J.S. Khehar, J.
1. Through the instant appeal, the appellant has impugned the order dated January 23, 2007, passed by the Income-tax Appellate Tribunal, wherein the Income-tax Appellate Tribunal has accepted the contention advanced by the respondent-assessee that a sum of Rs. 1,62,93,000 incurred by the assessee in engaging M/s. Coopers and Lybrands for a system study of the respondent-assessee was a revenue expense, and as such, was liable to be included by the respondent-assessee while computing expenses at its hands. It is in view of the aforesaid conclusion drawn by the Income-tax Appellate Tribunal, that the instant appeal has been preferred by the Revenue, suggesting the following substantial questions of law:
(i) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that while payments made to M/s. Coopers and Lybrands for a study and report on reorganization of core business of the assessee-company and improving its market share and profitability resulted in a benefit derived by the assessee for a number of years, the same was not in the nature of capital expenditure ?
(ii) Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that payments made to M/s. Coopers and Lybrands were revenue in nature even though a new line of business (scooter) was being set up and scope of study and advice by consultants, spread over three financial years, was not only for existing business ?
(iii) Whether, on the facts and in law, the Income-tax Appellate Tribunal erred in not taking note of the provisions of Sections 35D(1)(ii) and 35D(2)(a)(iii) while treating the payment of Rs. 1,62,93,000 made to M/s. Coopers and Lybrands as revenue expenditure?
2. Before delving upon the issue involved, it would be pertinent to mention that the respondent-assessee filed a return of its income on November 30, 1998, depicting losses to the tune of Rs. 10,36,61,189. In the assessment order passed on March 28, 2001, the Assessing Officer completed the assessment at a loss of Rs. 2,57,41,375. In the instant order, expenses to the tune of Rs. 1,62,93,000 allegedly incurred by the respondent-assessee as payments made to M/s. Coopers and Lybrands, for a study and report on reorganization of core business of the respondent-assessee and for improving its market share and profitability was treated as a capital expense, and as such, was ordered to be deducted from the losses depicted in the return dated November 30, 1998.
3. The order passed by the Assessing Officer dated March 28, 2001, was assailed by the respondent-assessee before the Commissioner of Income-tax by preferring an appeal. The appeal preferred by the respondent-assessee was, however, dismissed by an order dated January 10, 2003. Dissatisfied with the order passed by the Commissioner of Income-tax dated January 10, 2003, the respondent-assessee approached the Income-tax Appellate Tribunal. On this occasion, the Income-tax Appellate Tribunal by its order dated January 23, 2007, arrived at the conclusion that the expenditure of Rs. 1,62,93,000 incurred by the respondent-assessee as payment made to M/s. Coopers and Lybrands for a study and report on reorganization of core business of the respondent-assessee and for improving its market share and profitability was a revenue expenditure and as such, arrived at the conclusion that the deduction made on account of the aforesaid expense from the losses shown by the respondent-assessee in its return dated November 30, 1998, by the Assessing Officer was not justified.
4. The Revenue has preferred the instant appeal against the order rendered by the Income-tax Appellate Tribunal dated January 23, 2007.
5. During the course of hearing, learned Counsel for the appellant advanced three submissions. The submissions advanced by the learned Counsel for the appellant, are being dealt with hereunder sequentially in the manner they were advanced before us.
