Commissioner Of Income Tax Tamil Nadu-I, Madras v. M/S.carburandum Universal Limited Tiam House, Annexe, 72, (Old

In the High Court of Judicature at Madras Dated : 18.06.2008 Coram :- The Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mr.Justice P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.362 and 363 of 2008 Commissioner of Income TaxTamil Nadu-I, Madras .. Appellant / Respondent(in both cases)Vs. M/s.Carburandum Universal LimitedTiam House, Annexe, 72, (Old NO.28)Rajaji Salai, Chennai – 600 001... Respondent / Appellant TAX CASE (APPEALS) Nos.362 and 363 of 2008 are filed underSection 260A of the Income Tax Act against the order of the IncomeTax Appellate Tribunal Madras 'A' Bench dated 24.8.2007 passed inI.T.A.No.797/Mds/2003 and 542/Mds/2005 for the assessment years1998-99 and 1999-2000. against the order of the Commissioner ofIncome-Tax (Appeals) – III Chennai -34 I.T.A.No.Tr.352/2001-02/A-IIIDate of Order 28-1-2003 for the assessment year 1998-99 and againstthe order of the Joint Commissioner of Income-Tax, Special Range-I,Chennai-34 is P.A.No./G.1.No.AAA.CC.2474P///26-C date of order13.3.2001 for the assessment year 1998-1999 and against the order ofthe Commissioner of Income Tax(Appeals) VIII, Chennai – 34 isSTA.TR.No.145/2004-2005 date of order dt.25.11.04 for the assessmentyear 1999-2000 and against the order of the assistant Commissioner ofIncome Tax Company Circle – 1(3) (1/C) Chennai is G.I.No.PA.No-PAN.AAA.CC 2171P/G.D.No.CX102 date of order 25.3.2004 for theassessment year 1999-2000. For Appellant : Mr.Naresh Kumar,Sr.Standing Counsel for I.T. JUDGMENT JUDGMENT OF THE COURT WAS DELIVERED BY K.RAVIRAJA PANDIAN,J These appeals are filed by the revenue against the order ofthe Income Tax Appellate Tribunal Madras 'A' Bench dated dated https://hcservices.ecourts.gov.in/hcservices/ 24.8.2007 passed in I.T.A.No.797/Mds/2003 and 542/Mds/2005respectively. The relevant assessment years are 1998-99 and 1999-2000. The substantial question of law formulated in these appealsare as follows:- "1. Whether on the facts and in thecircumstances of the case the Income-taxAppellate Tribunal was right in law in deletingthe addition in respect of payments made toM/s.McKinsey & Co., Management Consultant andthe same should be allowed as revenueexpenditure is valid in law? 2. Whether on the facts and in thecircumstances of the case the Income-taxAppellate Tribunal was right in law in deletingthe addition made towards interest paid onborrowed capital is valid?" https://hcservices.ecourts.gov.in/hcservices/ 24.8.2007 passed in I.T.A.No.797/Mds/2003 and 542/Mds/2005respectively. The relevant assessment years are 1998-99 and 1999-2000. The substantial question of law formulated in these appealsare as follows:- "1. Whether on the facts and in thecircumstances of the case the Income-taxAppellate Tribunal was right in law in deletingthe addition in respect of payments made toM/s.McKinsey & Co., Management Consultant andthe same should be allowed as revenueexpenditure is valid in law? 2. Whether on the facts and in thecircumstances of the case the Income-taxAppellate Tribunal was right in law in deletingthe addition made towards interest paid onborrowed capital is valid?" 2. The facts of the case are as follows:-The assessee is a company engaged in the manufacture andsale of industrial ceramics. The assessee, for the relevantassessment years, had claimed a sum of Rs.75 lakhs being fees paid toM/s.Kinsey & Co., Management consultants. The claim was made on theground that the said amount was paid towards professional fees forassessment of market attractiveness of assessee's business in termsof gaining global market, reputise on dealing with global markets,evaluation of assessee's business ability to compete, analysis ofbusiness's future growth trend; development detailed businessstrategies for assessee to grow in the dynamic business environment.The assessing officer was of the opinion that the amount was paidtowards reorganization of business which would have long termbenefits and therefore, the same should be allowed only in five equalinstalments over a period of five years. Thus, he allowed a sum ofRs.15 lakhs and added the sum of Rs.60 lakhs to the income. Theaction of the assessing officer was confirmed by the Commissioner ofIncome-tax (Appeals) on appeal by the assessee. Against that orderthe assessee preferred an appeal before the Income-tax AppellateTribunal. The Tribunal held that no new business has been started bythe assessee company and consultancy services was received onlytowards restructuring of the business. Therefore, it cannot be saidthat it is a capital expenditure. On that reasoning, the Tribunal setaside the order of the lower authorities and allowed the assessee'sappeal. 