Judiciary and Counsel Details
- Alok Aradhe & Nataraj Rangaswamy | JJ.
- I. Sanmathi| Adv. for the Appellant
- Shankar| Sr. Counsel and M. Lava | Adv. for the Respondent
Facts of the Case
Assessee was a limited company carrying on manufacturing, purchasing, and selling excavators, loaders, cranes, dumpers and spare parts, etc. Assessee filed its return of income. The return was processed under section 143(1). Thereafter, the case of assessee was selected for scrutiny. The Assessing Officer (AO) completed the assessment and passed an order making disallowance of 4/5th of the consultancy charges.
Revenue contended that the consultancy charges paid by assessee were in respect of study report to relocate its sources and increase the company’s profitability. Therefore, the same will result in enduring benefit to assessee, and as such, the same had to be treated as capital expenditure.
However, the copy of the management proposal and study of the same shown that consultancy services were engaged for profitability study of cost reduction initiative for sustained profitability, which conferred a benefit of enduring nature to assessee over a period of time. Therefore, the same couldn’t be held as revenue expenditure. CIT(A) deleted the additions which was approved by ITAT as well. Aggrevied-revenue filed the instant appeal before High Court.
High Court Held
On appeal, Karnataka High Court held that the CIT(A) had deleted the additional expenditure incurred towards the cost reduction initiative for sustained profitability. Therefore, the provisions of Section 35D did not apply to the case as it was not the case of the pre-initial activity or setting up of a new capital asset. ITAT has affirmed the aforesaid finding in appeal and had held that the consultancy fee paid by assessee was for studying and preparing a strategy to reduce the cost of production by assessee. It had further been held that no new asset came into existence and the study conducted was only for improving the sales and profitability of assessee.
The concurrent findings of fact recorded by CIT(A) and ITAT could not be demonstrated to be perverse. Therefore, no interference was to be made in aforesaid concurrent findings of fact. Accordingly, assessee’s claim for expenditure on account of payment of consultancy fees was allowed.