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2016 (1) TMI 1021 - ITAT MUMBAI

2016 (1) TMI 1021 - ITAT MUMBAI - TMI - Expenditure in respect of project management study - revenue v/s capital - Held that:- The expenditure under consideration, in our considered view, did not give rise to creation of a capital asset. It would, at the most, give operational efficiency to the assessee company. The assessee company is already in business. The Ld. CIT(A) has also accepted these facts correctly. The only objection of Ld. CIT(A) that project management study is intended to drastic .....

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#8377; 4.21 crores in respect of project management study, are revenue in nature. Disallowance made by the AO in this regard is deleted. - Decided in favour of assessee

Nature of expenditure - revenue v/s capital - Held that;- CIT(A) has rightly observed that the AO has not questioned the revenue nature of these expenditure but held that as part of expenditure has been incurred for unutilized space, it had to be disallowed as capital in nature. The issue cropped up only because the as .....

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our view, Ld CIT(A) is legally and factually correct in holding that the fact that some space, which the assessee had taken on lease, remained unutilized, does not alter the nature of expenses it had incurred. We agree with the findings of Ld CIT(A) that the nature of expenses is revenue and have been incurred for the purpose of business, and therefore, the conclusion of the AO that expenses pertaining to unutilized space was capital in nature, is not correct.- Decided in favour of assessee

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ated that the three new lines are in the nature of IT enabled services, which is regular business run by it. The control and management is same for all the 17 lines, which constitutes the business activities. No fresh capital has been sourced to commence these new activities and the profits from all the activities are consolidated and reported together. It is worth noting that, as was submitted by the assessee company, all these expenses have been recovered subsequently in the normal billing cyc .....

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ndent : Shri S.S. Kumaran (DR) ORDER Per Ashwani Taneja (Accountant Member): These are cross appeals and cross objections, filed by the Assessee and the Revenue against the order of Ld. Commissioner of Income Tax (Appeals) -17, Mumbai {In short, CIT(A) }, for the assessment year 2003-04 dated 29.03.2006, decided against the assessment order passed by the Assessing Officer (in short AO ) u/s 143(3) of the Act. We first take up Cross Objection filed by the Assessee: 2. It is noted that the cross o .....

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eal memo are reproduced below: Aggrieved by the order passed by the Commissioner of Income-tax (Appeals)-17, Mumbai [hereinafter referred to as the learned CIT(A)], under section 250 of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, J.P. Morgan Services India Pvt. Ltd. [hereinafter referred to as 'the Appellant'] respectfully submits that the learned CIT(A) erred in partly upholding the order of the Income-tax Officer- Range 8(2)(2), by treating an a .....

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he appeal, so as to enable the Honourable Income-Tax Appellate Tribunal to decide this appeal according to law. 4. During the course of hearing, it was noted that assessee had filed following grounds as additional grounds vide its letter dated 30th December 2013: 1. The disallowance of Project Management Study Fees of ₹ 4,21,00,000 by the Income-tax Officer -8(2)(2), Mumbai ("the ITO") as capital expenditure, ought to have been deleted, as the same was illegal, void-ab initio and .....

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d the disallowance of expenditure of ₹ 75,99,000 in connection with new service line cost as capital expenditure by the ITO, ought to have been held as illegal, void-ab initio and without/in excess of jurisdiction, inter-alia, as: i) it was made by the ITO pursuant to directions given to him by the TPO; ii) in any event and without prejudice to (i) immediately above, the aforesaid directions of the TPO were themselves illegal, void-ab initio and without/ in excess of jurisdiction. 4.1. It .....

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Thermal Power Co. Ltd. vs. CIT 229 ITR 383. On the hand, Ld. DR submitted that additional grounds raised by the assessee may be admitted so long as these do not require any investigation of fresh facts. 4.2. We have heard both the sides on this issue, and it is noted by us that the additional grounds raised by the assessee are purely legal and do not require any investigation of fresh facts. Thus, in view of judgment of Hon ble Supreme Court in the case of National Thermal Power Co. Ltd., supra .....

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jection raised by the Ld. Counsel was that since the TPO had no jurisdiction to issue any such directions to the AO, these were bad in law and all subsequent proceedings taken by thereafter in this regard, including the query letters issued by the AO on the impugned issues were bad in law, and further, the disallowance/additions made by the AO in the assessment order, having been made on the basis of these directions of the TPO, were illegal and void ab initio. Ld. Counsel has drawn our attentio .....

