Professional charges paid for a failed land deal entered into for expansion of business can be treated as revenue expenditure

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Sec 37(1) – Can assessee treat professional charges paid for a failed land deal entered into for expansion of business as revenue expenditure? – YES, says ITAT

The issue before the Tribunal is – Whether AO is right in disallowing professional charges paid by the assessee for a failed land deal entered into for expansion of business. Whether treatment of professional charges under I-T Act is to be the same for a failed deal and a consummated land deal. And the Tribunal has ruled in favour of the assessee.

Facts of the case

Assessee Company is into the business of scientific research and development. To expand its business it entered into an agreement for the purchase of land situated at Yeshwant Pura. The deal of this land did not materialise due to some reasons. However, while computing the income of the impugned year the assessee claimed deduction for the professional charges paid for drafting of agreement and verification of title of this land as business expenditure. AO did not allow the same observing that similar type of expenses were capitalized by the assessee in subsequent materialised deal. CIT (A) allowed the appeal of the assessee.

On appeal, the Tribunal held that,

• at the out-set, the AO perhaps got confused with the entire issue when he compared a fell-through transaction with a completed transaction in which the assessee had acquired an asset (Hebbal property). As far as the Yeshwantpur land was concerned, the assessee had incurred certain professional expenses towards drafting of the sale agreement, verification of title etc., However, the transaction, according to the assessee, had fallen through which was not disputed by the AO either. The expense incurred claimed by the assessee as revenue expenditure was turned down by the AO on the sole ground that when the assessee had capitalized the legal expenses incurred in connection with the transaction of Hebbal land, the same yardstick should have been applied in respect of Yeshwantpur land too. He disagreed with the logic adopted by the assessee in treating of identical transactions differently and, thus, treated the professional expenses as capital expenditure and concluded the assessment accordingly;

• however, the CIT (A) took a divergent view and agreed with the assessee’s arguments and decided the issue in favour of the assessee;

• as could be seen from the impugned assessment order, the assessee was very fair in its approach in treating the expenses incurred with regard to Hebbal land as capital expenditure and, accordingly, capitalized the said expenditure with the cost of the asset. In respect of Yeshwanthpur land, since the transaction itself fell through and the expenses incurred towards professional charges were claimed as revenue expenditure. It was very apparent to note that the said property had not been acquired by the assessee. To put it gently, the AO was not justified in treating the twin transactions as similar in nature whereas the one transaction being a completed one, the assessee had acquired the said land and another (Yeshwanthpur land) being drifted away. Such being the ground reality, both the transactions cannot be categorized as identical which in fact were on the different footing;

• the facts and circumstances of the assessee’s case fall within the ambit of s. 37 (1) of the Act. The CIT (A) was very fair in deciding the issue in favour of the assessee after taking into cognizance the circumstances under which the assessee had to incur professional charges in respect of Yeshwantpur land.

Revenue’s appeal dismissed.