Section 37(1): If there is continuity of business with common management and fund, then even if the assessee starts a new line of business in a particular year, the payment made for carrying out running of such new business, is a business expenditure which has to be allowed in the year in which it has been incurred.
If the expenditure incurred by the assessee, to do business for earning some profit, does not impact its fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage from the expenditure so incurred, may endure in future.
Facts:
The assessee company was mainly engaged in the business of trading in telecom and security equipment and providing transportation service.
During the year under consideration, it had entered into the business of Fleet Management services and providing security products and networking solutions.
The assessee had paid consultancy charges to a consultant, who had provided various kinds of advisory services and had also contributed in identifying prospective customers, for rendering of the aforesaid services.
The Assessing Officer disallowed consultancy charges by treating the same as capital expenditure
On appeal before CIT(A), the assessee contended that the Assessing Officer had completely misunderstood the facts and that it had incurred the said consultancy charges only after setting up of the new business and for developing the existing new business, which was in the service industry.
On scrutinising the books of accounts of the assessee, CIT(A) noted that the income offered from new business services were meagre as compared to the income offered from existing business of trading and transportation service. He thus held that such consulting charges can neither be capitalised nor allowed as revenue expenditure. It was clear cut case of capital expenditure not allowable u/s. 37(1).
On appeal before the Tribunal.
Held:
For deciding the issue whether the expenditure is capital or revenue in nature, the concept of enduring benefit is quite a paramount factor but such test of enduring benefit cannot be held to be conclusive. There may be a case where expenditures have been incurred for obtaining advantage of enduring benefit but nonetheless they may be on revenue account. What has to be seen is the nature of advantage in a commercial sense, that is, whether it is in the capital field or for the running of the business. If the advantage is necessitating the business operations for enabling the assessee to do business for earning some profit without having impact on fixed capital, then such expenditure has to be reckoned on revenue account, even though the advantage may endure in future.
In the present case, there is no augmentation of asset to the assessee but the expenditure has helped the assessee to develop a proper guidance for running the new line of service industries. Thus, in our opinion, the payment for consultancy charges is on account of revenue field only and has to be allowed as revenue expenditure u/s. 37(1) as it is wholly and exclusively for the purpose of business.