3. It is the further case of the revenue that the assessee hasincurred an expenditure of Rs.38,73,450/- as interest paid on capitalborrowed for expansion of assessee's business. The assessing officeradded the entire interest to the cost of the fixed asset by rejectingthe claim of the assessee that the expenditure is revenue in nature. Against that finding, the assessee preferred an appeal before theCommissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) sustained the order of the assessing officer. Againstthat order the assessee preferred an appeal before the Income-taxAppellate Tribunal and the Tribunal following the decision of thisCourt in the case of same assessee reported in 205 CTR 498 set asidethe order of the Commissioner of Income-tax (Appeals) and deleted theadditions and allowed the assessee's appeal. Aggrieved by the saidorder, the appellant has preferred this appeal. 4. Heard the learned counsel on either side and perused thematerials available on record. Against that finding, the assessee preferred an appeal before theCommissioner of Income-tax (Appeals) and the Commissioner of Income-tax (Appeals) sustained the order of the assessing officer. Againstthat order the assessee preferred an appeal before the Income-taxAppellate Tribunal and the Tribunal following the decision of thisCourt in the case of same assessee reported in 205 CTR 498 set asidethe order of the Commissioner of Income-tax (Appeals) and deleted theadditions and allowed the assessee's appeal. Aggrieved by the saidorder, the appellant has preferred this appeal. 4. Heard the learned counsel on either side and perused thematerials available on record. 5. It is well settled that it is not only permissible, but isalso necessary for any business to update its own knowledge andadopt better ways of organising its business, if it is to survive inthe market. The expenditure incurred for such purpose cannot beregarded as capital expenditure and it is only a revenue expenditure.The assessee, with an intention of bringing about improvements in theway it did its business, had sought for and obtained reports of theconsultant for assessment of market attractiveness in terms ofgaining global market, reputise on dealing with global markets,evaluation of assessee's business ability to compete, analysis ofthe future growth trend of the business, development detailedbusiness strategies for the assessee to grow in the dynamic businessenvironment. The fees paid to the consultant was disallowed by therevenue officials as capital expenditure on the premise that thebenefits derived from such consultancies would enure to the futureyears also. According to the learned counsel for the revenue, thisquestion of law is covered against the revenue by the decision ofthis Court in the case of CIT vs. Crompton Engineering Co. Ltd.,(2000) 242 ITR 317, in which it was held as follows : "Merely obtaining a report from the management consultantand paying the fees therefor, could not be regarded as capitalexpenditure as such report was not obtained as part ofdocumentation packages, but was obtained in a contract coveringcomprehensive restructuring of the business involved. No newline of business was started on the strength of the report ofthe Consultants. The report was not regarded as essential partfor any new business that the assessee commenced thereafter. Inthe circumstances of the case, the expenditure incurred by theassessee, in obtaining that report was clearly an expenditure ofthe revenue in character."Hence, the first question of law is covered against the assessee.6. In respect of the second question of law, the interest paid onborrowed capital, the assessee borrowed money for the expansionproject and claimed deduction under section 36(1)(iii) o the IncomeTax Act. In respect of the assessment year 1994-95 in assessee's owncase, the issue has been decided in favour of the assessee by aDivision Bench of this court in the case of CIT v. Carborandum Universal Ltd., 205 CTR 498. This factum has also been brought tothe knowledge of the Court by the learned counsel for the revenue.Therefore, in terms of the above cited Rulings, the appeals aredismissed as the questions of law raised in the present appeals arecovered against the revenue. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.usk/mfTo1.The Assistant Registrar, Income-Tax Appellate Tribunal, III Floor, Rajaji Bhavan, Besant Nagar, Madras 90 (with records five copies).2.The Secretary, Central Board of Revenue, New Delhi (3 copies).3. The Commissioner of Income Tax (Appeals)-III, Chennai4. The Assistant Commissioner of Income Tax, Company Circle-I(3),(I/c), Chennai.5. The Commissioner of Income Tax, Chennai.6. The Commissioner of Income Tax (Appeals) VIII, Chennai – 34.+ 1 CC To Mr.Pushya Sitaraman, S.S.C.(I.T) Advocate SR NO.30712T.C.(As) Nos.362 & 363 of 2008SS(CO)SRA(09/07)