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.09 lakhs, to arrive at a finding whether this expenditure is to brought to tax or not. 5.1. It was argued by the Ld. Counsel that these observations made by the Ld. TPO in its order, constitute directions , which the TPO was not authorised to give to the AO. It was further submitted that immediately after receipt of the TPO s order, Ld. AO was prompted to issue query letter to the AO dated 08.03.2006 (i.e. within five working days), on the issues as were suggested by the TPO in its order. Our a .....

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at these observations given by the TPO in its order were not any kind of directions . It was further submitted that these observations were not binding upon the AO. It was also submitted that AO had given opportunity to the assessee and inquiries were made independently. Lastly, it was submitted by the him that even if these direction were expunged, the AO had inherent jurisdiction to examine these issues in the course of assessment proceedings carried out u/s 143(3), as the law has given ample .....

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and sound reasoning and therefore, these should be dismissed. 5.3. We have heard both the sides and gone through the material placed before us. In our considered opinion, Ld. Counsel has misunderstood or mis-appreciated the facts of the case and conceptual frame work of law on this issue. Firstly, the observations made by the TPO in its order were not any sort of directions . These may at the best constitute suggestions to the AO. Ld. Counsel has vehemently relied upon the judgment of Hon ble Bo .....

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rd the reasons comprising of belief formed by the AO for escapement of income of assessee. In that context, it was held by the Hon ble High Court that the belief made by the AO should be independent and on the basis of application of own mind of the AO, and that it should not be on the basis of directions of any superior authorities. Thus in this specific context, it was observed by the Hon ble High Court that belief of escapement of income must be determined by the AO himself and he cannot blin .....

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nd u/s 147 are totally different. There is no such obligation of formation of belief and recording of reasons for initiation of proceedings u/s 143(3), as are required in the proceedings initiated u/s 147. It is worth noting that proceedings initiated under section 147 for reopening of an already concluded assessment, have been couched by the legislature in a special framework of provisions contained in sections 147 to 151 of the Income Tax Act, 1961. All these provisions provide some fetters on .....

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sessee and taxable payable thereon, as per law. Thus, in our considered view, both the situations are not comparable, on the angle as suggested by Ld Counsel, and therefore, his submissions on this issue are not acceptable under the law. Further, without prejudice, even if we expunge the directions of the TPO, we find that AO has requisite powers under the law, de-horse the impugned directions of TPO, to examine the impugned issues during the course of assessment proceedings and making assessmen .....

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ct of fee paid for project management study, by treating the same as capital expenditure. 6.1. During the course of assessment proceedings it was noted by the AO that the assessee has claimed an amount of ₹ 4.21 crores being consultancy charges paid to M/s. Mckinsay & Co. for project management study. It was noted by the AO that the study was undertaken for addressing the matters relating to programme management methodology and defining a preliminary roadmap covering issues such as sit .....

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t the impugned payment was on account of revenue expenses and AO has wrongly treated the same as capital expenditure. Reliance was placed by the assessee on various judgments in support of its claim. However, Ld. CIT(A) was not convinced with the arguments of the assessee. It was held by him that Project Management Study was intended to enhance the level of activity of the assessee company in India, with view to take advantage of business opportunity available in India, this would in turn mean t .....

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t management study was undertaken by Mckinsey for preparing a programme management methodology and preliminary strategic road map showing the potential risks and rewards of significantly increasing operational volumes over the subsequent years. It was submitted that the terms of specific consideration for JPM Services, the report broadly highlighted the following aspects: a. Potential opportunities to increase business by developing additional resources and ramping up the existing operations. b. .....

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ion of a project management or feasibility report, especially where it is incurred in connection with an existing business, constitutes revenue expenditure. Ld. Counsel, placing reliance on various decisions in his favour, drew our attention on the propositions held in the decisions of DCIT vs Assam Asbestos Ltd 263 ITR 357, ITO vs Jacob Pacadiyil 43 ITD 459, Usha Alloys and Steels Ltd vs DClT 55 ITD 418 and Kesoram lndsutreis and Cotton Mills Ltd vs CIT 196 ITR 845. It was submitted that in Emp .....

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g to the facts of this case, submitted that the expenditure incurred by the assessee company on project management report did not bring into existence any asset or advantage of an enduring nature and merely sought to provide the management with an insight into Indian outsourcing industry so as to enable the management to conclude whether it would be advisable to expand the business while still achieving the same or better levels of efficiency and profitability, and hence the expenditure should b .....

