. The revenue challenged the entire order for the amount of Rs. 1,103.33 crore including the claim of the assessee of Rs. 204.30 as revenue expenses. The assessee itself has capitalized Rs. 8 crore and odd therefore the AO has to examine only the claim of revenue expenses. The learned DR further submitted that the entire payment of Rs. 1,103.3 crore in respect of acquisition of company and the report of technical person Mr. B. Mehta referred by the learned AR is for the purpose of acquisition. The learned DR by referring the order of CIT(A) s order submitted that the assessee has disallowed the expenses on the ground that the original bills for expenses are not in the name of the assessee company. The learned DR further submitted that section 37(1) of the Act clearly provides that the expenses incurred wholly and exclusively for the purpose of the business is only allowable as revenue expenses. The learned DR submitted that the assessee never asked Mc Kenscy Co. to do any work for the assessee and no job ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is u/s 37(1). The said section 37(1) reads as under:- 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . 9. In order to claim deduction of expenditure under section 37(1) of the Act the assessee has to satisfy certain conditions. The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36. The expenditure should not be of the nature of capital expenditure;It should not be a personal expenditure; and the expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. It is thus clear that conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. For this purpose, BPDCL obtained an expert report on the expenses of BPO project from a Chartered Accountant, Mr. Bansi S. Mehta and Co. Mr. Bansi S. Mehta, Chartered Accountant given his report dated 16th September 03 of which a copy has been placed at page Nos. 22 to 58 of assessee s paper book. In the said report, it was advised that Rs. 2,04,29,981 is to be borne by the assessee company and the same is to be reimbursed to the BPDCL. Relevant portion of the report is reproduced below:- On the basis of our remarks and opinion for each of the items as specified in Para 3 above and in the light of the information provided to us and considering the limitations of the assignment, we are of the opinion that a sum of Rs. 2,04,29,981, subject to the assumption that such expenses would fructify, the benefit of which would accrue to Transworks Limited and accordingly, the same is to be borne by them and reimbursed to BPDCL. 12. From the above facts, we find that the expenditures were already incurred by another assessee i.e. BPDCL for the purpose of their own business. When the assessee company acquired by Indian Rayon Industries Ltd., it was decided to share those exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The expenses which have been thrust upon the assessee without establishing the fact that the expenses incurred wholly and exclusively for the purpose of business is not allowable expenses under section 37(1) of the Act. The contention of the assessee that the turnover had increased due to these payments of expenditure is not supported by material evidence. There is no material on record, which support that the turnover of the assessee had been increased only due to the fact that the BPDCL has incurred the impugned expenditure for assessee company. The so called services rendered against the payment pointed out by the assessee are general in nature. The assessee has failed to establish the nexus between those services and the payment made. The AO categorically had given his finding that It is claimed by the assessee that the job of customer development was given to Mc Kinsey Co., but the fact is that the job was given by M/s Birla Project Development Co. Ltd. for assessing of potentials of IT companies. The expenses were incurred by M/s Birla Project Development Co. Ltd., and not by Transworks Information Services Ltd. The AO noted that at the time of hearing before him the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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