Commissioner of Income Tax-I vs Gujarat Urja Vikas Ltd.

Sonia Gokani, J.

Following is the substantial question of law raised by the Revenue, while challenging the order of the Income Tax Appellate Tribunal, Bench "C", Ahmedabad ("Tribunal" for short) dated 30th September, 2013, while preferring the present Tax Appeal under Section 260A of the Income-tax Act, 1961 ("the Act" for short).

"Whether on the facts and circumstances of the case and in law, the ITAT was justified in deleting the disallowance of expenditure of Rs. 6,60,52,000/- claimed by the assessee, without appreciating that the impugned expenditure was necessitated due to the coming into existence of the new entity i.e., the resulting assessee company consequent upon demerger and therefore, the A.O. had rightly treated it as capital expenditure."

Brief facts necessary for adjudication are as follows:

"2.1 The assessee company is engaged in the business of generation, transmission and distribution of electricity in the State of Gujarat. The erstwhile Gujarat Electricity Board in a process of restructuring was demerged into seven different companies. Gujarat Urja Vikas Limited ("GUVNL" for short) was assigned the function of bulk purchase and sale of power. The return of income filed by the respondent-assessee on 31st December 2006 for the A.Y. 2006-07 declared total income at Rs. Nil and the book profit was shown at Rs. 77,76,44,000/- and the same was revised later on 26th October 2007 on account of some error in computation and the same had been reduced to Rs. 72,68,26,004/-.

2.2. Such return was processed under Section 143(1) of the Income-tax Act, 1961 ("the Act" for short). However later, the same was scrutinized and in scrutiny assessment order under Section 143(3) of the Act came to be passed on 26th December 2008. The total income of the assessee was computed and so was the book profit under Section 115JB of the Act."

The Assessing Officer was of the opinion that an expenditure of Rs. 606.52 lacs claimed under "Legal & Professional Fees" pertained to reorganization of the business of erstwhile Gujarat Electricity Board by way of demerger and also included expenditure pertaining to issue of allotment of shares; expenditure pertaining to Internet Bandwidth, supply and installation of software, legal and professional fees in respect of restructuring, etc. These expenses according to the Assessing Officer were not the business expenditures, but, were capital in nature. Accordingly, the total amount of Rs. 606.52 lacs had been disallowed.

Aggrieved assessee preferred appeal before the Commissioner of Income-tax (Appeals). CIT(A) extensively dealt with the issue and held in favour of the assessee holding that Messrs. Crisil Limited and Feedback Ventures Limited were paid certain amounts for preparation, finalization and for filing of the annual revenue requirement (ARR), petitions before GERC, for preparation of short-term power purchase agreements and for formulating strategies for demand side management. Moreover, other expenses were neither covered nor could be categorized as capital in nature.

CIT(A) when allowed the appeal of the assessee-respondent and held that the payments made were not capital in nature, the Department chose to challenge such order by preferring appeal before the Tribunal.

The Tribunal concurred with the findings of CIT(A) and dismissed the appeal of the Department, and therefore, the present Appeal raising aforementioned substantial question of law.

We have heard extensively learned standing counsel Shri K.M. Parikh for the Department and Mr. Manish J. Shah, learned counsel for the respondent-assessee. Both have fervently made submissions in support of their respective claims.

6.1 It could be noticed from the material on the record that the respondent No. 1 is one of the resulting companies from the demerger of erstwhile Gujarat Electricity Board into seven companies. A.Y. 2006-07 was the first year of the existence of the respondent Company in wake of directions issued by the GERC and Gujarat Electricity Regulation Commission, demerger took place. It appears that Messrs. Crisil Limited & Feedback Venture Limited were paid certain amount for preparation, finalization and filing of annual revenue requirement (ARR), petitions were preferred before GERC for preparation of short term power purchase agreements, and for formulating strategies for demand side management.

6.2 M/s. Gujarat Info Petro was paid fees for supporting LAN network, providing IT professionals for facility management service, coordination with BSNL for interest connectivity and for providing and up-grading interest bandwidth.

6.3 Likewise, GERC was paid fees for approval of power purchase agreements and license fees for intra-state trading. Such license fees are payable annually. Concerned advocates also were paid professional and consultancy fees for advice on statutory and regulatory issues and for representing the respondent-assessee in various matters before the Courts of law. Moreover, for representing the respondent-company, professional fees were paid to the senior advocates of the Gujarat High Court in the matter relating to Letters Patent Appeal and Special Civil suits. For restructuring the high cost debts, Messrs. Allianz Securities Limited were paid professional fees. For proper maintenance of EPBX system and WAN network systems, Messrs. Siemens Limited were paid annual maintenance contract charges. It was the case of the respondent that none of these investments could be said to be capital in nature for not having any enduring benefit. CIT(A) and Tribunal both have accepted such interpretation by upholding the say of the respondent-assessee.