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before us page no. 25 of the paper book, to argue that prima facie it appears that expenses were incurred for starting a new project, and therefore, these expenses were capital in nature and not allowable against the income of the current year. Reliance was placed on the detailed observations of the AO and findings of the Ld. CIT(A), and it was submitted that the orders of the lower authorities should be upheld on this issue. 6.6. We have gone through the arguments made by both the sides, order .....

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nterconnection, interlacing and interlocking of the funds and common management in the existing business and the proposed new project of the assessee company. Although, the assessee s stand is that there was no new business under consideration, but it was expansion of the existing business only, that was under consideration. On this issue, under these facts, the law laid down in the judgments relied upon by the Ld. Counsel, as mentioned in the above para, is clear. The view, emerging from the pe .....

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connection with preparation of survey and feasibility report and various technical services for setting up a project would be revenue in nature, so long as the assessee is already in business. In the case of Assam Asbestos Ltd 263 ITR 357, expenses incurred by the Assessee in connection with survey and feasibility report to establish a mini cement plant to feed its asbestos unit were held as revenue expenses by Hon ble Gauhati High Court, as it did not bring into existence of new fixed capital. .....

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in connection with proposed cement factory project, were found to be expenses pertaining to exploring the feasibility of expanding or extending the existing business and were therefore held to be allowable deduction. 6.7. Now, we shall deal with reasoning of Ld CIT(A) to treat these expenses as capital in nature and his objections in accepting the claim of the assessee for treating them as revenue in nature. For this purpose, we have further analysed, some more fatcs with respect to nature of th .....

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ompany, for preparation of programme management methodology and primary strategic road map, highlighting the potential risks and rewards of significantly increasing operation volumes of the assessee in subsequent years. It was submitted to us that, in nutshell, the object of obtaining the aforesaid study report was to enable the assessee company to understand whether it would be beneficial to step up the operations or to continue operating at the same levels. In our considered view, undoubtedly, .....

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ivity in India with a view of taking advantage of business opportunity available in India, which would in turn mean that the nature of advantages which assessee would derive, would be enduring in nature, and therefore, expenses of project management study should be treated as capital expenditure. In our view, here at this stage, while drawing conclusion, Ld. CIT(A) has gone wrong, in appreciating the correct legal position. The facts were analysed by the Ld. CIT(A) in the right context. But, wha .....

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incurred in the form of payments made on the account of salary to the employees or expenses incurred on training of the employees. In such a situation, after getting the training, the employees may provide useful contribution to its employer-organization in the longer period, thereby providing benefits of enduring nature. We can take another example of expenses incurred on advertisement; these also provide benefits of enduring nature in the longer term. There can be numerous other examples of s .....

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Court in the case of Empire Jute Co. Ltd. vs CIT 124 ITR 1. In our considered opinion, before the expenditure can be put into capital field, it has to pass the twin tests i.e. onethe expense should provide benefit of enduring nature, and two- the expense should give rise to creation of a capital asset. Unless both the ingredients are present, cumulatively, the expense cannot be put into the capital field. 6.8. Coming back to the facts of the case; the expenditure under consideration, in our con .....

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specially in the given facts and circumstances of this case. Therefore, keeping in view the facts and circumstances of the case and the judicial pronouncements, as were relied upon by the Ld. Counsel in the submissions made before Ld. CIT(A) and before us, we hold that the expenses incurred by the assessee for an amount of ₹ 4.21 crores in respect of project management study, are revenue in nature. Disallowance made by the AO in this regard is deleted. Thus, the ground raised by the assess .....

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n the circumstances of the case and in law, the CIT(A) erred in holding expenditure relating to setting up new service lines amounting to ₹ 75,99,000/- as revenue in nature, without appreciating the fact that the expenditure would give the assessee enduring benefit and hence the A.O. rightly treated the same as capital in nature. 8. Ground No.1: In this ground, Revenue has challenged the action of Ld. CIT(A) in treating expenses of ₹ 1.79 crores as revenue in nature. 8.1. It was obse .....

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ious costs in the nature of rental expenses, facility management, depreciation on leasehold and furniture and fixture, utilities costs and repairs & maintenance for the purpose of its business. The assessee company also submitted that these being routine business expenses of the company, werer accounted under the respective heads viz. rent, repairs and maintenance etc. However, as parts of the premises were vacant for a period of time, the above costs in this regard could not be recovered by .....