6. The first contention of the learned Counsel for the appellant is based on Section 35D of the Income-tax Act, 1961 (hereinafter referred to as the 1961 Act). Pointed reference was made by the learned Counsel for the appellant to Sub-section (2)(a)(iii) thereof. Section 35D of the 1961 Act is being extracted hereunder:
35D. Amortisation of certain preliminary expenses.-(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in Sub-section (2),-
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit,
the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation:
Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in Sub-section (2), the provisions of this Sub-section shall have effect as if for the words 'an amount equal to one-tenth of such expenditure for each of the ten successive previous years', the words 'an amount equal to one-fifth of such expenditure for each of the five successive previous years' had been substituted.(2) The expenditure referred to in Sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:
(a) expenditure in connection with- (i) preparation of feasibility report ; (ii) preparation of project report;
(iii) conducting market survey or any other survey necessary for the business of the assessee ;
(iv) engineering services relating to the business of the assessee:
Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved in this behalf by the Board ;
(b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee ;
(c) where the assessee is a company, also expenditure-
(i) by way of legal charges for drafting the memorandum and articles of association of the company ;
(ii) on printing of the memorandum and articles of association ;
(iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956) ;
(iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus ;
(d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed.
(3) Where the aggregate amount of the expenditure referred to in Sub-section (2) exceeds an amount calculated at two and one-half per cent.-
(a) of the cost of the project, or
(b) where the assessee is an Indian company, at the option of the company, of the capital employed in the business of the company, the excess shall be ignored for the purpose of computing the deduction allowable under Sub-section (1):
Provided that where the aggregate amount of expenditure referred to in Sub-section (2) is incurred after the 31st day of March, 1998, the provisions of this Sub-section shall have effect as if for the words 'two and one-half per cent.', the words 'five per cent.' had been substituted. Explanation. - In this Sub-section-
(a) 'cost of the project' means-
(i) in a case referred to in Clause (i) of Sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the business of the assessee commences ;
(ii) in a case referred to in Clause (ii) of Sub-section (1), the actual cost of the fixed assets, being land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation, in so far as such fixed assets have been acquired or developed in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the assessee;
(b) 'capital employed in the business of the company means-
(i) in a case referred to in Clause (i) of Sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the business of the company commences ;
(ii) in a case referred to in Clause (ii) of Sub-section (1), the aggregate of the issued share capital, debentures and long-term borrowings as on the last day of the previous year in which the extension of the industrial undertaking is completed or, as the case may be, the new industrial unit commences production or operation, in so far as such capital, debentures and long-term borrowings have been issued or obtained in connection with the extension of the industrial undertaking or the setting up of the new industrial unit of the company ;
(c) 'long-term borrowings' means-
(i) any moneys borrowed by the company from Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India or any other financial institution which is eligible for deduction under Clause (viii) of Sub-section (1) of Section 36 or any banking institution (not being a financial institution referred to above), or
(ii) any moneys borrowed or debt incurred by it in a foreign country in respect of the purchase outside India of capital plant and machinery, where the terms under which such moneys are borrowed or the debt is incurred provide for the repayment thereof during a period of not less than seven years.
(4) Where the assessee is a person other than a company or a cooperative society, no deduction shall be admissible under Sub-section (1) unless the accounts of the assessee for the year or years in which the expenditure specified in Sub-section (2) is incurred have been audited by an accountant as defined in the Explanation below subsection (2) of Section 288, and the assessee furnishes, along with his return of income for the first year in which the deduction under this section is claimed, the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
(5) Where the undertaking of an Indian company which is entitled to the deduction under Sub-section (1) is transferred, before the expiry of the period of ten years specified in Sub-section (1), to another Indian company in a scheme of amalgamation,-
(i) no deduction shall be admissible under Sub-section (1) in the case of the amalgamating company for the previous year in which the amalgamation takes place ; and
(ii) the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place.
(5A) Where the undertaking of an Indian company which is entitled to the deduction under Sub-section (1) is transferred, before the expiry of the period specified in Sub-section (1), to another company in a scheme of demerger,-
(i) no deduction shall be admissible under Sub-section (1) in the case of demerged company for the previous year in which the demerger takes place, and
(ii) the provisions of this section shall, as far as may be, applied to the resulting company, as they would have applied to the demerged company, if the demerger had not taken place.
(6) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure specified in Sub-section (2), the expenditure in respect of which deduction is so allowed shall not qualify for deduction under any other provision of this Act for the same or any other assessment year.
