ITAT: Expenses Incurred During Regular Course of Business Cannot be Treated as Capital Expenses

ITAT: Expenses Incurred During Regular Course of Business Cannot be Treated as Capital Expenses

The Income Tax Appellate Tribunal (ITAT), Delhi bench ruled that expenses claimed by assessee which have incurred during the regular course of business cannot be treated as capital expenses.

The division-member bench comprising of Yogesh Kumar US (Judicial Member) and Anil Chaturvedi (Accountant Member) were adjudicating an appeal filed by the Revenue against an order dated 19th September, 2019 of the Commissioner of Income Tax (Appeals)-3 (CIT[A]), New Delhi relating to Assessment Year 2016-17.

Assessee/respondent- Drishti Soft Solutions Pvt a company stated to be engaged in the business of software development. Assessee electronically filed its return of income for Assessment Year 2016-17 on 17th October, 2016 declaring total income at Rs.1,69,85,280. The case of the assessee was selected for scrutiny and, thereafter, assessment was framed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide order dated 20th December, 2018 and the total income was determined at Rs.24,26,59,340.

Aggrieved by the order of Assessing Officer (AO), assessee carried the matter before CIT(A) who granted substantial relief to the assessee.

Two important grounds were raised by the revenue. First, was with respect to the deleting the addition of Rs.21,57,85,188 on account of share premium valuation.

The issue in the ground was with respect to deleting the addition made by AO on account of issue of shares at a premium under Section 56(2)(viib) of the Act.

It was an undisputed fact that during the year under consideration, assessee had issued 201402 shares (Compulsorily convertible preference shares) at a share premium of Rs.1240.29/- per share having face value of each Rs.1/- to M/s. Forum Synergies India Trust (FSIT).

The Tribunal noted that assessee is a domestic company and its shares are not listed at any Stock Exchange and it is not engaged in any of the business activities which are termed as negative list of business activities. It was also an undisputed fact that the investor of the shares to whom the assessee had allotted shares was Forum Synergies India Trust who had been granted registration by Securities and Exchange Board of India as Venture Capital Fund on 30th September, 2008 and the registration granted by the SEBI had not been withdrawn by the SEBI during the year under consideration.

The Tribunal remarked that, "proviso of Section 56(2)(viib) of the Act provides that the provision of Section 56(2)(viib) would not be applicable where the consideration for issuance of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund. As per Explanation (b) to Section 56(2)(viib) "venture capital company", "venture capital fund" and "venture capital undertaking" shall have the meaning assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of Section 10."

The Tribunal also noted that CIT(A) after considering the submissions made by assessee and considering the material on record has given a finding that the investor, M/s. Forum Synergies India Trust (FSIT) is a Venture Capital Fund (VCF) and assessee is a Venture Capital Undertaking. The aforesaid finding of CIT(A) had not been demonstrated by Revenue to incorrect or not in accordance with the provisions of the Act.

Further, before the ITAT, the assessee demonstrated that the business of the assessee does not fall under the negative business list as specified by the Central Government and further, Revenue did not pointed out any fallacy in the findings of CIT(A) nor has demonstrated that the assessee's case does not fall under proviso to Section 56(2)(viib) of the Act. Considering the totality of the aforesaid facts, we bench dismissed the ground of revenue.

The second ground raised by the Revenue was with respect to the deleting the addition of Rs.1,36,000/- under Section 37(1) of the Act.

The bench noted that during the course of assessment proceedings and on perusing the professional fees paid by the assessee, AO noted that assessee had paid Rs.1,36,000/- to Vineet K. Gupta & Co. on account of Professional fee for share valuation certificate.

It was an undisputed fact that the aggregate amount of Rs.1,36,000/- had been paid to Vineet K. Gupta & Co. Chartered Accountant. It was the submission of the assessee that the payment was towards the professional fee, which include monthly retainership fees for the professional services.

The ITAT upheld the order passed by the CIT(A) and observed that, "expenses claimed by the assessee have been incurred during the regular course of business and cannot be treated as capital expenses," thus the second ground as well as the appeal of the Revenue was dismissed.