IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI “D” BENCH, MUMBAI
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER, AND

SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER

ITA. No. 617/Mum/2013 Assessment Year:2009-10
ITO (Appellant) vs M/s. Dil Ltd (Respondent)
Date of Order: 28-09-2015

ORDER

PER SHAILENDRA KUMAR YADAV, J.M:

This appeal has been filed by Revenue against the order of Commissioner of Income-Tax (Appeals)-12, Mumbai, dated 12.10.2012 for A.Y. 2009-10 on following grounds:

“1. On facts and circumstances of case and in law, the Ld.CIT(A) erred in treating capital expenditure incurred in connection with carrying out acquisition of a new company as revenue expenditure.

2. On facts and circumstances of case and in law, the Ld.CIT(A) erred in allowing expenditure of Rs.98,68,564/- incurred under the head legal & professional fee and Rs.8,21,404/- incurred under the head travelling as revenue expenditure, without appreciating that it was actually capital expenditure which was incurred in connection with carrying out due diligence for acquiring/taking over a foreign company, engaged in similar business as that of assessee.

3. The appellant prays that the order of Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”

2. First issue is with regards to action of Assessing Officer in disallowing Rs.98,68,564/- being expenditure incurred in conducting due diligence study treating the same as capital expenditure. Similar issue arose in A.Y. 2005-06. In said year like in the current year, Assessing Officer had treated due diligence study expenses as capital expenditure. Aggrieved by the action of Assessing Officer, assessee preferred an appeal before the CIT(A) who has decided the issue in favour of assessee by observing as under:

"4.3 I have duly considered the submission of the A.R. of the appellant and I find that AO is not justified in treating expenditure on due diligence study as capital expenditure. The assessee has incurred expenditure to increase the profitability and efficiency of its esisting bulk drug business. Hence the expenditures are to be regarded as revenue in nature as held in the case of CIT vs. Coromandal Fertilizers 220 ITR 298 (AP). These expenditures are not prior period expenditure or expenditure before the commencement of business. Hence the case law cited by the AO are not applicable to the facts of this case. Hence the AO is directed to allow the claim of the appellant. This ground of appeal is allowed. "

2.1 Against the order of CIT(A) as discussed above, the Department had preferred an appeal before the ITAT, Mumbai. The ITAT vide its order dated 11.08.2009 has stated as under:

"11. We have heard both the parties. We find that the expenditure is not prior period expenditure before the commencement of business. The assessee company is engaged in the business of marketing of bulk drugs chemicals and intermediates. Therefore, the expenses are for ascertaining/ studying the viability of the investment in URL Ltd. to increase the profitability and efficiency of the business of marketing of bulk drugs and chemicals and in the normal course of the business though it proved to be abortive. In our opinion the sum of Rs.18,95,294/- is expenditure incurred wholly and exclusively incurred for the purpose of business and allowable u/s.37 of the I.T. Act, 1961.

3. In this background, CIT(A) observed that the facts of the case in the year under consideration was similar of that above year i.e. A.Y. 2005-06. Facts being similar, so following same reasoning of ITAT's order for AY 2005-06 in assessee’s own case CIT(A) was justified in holding that concerned expenditure is wholly and exclusively for the purpose of business and liable for deduction u/s 37(1) of the Act. Accordingly, this reasoned finding of CIT(A) needs no interference from our side. We uphold the same.

4. Next issue in Revenue’s appeal is with regards to disallowance of Rs.8,21,404/- incurred on travelling. Assessee claimed that expenditure has been incurred wholly and exclusively for the purpose of business during course of due diligence study. Assessing officer has held that travelling expenses of Rs.8,21,404/- debited by the assessee on account of travelling expenses incurred by the consultant in connection with the due diligence operation need to be disallowed as he has disallowed main expenditure said to have been incurred under the head 'Legal& Professional Expenses' holding that they were not allowable expenditure under section 37(1) of the Act. As discussed above, expenditure incurred as due diligence expenditure by assessee has been held allowable u/s. 37(1) of the Income Tax Act, therefore any expenditure incurred in relation to same would be allowable as deduction u/s.37(1) of the Act. Assessing Officer has not doubted the expenditure or held it to be not incurred. The disallowance has mainly been made in connection with due diligence operations of assessee and Assessing Officer has held that any expense on such an operation is not allowable as revenue expenditure. As the main expenditure stands allowed by us in para 2& 3 u/s.37(1) of the Act relying on the order of ITAT for A.Y. 2005-06 as discussed above, the addition on account of disallowance of travelling expenses related to due diligence expenses made by Assessing Officer was rightly deleted by CIT(A) and this reasoned finding of CIT(A) needs no interference from our side.

We uphold the same.

5. As a result, appeal filed by Revenue is dismissed.

Pronounced in the open Court on this the 28th day of September, 2015.

Sd/-                                                     Sd/-
(ASHWANI TANEJA)                         (SHAILENDRA KUMAR YADAV)
ACCOUNTANT MEMBER    JUDICIAL MEMBER