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. In view of these facts, it was held by the AO that firstly the expenses do not partake the nature of revenue expenses since it could not be established that the expenses pertain to the assessee's business, and therefore these should have been charged to the clients. Secondly, without prejudice to the above, as confirmed by the assessee also, the assessee company was in the expansion stage, and therefore, viewd from this angle also, these were capital expenditure and not revenue. As per AO, .....

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CIT(A). It was submitted that the assessee while setting up unit-II, had planned its operation and infrastructure in a manner taking into account the growth of the business and anticipated expansion plans. However, being the initial years of operation, some of the facilities remained unutilized for various reasons. All the facilities, although not fully utilized, were nevertheless utilized for the purpose of business. The assessee, for services rendered to its overseas entities, recovers its fe .....

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IT 253 ITR 26 ii)CIT vs. Western India Sea Food (F) Ltd. 199 ITR 77 iii) Juderchand Harisam vs.CIT 23 ITR 437 iv) CIT vs. Malayalam Plantations 53 ITR 140 8.3. In view of the submissions of the assessee and case laws relied upon therein, Ld. CIT(A) held that these expenses were revenue in the nature and were incurred for the purpose of business, and accordingly, addition made by the AO was deleted by him. 8.4. We have gone through submissions made by both the sides very carefully and the orders .....

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quired the AO to determine the nature of some of the expenses. The assessee being in initial years of operations, was in expansion mode and necessarily had to take on lease extra space anticipating business in future. It appears that anticipated business took time while the assessee had to incur the expenditure which it had committed. In our view, Ld CIT(A) is legally and factually correct in holding that the fact that some space, which the assessee had taken on lease, remained unutilized, does .....

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cannot be treated as capital in nature, at all. Therefore, in view of the detailed reasoning as given by us in para 6.7. of this order, findings of Ld. CIT(A), the facts and circumstances of this case and well settled position of law, it is held that the amount of ₹ 1.79 crore being the expenses incurred by the assessee is revenue in nature and Ld. CIT(A) has rightly deleted the disallowance made by the AO. No interference is called for in the order of Ld. CIT(A) and the same is upheld, an .....

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ained that the assssee company has been in a stage of continuous expansion since its incorporation. It has been adding various services lines to its business from time to time. During the previous year relevant to the assessment year under consideration, the assessee company added following three new service lines in addition to its existing service lines viz: 1. Commercial Loan Services 2. Provision of services in relation to brokerage 3. Call centre services The company had incurred various co .....

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ny has added three new different service lines in its own business, and since any new services introduced by the company is a new venture in itself, and therefore the expenses incurred for setting-up the new venture are nothing but capital expenditure, and accordingly this amount was treated as capital expenditure and added back to the total income of the assessee by the AO. 9.1. Being aggrieved, the assessee contested this matter before Ld. CIT(A), wherein it was submitted that the assessee com .....

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rendered by the client continue to remain a new venture. The inherent nature of the IT enabled service consists of receipt of data, processing the same and delivering the processed data to the client. These activities are carried out using the computers, leased lines and technology. It was submitted that in view of these facts, the formation of new teams does not mean that the assessee had entered into a new venture. In the year under consideration, the assessee was engaged in rendering 17 types .....

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ertaken by an assessee may be viewed as same business. Taking help from these decisions, it was argued that the new lines were not new venture or business commenced by the assessee, but merely a new line of business within the realm of the IT enabled services rendered by it to its group entities located worldwide, due to the following reasons: a) The support services rendered under the commercial loan segment, brokerage segment and call centre service line of business were actually part of bssin .....

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ic facilities provided for these new lines of business are costs similar to the costs required for running other lines of business under the IT enables services f) Further, the expenditure incurred by the assessee on these new lines of business have not brought into existence any capital asset. In view of the aforesaid facts, it was submitted that the expenses incurred by the assessee were expenses incurred in rendering services under new lines of business as against expense for setting up new v .....

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osts incurred. In view of the above, it was argued that the expenses in the nature of salary and facilities costs could by no stretch of imagination be regarded as capital expenditure. 9.2. After considering detailed submissions of the assessee, it was found by the Ld. CIT(A) that these expenses were revenue in nature and therefore, disallowance made by the AO was deleted by him, after recording detailed findings and passing a well reasoned order considering aforesaid facts, and endorsing the su .....

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