ORDER
T.V.K. Natarajachandran, Accountant Member
1. to 13. [These paras are not reproduced here as they involve minor issues.]
14. The fourth issue relates to deduction of Rs. 50,000 paid to M/s Multiproducts of Ahemdabad. The assessee paid Rs. 50,000 as consultancy fees to M/s. Multiproducts, Ahmedabad for obtaining project report. The ITO observed that M/s Multiproducts had not given any such project report to any other person and the assessee is also derived benefit of the project report in the years to come and, therefore, the payment was capital in nature. Consequently, he disallowed the claim and added that to the total income.
15. On appeal, the CIT(A) considered the various facets of the project report and the services rendered by M/s. Multiproducts. As per letter dated 4-2-1984 M/s. Multiproducts had agreed to take up the project for market survey, consultation and advice for the assessee’s gas agency and the charge fixed for was Rs. 50,000 for the total jobs. The scope of the work undertaken as per the report is as under :-
(1) Improve customer relation
(2) Improve customer services
(3) Suggest modern working methods to achieve the above goal
(4) To establish MIS
(5) To guide in office automation & computerisation
(6) To increase profitability
(7) Suggest future course of expansion and other allied activities
(8) Methods to impart safety among the LPG users.
On the basis of the aforesaid data, the assessee contended that the report given by M/s Multiproducts for the purpose of facilitating carrying on the business in a more effective way by adopting modern management & technics and, therefore, the expenses should be treated as revenue in nature and not as capital in nature. The CIT(A) was in full agreement with the claim made by the assessee. According to the CIT(A), the market survey and project report did not bring in any advantage of enduring nature. It only provided broad and scientific management system to the assessee which helped in carrying on the business in a more effective way to provide better services to the customers while at the same time helping to increase the profit of the assessee. Therefore, he concluded that the expenditure is revenue in nature and, therefore, it has to be fully allowed. Consequently, he deleted the addition.
16. The learned D.R. has duly supported the conclusion of the ITO and stressed the ground taken by the Revenue. He filed a statement showing break up details of the consultation fees of Rs. 50,000 paid to M/s. Multiproducts. According to the statement, (i) for software development of Gas Agency working and selection of computer and training of personnel fees is Rs. 20,000; (ii) for management consultancy, selecting of personnel, steamlining of office work of Gas Agency etc. by devising of cash flow, work chart and customer satisfaction survey and suggestions arising of responsibility etc. for official working Rs. 25,000; and (iii) proposals for diversification new project facility on Pharmaceutical formulation Rs. 5,000. Accordingto him, the expenditure relating to item No. (ii) amounting to Rs. 25,000 alone is attributable to the Gas Agency business, while the expenditure relating to item Nos. (i) & (iii) relate to new line of business and, therefore, the nature of expenditure is capital and not revenue. Therefore, he supported the order of the ITO with respect to expenditure in item Nos. (i) & (iii).
17. The learned counsel for the assessee, on the other hand, filed a paper-book compilation and referred to the same in the course of his arguments. He has referred to page 25 of the paper-book in which M/s. Multiproducts by letter dated 4-2-1984 addressed to the assessee had agreed to take up the project for market survey, consultation and advice for the agency and for future expansion project for which charges were fixed at Rs. 50,000. Page 27 of paper book contains list of contents of the services rendered which include scope of work, stock taking, market survey, staff structure, reporting system, documentations & formalities, automation and computerisation and future projects/expansion. Referring to these documents, the learned counsel for the assessee stated that for running existing business more profitably, the project report was obtained and not for commencing any other business. He pointed out that though the business was commenced on 1-7-1983, the agreement was entered with M/s Multiproducts on 4-10-1984 to show that it is only out of commencement of the business, the expenditure on project report was incurred and not prior to carrying on the business in Gas Agency. In this connection, he referred to the decision of the Andhra Pradesh High Court in CIT v. Praga Tools Ltd. [1986] 157 ITR 282 at page 284. In that case, the assessee M/s. Praga Tools Ltd., a machine tools manufacturing co., incurred expenditure on consultancy services obtained from National Productivity Council for increasing the manufacturing efficiency and formulating incentive schemes. It was held by the Andhra Pradesh High Court that the expenditure was not incurred for acquiring asset of enduring nature but allowable as deduction. At page 284 of the report, it has been observed that the amount paid to National Productivity Council was paid for the benefit of increasing the manufacturing efficiency and formulating incentive schemes. In an age of speedy technological progress, no degree of permanency can be attached to these opinions given by the firms like the National Productivity Council on how to increase the production. They are all susceptible to modifications and alterations. Therefore, the fee paid to National Productivity Council was not regarded as expenditure incurred for acquiring asset.
18. He also referred to the decision of the Karnataka High Court in the case of CTT v. Karnataka State Industrial & Investment Development Corporation [1987] 163 ITR 657 [1986] 26 Taxman 575 wherein the expenditure incurred on project report and feasibility studies was held to be revenue expenditure. Reference was also made to the judgment of Supreme Court in the case of Alembic Chemical Works. Co. Ltd. v. CIT [1989] 177 ITR 377 43 Taxman 312.
19. We have duly considered the submissions of the parties. At the outset, we have to make a pointed reference to the letter dated 4-2-1984 conveying agreement of M/s. Multiproducts Ltd. for rendering services to the assessee. In this letter, besides market survey, consultation and advice for the gas agency, reference is also made for future expansion project. It is for this reason that the learned D.R. has furnished break up details of the fees paid to M/s. Multiproducts and argued that the expenditure relating to software development and proposal for diversification to new project facility on pharmaceutical formulation relating to different project was capital in nature. Page 34 of the paper compilation filed by the assessee contains Chapter VIII relating to future project and expansion in which it has been mentioned that there was hardly any future prospects for gas agency business because as per the prevailing rules now the ceiling limit is kept at 6000 refill sale per month and a distributor would not be getting new connection thereafter. Therefore, no additional income other than the commission on Cylinder delivery with prevailing commission of Rs. 3.62 per Cylinder delivery maximum income will not exceed Rs. 19,720 per month. Therefore, it was suggested that the ideal time for gas distributor to diversify is on the later part of the second year of operation. Therefore, it was suggested the project of Intravenous Transfusion solution would be economically viable and for this purpose, they enclosed the study report procured from M/s Core Consultants. Therefore, a perusal of the entire consultancy report including suggestion for future diversification shows that the entire fees paid to M/s. Multiproducts pertained to the Gas Agency business carried on by the assessee only and the bifurcation of the fees into three parts made by the learned D.R. is not warranted. Keeping in view the legal principles laid down in the cases of Praga Tools Ltd. (supra), Karnataka State Industrial & Investment Development Corpn. (supra) and Alembic Chemical Works Co. Ltd. (supra), the expenditure incurred by the assessee is revenue in nature because the assessee is already in business and being new to the line of business, he obtained the project report for running the business more profitably and the expenditure fell in the revenue field and not in the capital field though the benefit is enduring in nature. The decision of SC in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 3 Taxman 69 is relied on. Accordingly, we uphold the order of the CIT(A) on this point.
20. [This para is not reproduced here as it involves minor issue.]