HIGH COURT OF DELHI
Commissioner of Income-tax
Versus
Rio Tinto India (P.) Ltd.
IT APPEAL NOS. 817, 819, 822, 899 & 900 of 2011
OCTOBER 5, 2012
JUDGMENT
S. Ravindra Bhat, J. – The present common judgment will dispose of five appeals. The following common question of law arises for consideration:
“Did the Tribunal fall into error in holding that the assessment order for AY 1998-99 was conclusive on the issue of date of commencement of the assessee’s business for the purpose of determining its tax liability.”
2. The brief facts necessary to decide the case are that the assessee was incorporated on 19.12.1996 to provide technical services for and give technological support to the Indian mining industry. It claimed commencement of business with effect from 01.07.1997. Upon examination of its income tax returns, the AO directed certain queries with regard to the income and expenditure claimed by it. In reply, by its letter dated 24.01.2001, the assessee claimed that it commenced business on 01.07.1997 and that its Bangalore office was functional in April 1997 for which capital was received in that year. It further stated that in July 1997, personnel were recruited and that discussions with clients for rendering consultancy services were initiated prior to July 1997. It was also seeking opportunities to provide services for mining and related projects in India. The assessee claimed as expenditure, incurred under several heads – travel and conveyance, consultancy expenses, salary, wages, bonus, postage, telephone and telex, business promotional expenses and rent. It claimed that being a service provider, it needed good infrastructure and personnel with expertise in the field. Consequently, it had to make its presence felt in the market and expenses were mainly incurred for business promotion purposes during that year. The assessee entered into a contract with CIDCO and filed a copy of the same and also mentioned about another contract with RIO TINTO Orissa limited w.e.f. 01.06.1996.
3. The AO, by his order dated 01.02.2001, confirmed the assessment for the concerned Assessment year 1998-99 after considering the assessee’s expenses. The AO concluded as follows:
“5.2 The submissions of the assessee were considered. The assessee itself had submitted that such a heavy expenditure was incurred as the year under consideration is the first year of operations of the assessee and that the company had to prove in the market that it had sufficient infrastructure to provide services. From the reply of the assessee, it is inferred that such expenditure was incurred primary to kick start the business, hence, benefit of enduring nature was likely to be obtained. Therefore, such expenditure cannot be allowed as a revenue expenditure as such expenditure has been incurred by the assessee to create an infrastructure for facilitation of future business, hence, benefit of enduring nature was imposed to be derived. However, it cannot be denied that some expenses would be required under the stated heads for running the day-to-day business of the company. Therefore, 20% of these sums of (total Rs. 3,77,15,537/-) i.e. Rs. 5,43,707/- is allowed while computing the total income of the assessee company. The balance amount of Rs. 3,01,74,830/- is disallowed as expenses of capital nature.”
4. The assessee carried the matter in appeal to the CIT (Appeals), who accepted its contentions and held that the individual items of expenses though substantial were incurred on business operations at the initial stage and were, therefore, revenue in nature. The reasoning of the appellate commissioner is found in the following extract of his order, allowing the assessee’s appeal:
“Substantial expenses have been incurred on account of postage, telephone, telex, travelling and conveyance, business promotion, rent, consultancy etc. The genuineness of the expenditure or its relation to the business of the appellant has not been doubted during the assessment proceedings. The individual items of expenses though substantial in amount have been incurred on business operations in the initial stages and are revenue in nature. These have not resulted in the creation of an asset of enduring benefit. The nature of expenses incurred are such that the benefits derived therefore cannot be said to be yielding an advantage of enduring benefit. No specific items in the nature of capital expenses have been pointed out in the assessment order. The legal position as laid down in various decisions of the Hon’ble Courts, particularly the observations of the Apex Court in Expire Jute Co. Ltd. v. CIT 124 ITR 1 as cited above indicates that where the expenditure has been incurred in connection with the efficient day to day running of business activities, the same is to be regarded as revenue expenditure. The quantum of expenditure is not the test for determination of whether or not any expense is deductible. The disallowance of 80% of total expenditure by the assessing officer is on adhoc basis without specifying and establishing that any enduring benefit has arisen to the appellant. The addition of Rs. 3,01,74,830/-made in the assessment is without any proper basis and unsupported by concrete and sufficient material. The same is therefore ordered to be deleted. This ground of appeal is therefore decided in favour of the appellant.”
5. The revenue had carried the matter in appeal to the Income Tax Appellate Tribunal (ITAT), which dismissed it (ITA 240/Del/2002), by its order dated 30.11.2007. The Tribunal held as follows:
“7. In the instant case the impugned expenditure was incurred on account of postage, telephone, telex, travelling and conveyance etc., the genuineness of which has not been doubted by the Assessing Officer. Undisputedly, the expenses have also not resulted into creation of any capital assets, nor it can be envisaged to have given any advantage of enduring benefit to the assessee. As the expenditure so incurred are revenue in nature irrespective of their quantum the same is liable to be allowed. Thus we do not find any infirmity in the order of CIT (Appeals) treating the expenses as revenue. Before parting with the matter it is pertinent to bring on record that we are upholding the order of CIT(A) for treating the expenditure as revenue expenditure, here we are not deciding the issue regarding date of setting up of business or commencement of business and allowability or otherwise of expenses accordingly.”
6. For the succeeding years, the assessee had claimed substantial expenses which resulted in loss. As against this, it also disclosed service charges that were collected by it and were considerably lower than expenditure which it disclosed to the income tax authorities. The following chart would indicate the amounts received as services, charged towards the assessee’s income and the expenses claimed by it which resulted in loss, for the relevant assessment years:
