THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE SANJAY KUMAR ITTA No.270 of 2011 Dated:15.11.2011 Between: The Commissioner of Income Tax I, Hyderabad. …Petitioner And M/s.Biological E.Ltd 18/1/&3, Azamabad Hyderabad. …Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE SANJAY KUMAR ITTA No.270 of 2011 JUDGMENT: (per Hon’ble Sri Justice V.V.S.Rao) This appeal by the Revenue under Section 260-A of the Income Tax Act, 1961, is against the order dated 18.01.2008, in ITA No.1064/Hyd/2002 passed by the Income Tax Appellate Tribunal, Hyderabad Bench ‘B’, Hyderabad. The brief facts of the matter, to the extent necessary for disposing of the appeal at the stage of admission, are as follows. For the assessment year 1999-2000 the respondent filed the return admitting the income of Rs.3,91,95,220/-. It was taken up for scrutiny. The Assessing Officer, inter alia, proposed to treat an amount of Rs.2,06,38,850/- as capital expenditure. In the return the assessee, however, claimed it to be revenue expenditure incurred towards professional charges for availing the services of M/s.Mc.Kinsey & Co. The assessee appeared and presented its case but in vain. Against the assessment order dated 15.03.2002, the assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals)-II. By an order dated 25.09.2002, the appellate authority allowed the appeal placing reliance on the decision of the Supreme Court in Alembic Chemical Works Co.Ltd v Commissioner of Income Tax, Gujarat[1] and the decision of Madras High Court in CIT v Crompton Engineering Co. Ltd. (Now Best and Crompton Engineering Ltd.)[2]. In this appeal, the Senior Standing Counsel for Income Tax submits that without referring to the report submitted by M/s.Mc.Kinsey & Co., the Tribunal came to the conclusion that the professional services were availed only for restructuring the company and not for the purpose of introducing a new product or a new plant or machinery. In that view of the matter, according to the Counsel, the finding recorded by the Tribunal is perverse. He does not, however, dispute the legal position as discussed by the Tribunal which derives support from Alembic Chemical Works Co.Ltd. Whether expenditure is of capital or revenue nature depends on, as rightly submitted by the Counsel for Income Tax Department, various factors. If professional charges are paid for setting up a new plant or introducing a new technology in manufacturing, different considerations would have to be applied while appreciating the contention of the assessee that such professional charges cannot be treated as revenue expenditure. On the other hand if an ongoing concern avails professional charges for restructuring its management or streamlining its manufacturing method, not having the effect of setting up a new plant but only upgrading the existing technologies, it has to be certainly treated as revenue expenditure. In Alembic Chemical Works Co.Ltd., the Supreme Court made the following observations. In computing the income chargeable under the head “Profits and gains of business of profession”, section 37 of the Act, enables the deduction of any expenditure laid out or expended wholly and exclusively for the purpose of the business or profession, as the case may be. The fact that an item of expenditure is wholly and exclusively laid out for purposes of the business, by itself, is not sufficient to entitle its allowance in computing the income chargeable to tax. In addition, the expenditure should not be in the nature of a capital expenditure. In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is well nigh impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation… While holding that it is impossible to formulate any general rule, some broad and general tests suggested from time to time in various reported cases were considered which tests are generally efficacious and served as useful servants; but as masters they tend to be over-exacting. From the judgment of the Supreme Court we may cull out the following. i) If the outlay is on the “acquisition of the concern” it would be capital, while an outlay in “carrying on the concern” is revenue. ii) If the expenditure is “once for all” it is capital and if it is “going to recur every year” it is revenue expenditure. iii) If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and it is in the nature of capital expenditure. If the expenditure is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce profits, it is a revenue expenditure (Assam Bengal Cement Companies Ltd. v CIT[3]). In Alembic Chemical Works Co.Ltd., the Supreme Court also observed that “the idea of 'once for all' payment and 'enduring benefit' are not to be treated as something akin to statutory conditions; nor are the notions of 'capital' or 'revenue' a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must need be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasize the element of a sufficient degree of durability appropriate to the context”. Thus, there is no single definitive criteria determinative of the nature of expenditure incurred by the assessee. If the fact-finding authority records a finding that the professional charges paid to a management consultant firm is only for bringing out improvements and ushering in structural changes, by no stretch of imagination can it be treated as a capital expenditure. In this connection we may quote from the impugned order of the Tribunal itself with which we agree. In the light of the above judicial pronouncements, if we consider the facts of the case under consideration, we find that the professional charges paid to McKinsey & Co. was for not acquiring any know-how but was paid for restructuring its management and products connected with the existing ongoing business. It is admitted facts of the case that the payment was not made for any new product or new plant or machinery. The payment was made for the purpose of running the business. The assessee company with the intention of bringing about improvement in the way it did its business and has sought to obtain report of the consultants so that efficiency of the business could be increased by employing better method and reorganizing its business to the extent required. Merely obtaining report from Management Consultant and paying fees therefore, cannot be regard as capital expenditure; as such report was not obtained as part of documentation packages but in respect of comprehensive restructuring of the business involved. No new line of business was started on the report of the consultants. There is also no dispute that there was a running business. It was not a case where business was in the process of establishing. The business of the assessee was already running and it was in connection with the running of business that technology was acquired and technology so acquired for running business should ordinarily be deductible as revenue expenses especially in the context of the change of technology. Our above finding is fortified by the judgment of the Apex Court in the case of CIT Vs Ciba of India Ltd. (69 ITR 692) (SC) and Alembic Works Co.Ltd Vs. CIT (177 ITR 377). In this case, the report submitted by M/s.Mc.Kinsey & Co., would certainly have thrown considerable light on the nature of consultancy availed by the respondent – assessee. This Court on 23.08.2011 adjourned the matter giving time to the Senior Standing Counsel to produce the copy of the report of the consultant. It was not produced. We are aware that sitting in appeal under Section 260- A of the Income Tax Act, ordinarily we cannot travel beyond the finding of fact recorded by a fact-finding authority like the Tribunal. Even then, to satisfy our conscience the report was called for, which is not produced. The Senior Standing Counsel submits that the report is not available in the Department. In the absence of the same, the plea of perversity cannot be considered. The appeal is accordingly dismissed. No costs. _______________ (V.V.S.RAO, J) _____________________ (SANJAY KUMAR, J) 15.11.2011 vs [1] (1989) 177 ITR 377 (SC) [2] (2000) 242 ITR 317 (Mad) [3] (1995) 27 ITR 34