It would be profitable to summarily reproduce the details of the legal and professional expenditure amounting to Rs. 660.52 lacs, as was submitted before the Assessing Officer, which reads thus -

7.1 It is worth noting here that except for a sum of Rs. 1.10 Crores [rounded off] said to have been expended towards IT system maintenance, learned counsel for the Department has hardly any resistance in treating such amount as business expenditure. As could be noticed, the particulars at serial Nos. 1 & 2 represent expenditure of Rs. 90.61 lacs and Rs. 86.25 lacs [rounded off] are towards consultancy charges. Item No. 4 is "Filing Fees" given to GERC. Item No. 5 is the legal consultancy fees to advocate. Likewise, particulars in item Nos. 6 & 9 are again respectively toward "Finance consultancy and IT consultancy charges". Likewise, Item Nos. 7 & 8 are also "advocate fees" paid to counsel to represent the respondent-assessee before the Gujarat High Court in Letters Patent Appeal as well as Special Civil Suits. Wherever, there was a legal consultancy or fees paid to the advocates, there is hardly any dispute that such fees cannot be said to have been capital in nature. The only emphasis is on the sum of Rs. 1.10 Crores which has been spent towards IT system by Gujarat Info Petro Limited. As could be noticed, this was for the purpose of supporting LAN networking for providing IT professional facility management service and also for coordination with BSNL for internet connectivity and providing IT providing and upgrading internet band with. It can be noted that such consultancy work and preparation of ARR can be said to be connected with the business of the assessee.

Before dilating further on this issue, a reference needs to be made in this regard to the decision in case of Commissioner of Income Tax-III Vs. Gujarat Narmada Valley Fertilizers Co. Ltd., wherein question was with regard to payment to financial consultants for professional services in connection with the corporation debt restructuring by negotiating with Banks and Financial Institutions. Such expenditure was considered for the purpose of business and allowable in entirety in the year in which it was incurred and it was held to be revenue in nature and not capital.

Reference to a decision of Supreme Court in case of M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I, Madras, where the Apex Court was deciding whether a particular expenditure was revenue expenditure incurred for the purpose of business or capital in nature. Such question needs to be determined on a consideration of all the facts and circumstances of the case and by application of the principle of commercial expediency. This Court answered the question as follow:--

"4.3 In the present case also, the CDR expenses to the tune of Rs. 2.57 crores have been rightly held by both the Commissioner of Income-tax (Appeals) and the Tribunal as revenue in nature and the same has rightly not been held to be capital in nature. For the waiver of the loan, the payment has been made to the financial consultants. This was for the purpose of business and the same was held to be allowable under section 37(1) of the Act. Having held the said amount to be revenue in nature applying the decision of the Supreme Court in the case of Madras Industrial Investment Corporation Limited (supra), when the amount has been spread over a period of six years, no error is committed by both the authorities. Once the expenditure is held to be revenue in nature incurred wholly and exclusively for the purpose of business, it can be allowed in its entirety in the year in which it is incurred. However, considering the decision in the case of Madras Industrial Investment Corporation Limited (supra), when the spreading is done for over a period of six years and as the assessee-respondent has no objection to such revenue expenditure being spread out, though it could have insisted for this amount allowed in the year under consideration, with no such objecting having been raised, the Revenue would not succeed in this issue as the expenditure is held to be revenue in nature. Thus, the second question also does not merit any consideration."

In the instant case also, this decision would have a direct applicability particularly when expenditure in incurred for the purpose of business. Considering the principle of commercial trading, when the question is to be addressed, both the CIT(A) as well as the Tribunal rightly held it to be revenue in nature and the same cannot be said to be capital. It is quite apparent that the fees paid for support for LAN work; providing and upgradation of Internet Bandwidth, or for coordination with BSNL for internet connectivity, etc are not having any enduring benefit. If any consultancy is required for the said purpose, the amount clearly would come under the head of Consultancy and that surely could not be considered as capital in nature. In the present form, the expenditure made was at the best for continuing the benefit for one year. Resultantly, such payment cannot be categorized as capital in nature as no asset is brought into existence on account of such payment.

No interference therefore is warranted in the decision of the Tribunal. Tax Appeal is dismissed and disposed of accordingly.