Consultancy fees paid for studying & preparing a strategy to reduce cost of production is eligible for deduction: HC

Case details: CIT v. Telco Construction Equipment Co. Ltd. – [2021] 127 taxmann.com 488 (Karnataka)

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.

Case Review

• • • Radhasoami Satsang CIT [1992] 60 Taxman 248/193 ITR 321 (SC) (para 8), followed
    • Parashuram Pottery Works Co. Ltd. ITO [1977] 106 ITR 1 (SC) (para 8), followed

List of Cases Referred to

• • • Shree Choudhary Transport Company ITO [2020] 118 taxmann.com 47/272 Taxman 472/426 ITR 289 (SC) (para 5)
    • Director Prasar Bharati CIT [2018] 92 taxmann.com 11/255 Taxman 1/403 ITR 161 (SC) (para 5)
    • Pingle Industries Ltd. CIT [1960] 40 ITR 67 (SC) (para 5)
    • Bharat Earth Movers CIT [2000] 112 Taxman 61/245 ITR 428 (SC) (para 7)
    • Parashuram Pottery Works Co. Ltd. ITO [1977] 106 ITR 1 (SC) (para 7)
    • Life Insurance Corporation of India CIT [1996] 85 Taxman 313/219 ITR 410 (SC) (para 7)
    • Taparia Tools Ltd. Jt. CIT [2015] 55 taxmann.com 361/231 Taxman 5/372 ITR 605 (SC) (para 7)
    • Bombay Steam Navigation Co. [1953] (P.) Ltd. CIT [1965] 56 ITR 52 (SC) (para 7)
    • Empire Jute Co. CIT [1980] 3 Taxman 69/124 ITR 1 (SC) (para 7)
    • Radhasoami Satsang CIT [1992] 60 Taxman 248/193 ITR 321 (SC) (para 8)
    • Syeda Rahimunnisa Malan BI [2016] 10 SCC 315 (para 9)
    • CITv. Softbrands India (P.) Ltd. [2018] 94 taxmann.com 426/406 ITR 513 (Kar.) (para 9)