Professional and consultancy charges incurred during acquisition of companies cannot be treated as revenue expenses

Last updated: 26 July 2021

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The Income Tax Appellate Tribunal (ITAT) has ruled that professional and consultancy charges incurred during the acquisition of companies cannot be treated as revenue expenses. In the case of M/s. Steer Engineering Pvt. Ltd., the tribunal upheld the disallowance of these costs as revenue expenditure, classifying them as capital in nature. This decision aligns with previous Supreme Court rulings, reinforcing that such expenses are integral to acquiring a capital asset.

Court :
ITAT Bengaluru

Brief :
In M/s. Steer Engineering Pvt. Ltd. v. The Addl. Commissioner of Income Tax [ITA No. 2070/Bang/2018 decided on July 22, 2021], M/s. Steer Engineering Pvt. Ltd. ('the Appellant') acquired the business of two companies namely Concord United Products Pvt. Ltd., and M/s. Aditya Precision Deposition Moulding Pvt. Ltd. and incurred Rs.1,20,820/- as professional fees for drafting business transfer agreements and legal opinions. The Appellant claimed it as revenue expenditure.

Citation :
ITA No. 2070/Bang/2018 decided on July 22, 2021

In M/s. Steer Engineering Pvt. Ltd. v. The Addl. Commissioner of Income Tax [ITA No. 2070/Bang/2018 decided on July 22, 2021], M/s. Steer Engineering Pvt. Ltd. ('the Appellant') acquired the business of two companies namely Concord United Products Pvt. Ltd., and M/s. Aditya Precision Deposition Moulding Pvt. Ltd. and incurred Rs.1,20,820/- as professional fees for drafting business transfer agreements and legal opinions. The Appellant claimed it as revenue expenditure.

Assessing Officer ('AO')- Disallowed by holding it to be capital in nature.

Commissioner (Appeals) ('the Respondent')- Upheld the order of the AO. Being aggrieved the Appellant approached the ITAT for relief.

The ITAT, Bengaluru- Upheld the ruling of the Respondent and AO, observed that the nature of expenditure incurred in the acquisition of two companies by the Appellant is of capital expenditure.

Further, relied on the Hon’ble Supreme Court case of Alembic Chemical Works Co. Ltd., Vs. CIT [(1989) 177 ITR 377] and opined that professional and consultancy charges incurred by the Appellant for acquisition of the two companies can’t be treated as revenue in nature.

FAQ :

The main issue was whether professional and consultancy fees incurred for acquiring two companies could be claimed as revenue expenses or if they were capital expenses.

The ITAT upheld the decisions of the Assessing Officer and Commissioner (Appeals), ruling that the expenditure was capital in nature and not revenue.

The tribunal observed that the expenditure was incurred for the acquisition of two companies, which is an act of acquiring a capital asset, and therefore, the associated costs are capital in nature.

The ITAT relied on the Supreme Court case of Alembic Chemical Works Co. Ltd. Vs. CIT.

No, according to this ruling and precedents, professional and consultancy charges incurred for acquiring companies are considered capital expenses.