7. Based on Sub-section (2)(a)(iii), extracted above, it is the vehement contention of the learned Counsel for the appellant, that the expenses incurred by the respondent-assessee in making payments to M/s. Coopers and Lybrands, must be treated as expense incurred for conducting 'market survey or any other survey necessary for the business of the assessee.' Unfortunately, learned Counsel for the appellant could not invite our attention to any part of the pleadings or any of the orders rendered by the Revenue authorities, wherefrom it could be concluded that the engagement of M/s. Coopers and Lybrands by the respondent-assessee was aimed at conducting market survey or any other survey necessary for the business of the assessee. The substantial questions of law framed by the assessee in the instant appeal, however, reveal that the report submitted by M/s. Coopers and Lybrands, whose services had been engaged by the respondent-assessee, pertained to 'reorganization of core business of the respondent-assessee and improving its market share and profitability.' As such, it is not possible for us to accept that the expenditure incurred by the respondent-assessee can be considered to be an expense falling within the purview of Sub-section (2) (a) (iii) of Section 35D of the 1961 Act. It is, therefore, not possible for us to accept the first contention advanced by the learned Counsel for the appellant.
8. The second contention advanced by the learned Counsel is based on Rule 46A of the Income-tax Rules, 1962 (hereinafter referred to as the 1962 Rules). The aforesaid rule pertains to the production of additional evidence before the Deputy Commissioner (Appeals) or the Commissioner of Income-tax (Appeals). In this behalf, it is the submission of the learned Counsel for the appellant, that the Commissioner of Income-tax (Appeals) while entertaining the appeal preferred by the respondent-assessee, against the order passed by the Assessing Officer dated March 28, 2001, allowed the respondent-assessee to adduce additional evidence. In order to substantiate the instant contention, learned Counsel for the appellant has placed reliance on the order passed by the Assessing Officer, wherein the following observations were recorded:
The assessee was required to produce the proposal dated October 23, 1996, entered into with M/s. Coopers Lybrands. In response, the assessee has filed letter dated September 23, 1996. According to this letter, a proposal was made on September 4, 1996, which has not been filed by the assessee. As per this letter the time scales for the individual parts of the assignments are as under:Assignment start 1-10-1996Strategy document rendered by 25-11-1996Agreement on strategy by 30-11-1996Business plan complete by 31-1-1997Implementation plan complete by 15-4-1997
9. On the basis of the aforesaid contention, it is the submission of the learned Counsel for the appellant, that the only material placed by the respondent-assessee before the Assessing Officer, was the letter dated September 23,1996. It is submitted by the learned Counsel that in spite of the fact that the respondent-assessee only placed reliance on the aforesaid letter dated September 23, 1996, the appellate authorities took into consideration a host of other material. In this behalf, learned Counsel invited our attention to material taken into consideration by the appellate authorities by referring to the observations recorded by the Commissioner of Income-tax (Appeals) in his order dated January 10, 2003, highlighting the following material relied upon by the respondent-assessee:
1. The assessee-company had approached M/s. Coopers and Lybrands, a management consultant, to study the performance of the company and to suggest reorganization pf its core business to significantly improve the market share and profitability.
2. The total work was divided into different phases.
3. The services rendered by M/s. Coopers and Lybrands in respect of:
1. Business reforms and its reorganization.
Reports cover existing marketing structure and improvement in the marketing system, etc., plus administrative reforms in a vast scale no part of the report relating to any suggestion in the nature of capital expenditure.
A copy of the 'executive summary' furnished by M/s. Coopers and Lybrands on the areas covered is enclosed.
4. The complete detail of the study conducted by M/s. Coopers and Lybrands has been submitted in 2 volumes running into 235 pages the same is being produced before your honour.
