Infrastructure investment on leased property is a revenue-generating expense

Fact and issue of the case

These cross appeals filed by the assessee and Revenue are directed against the order of ld. CIT (A)-38, New Delhi pertaining to assessment year 2015-16.

The Revenue has taken the following grounds of appeal :-

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is right in deleting the addition made on account of disallowance of Infrastructure development expenses amounting to Rs.12,24,32,850/- which were considered by AO as capital expenditure.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is right in deleting the addition made by the Assessing Officer on account of disallowance made u/s 40(a)(i) of the I.T Act, 1961 of the Foreign Remittances (TDS u/s 195 not made) amounting to Rs.7,75,31,468/- .

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT (A) is right in deleting the addition made by the Assessing Officer on account of disallowance of loss on foreign currency fluctuation amounting to Rs.6,18,30,027/-.

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in reducing the addition made on account of other expenses amounting to Rs.21,68,000/- to Rs.10,84,000/- particularly when the expenses are not fully verifiable.

Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) is right in deleting the addition made by the Assessing Officer on account of disallowance of legal expenses amounting to Rs.11,56,765/- which was related to plant (capital expenditure).

The assessee has taken the following grounds of appeal :-

That Learned Commissioner of Income Tax (Appeal)-38 grossly erred in sustaining the addition of Rs.10,84,000/- in the assessment order passed by Ld. Assistant Commissioner of Income Tax Circle 4(1) Delhi u/s 143(3) of the I.T Act, 1961.

That Ld. CIT (Appeal) grossly erred both in law and on facts reducing the adhoc addition by 1% of total miscellaneous expenses from original disallowance at the rate of 2%.”

First, we take up Revenue’s appeal being ITA No.6680/Del/2019.

Apropos issue of addition made on account of disallowances of Infrastructure development expenses to Rs.12,24,32,850/- which were considered by AO as Capital Expenditure :

On this issue, AO noticed from the agreement of infrastructure development that the assessee has taken the property on the lease of 99 years, which was as good as ownership and expenses incurred on the development of this property should be capitalized. Accordingly, AO held expenditure of Rs.13,60,36,499/- as capital nature and its claim in profit and loss account was disallowed. AO further held that on capitalization of Rs.13,60,36,499/-, depreciation was allowed at the rate of 10% being land and building expenses. Accordingly, AO disallowed Rs.12,24,32,850/-after giving the benefit of depreciation @ 10%.

Against this order, assessee appealed before the ld. CIT (A). Ld. CIT (A) observed from the agreement of Infrastructure Development produced during appellate proceedings that assessee company entered into a separate infrastructure development agreement with Sri City Pvt. Ltd. to maintain common facilities and amenities outside the owned property of the assessee company. The AO took the property as owned by the assessee company but this is not the case here. He also observed that the Hon’ble Supreme Court in the case of L.H. Sugar Factory and Oil Mills Pvt. Ltd. (125 ITR 293) has followed its decision in the case of Lakshmiji Sugar Mill Co. Pvt. Ltd. and has made the observation that in a case where the advantage consists merely in facilitating the assessee’s business operation or enabling management to conduct business in a more efficient manner, leaving the fixed capital untouched, then such expenditure would be on revenue account, even though the advantage may endure for an indefinite time. Accordingly, ld. CIT (A) deleted the aforesaid addition.

Against the aforesaid order, Revenue is in appeal before us. We have heard both the parties and perused the records.

The ld. DR for the Revenue relied upon the order of the Assessing Officer.

Observation of the court

Upon careful consideration, we note that AO has made ad hoc disallowance of 2% of the total expenses without mentioning any specific defects. Ld. CIT (A) has appreciated that there was very little discrepancies to such expenses. However, he also sustained addition of 1% of total expenses. We note that assessee is a corporate entity and ad hoc disallowance of expenditure without pointing out any specific defect is not permissible. Hence, we set aside the orders of the authorities below and decide the issue in favour of the assessee. Accordingly, assessee’s grounds on this issue are allowed and the ground of Revenue on this issue is dismissed.

Apropos on the issue of addition on account of disallowance of legal expenses amounting to Rs.11,56,765/- which was related to plant (Capital Expenditure) :

AO noticed that assessee has claimed Rs.197.61 lakhs on account of legal expenses in Profit and Loss Account. Assessee has submitted its details on 06.11.2017. On perusal of the details, AO noticed that assessee has paid Rs.90,47,068/- to Khaitan & Co. From this, assessee itself has disallowed Rs.63.57 Lakhs related to plant but not disallowed Rs.11,56,765/- which was also related to the plant and the assessee was asked why the balance amount of Rs.11,56,765/- should not be disallowed. Assessee could not justify the claim by submitting any satisfactory reply. Therefore, AO disallowed Rs.11,56,765/- and added back to the income of the assessee.

Assessee appealed before the ld. CIT (A) against the above said order. Ld. CIT (A) observed that the amount of Rs.11,56,765/- charged towards drafting agreements, resolutions and rendering legal consultancy services relating to plant which was purely professional services in nature. On applying the ratio of judgment in the case of CIT vs. United Breweries Ltd. 36 DTR 80, ld. CIT (A) deleted the disallowance of Rs.11,56,765/- treating professional fee as capital expenditure.

The ld. DR for the Revenue relied upon the order of the Assessing Officer.

Counsel for the assessee submitted written submissions on this issue which reads as under :-

The Assessee company duly explained during the course of assessment proceedings that the amount of Rs.11,56,765/- was paid towards the consultancy services rendered by M/s Khaitan & Co to the assessee company. It was also duly explained during the course of assessment proceeding that the Khaitan & Co. are renowned law firm and assessee company availed professional services in order to draft agreements, board resolutions, checklist, conducting teleconferences and administrative expenses incurred related thereto. The same can be evident from copy of invoices issued by Khaitan & Co. at pages 213 to 217 of the paper book.

Reliance is placed on a landmark judgment held by Hon’ble Karnataka High Court in the case of CIT vs. United Breweries Ltd. 36 DTR 80 on the proposition that

“an expenditure incurred even in connection with acquiring a capital asset which is in the nature of a fee paid towards consultation for the business expansion, is revenue in nature “.

Heavy reliance is placed on the findings of CIT (A) at page 13 of the order.

Upon careful consideration, we find that AO has erred in disallowing of Rs.11,56,765/- being legal expenses on account of plant acquisition. Ld. CIT (A) has given a finding that the amount of Rs.11,56,765/- was charged towards drafting agreements, resolutions and rendering legal consultancy services relating to plant which is purely professional services in nature. Ld. CIT (A) has rightly applied the judgment of CIT vs. United Breweries Ltd. 36 DTR 80. Hence, we find that the ld. CIT (A) has passed a reasonable order which does not require any interference on our part.

In the result, the appeal of the Revenue stands dismissed and the appeal of the assessee is allowed.

Order pronounced in the open court on this 26th day of July, 2023.