Expenditure u/s 37(1) should be disallowed to the extent not in line with existing business

Asian Paints Ltd. Vs DCIT (ITAT Mumbai)

Conclusion: Expenditure incurred by assessee should be disallowed to the extent that expenditure which had been incurred for evaluation of business opportunities that could not be said to be in line with the existing business or an extension of the existing business of assessee of manufacturing of paints and enamels. AO was directed to decide on the allowability of each expenditure after duly examining the engagement letter with the consultants and the scope of work.

Held: Assessee was a company and was engaged in the business of manufacturing paints and enamels. During the year under consideration, assessee debited an amount of Rs.54.06 lakh on account of expenditure incurred on account of professional and consultancy fees paid to various consulting firms to carry out due diligence/market survey, legal fees for drafting agreements and scheme valuation of target company and also consultancy service for business opportunities in the area of home decor/improvements and overseas acquisition, etc. During the assessment proceedings, assessee was asked to show cause why the claim of the aforesaid expenditure should not be disallowed. In response thereto, assessee submitted that the expenditure was in the nature of revenue expenditure and allowable under section 37(1). AO vide assessment order did not agree with the submissions of assessee and held that assessee had been in the field of paints business for more than 50 years and was entering into a completely new line of business, i.e. home decor/home improvement and acquisition of overseas company. Accordingly, AO held that such an expenditure was liable to be treated as capital expenditure and disallowed the amount of Rs.54.06 lakh paid by assessee to various professionals and consultants for the evaluation of various business opportunities. CIT(A), vide impugned order, dismissed the ground raised by assessee on this issue by following the approach adopted by its predecessor in assessee’s own case for the assessment years 2012-13 and 2014-15. It was held that the entire expenditure was incurred on home improvement projects, furniture and furnishings business, bathroom space business, modular kitchen, market research in Saudi Arabia project, etc. Unlike the assessment year 2014-15,  assessee had not furnished the copy of engagement letters/scope of work in respect of the exploration of various business opportunities by the consultants. However, since in the preceding year, the coordinate bench had examined each business evaluation separately, which appeared to have also been undertaken during the year under consideration, it was deemed appropriate to restore this issue to the file of the AO for de novo adjudication in light of the decision of the coordinate bench of the Tribunal in assessee’s own case in the assessment year 2014-15. AO was directed to decide on the allowability of each expenditure after duly examining the engagement letter with the consultants and the scope of work, in light of the aforesaid decision of the coordinate bench cited supra.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The present cross-appeal has been filed challenging the impugned order dated 19/02/2019, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)–1, Mumbai, [“learned CIT(A)”], for the assessment year 2015–16.

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