5. Copy of letter received from M/s. Coopers and Lybrands is enclosed.
10. It is not possible for us to accept the second submission advanced by the learned Counsel for the appellant for the sole reason, that no challenge has been raised at the hands of the Revenue in the instant appeal assailing the action of the Commissioner of Income-tax (Appeals), in allowing the respondent-assessee to bring to its notice additional evidence not available before the Assessing Officer, and/or the reliance thereon by the Income-tax Appellate Tribunal. Had the submission made by the learned Counsel for the appellant been actually correct, the instant appeal would definitely have been preferred with a pointed plea on the submission advanced by the learned Counsel for the appellant. Even otherwise, we are of the view that the extract from the order passed by the Assessing Officer, reproduced hereinabove (which is the sole basis for the instant submission) cannot lead to the conclusion that no other material was placed by the res-pondent-assessee before the Assessing Officer, besides the letter dated September 23, 1996. In the extract reproduced above, the Assessing Officer merely notices, that in response to a direction issued by the Assessing Officer to the respondent-assessee to produce the proposal dated October 23, 1996, entered into with M/s. Coopers and Lybrands, the respondent-assessee produced a letter dated September 23, 1996. That, in our view, cannot by itself lead to the inference, that the material referred to by the Commissioner of Income-tax (Appeals) in his order dated January 10, 2003, had not been produced by the respondent-assessee before the Assessing Officer. Thus viewed, we find no merit in the second submission advanced by the learned Counsel for the appellant.
11. The last contention advanced by the learned Counsel for the appellant was to the effect, that the respondent-assessee is likely to have a long-term benefit from the report submitted by M/s. Coopers and Lybrands. It is also the contention of the learned Counsel for the appellant, that the Income-tax Appellate Tribunal overlooked the fact, that the scope of study was spread over a span of three years. It was also submitted that heavy expenses were incurred by the respondent-assessee in engaging M/s. Coopers and Lybrands, for the project under reference. It is, therefore, the vehement contention of the learned Counsel for the appellant, that the expenses incurred by the respondent-assessee should be treated as a capital expense and not as a revenue expense.
12. We have considered the last submission advanced by the learned Counsel for the appellant, in the background of the conclusions drawn in the impugned order dated January 23, 2007, rendered by the Income-tax Appellate Tribunal. On a perusal of the aforesaid order, it is apparent that the Tribunal arrived at the following conclusion:
Firstly, that the business of the assessee, in respect of which M/s. Coopers and Lybrands was engaged, was in existence for a period of more than three decades, prior to the said engagement.
Secondly, the report given by M/s. Coopers and Lybrands on the basis of the study conducted by it, was in regard to the existing business of the respondent-assessee.
Thirdly, M/s. Coopers and Lybrands in its report had not given the respondent-assessee any information or technique for producing any new parts (which were not under the production of the respondent-assessee hereto before) nor did it render any technical know-how in respect of any manufacturing or processing or production activity of the respondent-assessee.
Fourthly, the report rendered by M/s. Coopers and Lybrands resulted in effecting economy and efficiency in the working of the company for manufacturing and selling of existing items, which gave the respondent-assessee a business advantage ; and
Fifthly, the expenditure incurred by the respondent-assessee had merely facilitated the respondent-assessee's trading operation and enabled it to manage and conduct the business more efficiently, while leaving the fixed capital untouched.
13. For the reasons depicted in the order passed by the Income-tax Appellate Tribunal, in respect whereof there is not the slightest dispute, we are satisfied that the pleas advanced by the learned Counsel for the appellant deserve to be rejected. Without controverting the reasons depicted in the order passed by the Income-tax Appellate Tribunal, some of which are purely factual conclusions, it is not possible for us to accept the submissions advanced by Revenue to return a finding, that the expense incurred by the respondent-assessee in engaging M/s. Coopers and Lybrands ought to be treated as a capital expense.
14. No other submission was advanced by the learned Counsel for the appellant.
For the reasons accorded hereinabove, the questions of law raised by the Revenue in the instant appeal, are held to be bereft of any merit. The instant appeal is, accordingly, dismissed.