Legal charges paid to bring in existence a new business opportunity in existing business a revenue expenditure

The Income Tax Appellate Tribunal (ITAT) in the matter of M/s. Esteem Finventures Limited Vs. ACIT ruled out that Legal & professional charges paid to bring into existence a new business opportunity in the existing line of business are allowed as revenue expenditure.

The facts in brief are that appellant company is a non banking financial company NBFC and is engaged in the business of investments and financing activities. Return declaring an income of Rs. 2,36,44,670/- was filed on 29.09.2013. The case was selected for scrutiny. The AO completed the assessment u/s 143(3) vide order dated 31.03.2016 after making disallowance on account merger expenses at Rs. 7,67,790/- and on account of legal and professional expenses at Rs. 35,45,352/-.

In appeal the ld. F.A.A. while partly allowing the appeal had confirmed the addition to the extent of Rs.22,45,508 which related to legal and professional charges paid to M/s. Khaitan Sud & Partners of Rs. 15 lacs and M/s. Sapphaire Professional Services Rs. 7,45,508/-.

The Coram Found out that, “Ld. CIT(A) has also fallen in error in observing that as expenses were incurred for acquiring or taking over of the company they could not be revenue in nature and not allowable as claimed by the appellant. Backward or forward integration of the activities of a manufacturing business cannot be considered to be establishment of a new enterprises to consider such legal and professional expenses to be for acquiring new assets and to not treat them revenue expenditure. Hon’ble Delhi High Court in Commissioner of Income Tax vs. Priya Village Roadshows Ltd. (supra) has held that expenses incurred in preparation of feasibility report in the same line of business has to be treated as revenue expenditure. In this judgment itself Hon’ble High Court has also taken into consideration that if the project is shelved that does not make the expenditure made upon feasibility study to be disallowed as business expenditure u/s 37 of the Act. Relying this judgment a Co-ordinate Bench in the Krishak Bharati Cooperative ltd. vs. Jt. Commissioner of Income Tax (supra) had held that the expenditure which were made by the said assessee to obtain consulting report/ feasibility study on connected business activity, which was ultimately abandoned can be debit under the head “legal and professional charges” as a revenue expenditure.”

The Authority rule out that, ” In the light of aforesaid the grounds raised are sustained as Ld. CIT(A) has erred in confirming the disallowance of Rs. 22,45,508/- out of legal and professional charges made by the Ld. AO. The appeal of assessee is allowed.”

The Judgment was made by R.K.Panda and Anubhav Sharma.

The Petitioner was represented by Sh. Ved Jain and Sh. Vivek Vardhan.