THE issue before the Bench is - Whether when assessee is born out of restructuring of an Electricity Board, the expenditure incurred on IT support to LAN, upgradation of bandwidth and for coordination with BSNL for better connectivity is to be treated as capital in nature. And the answer goes against the Revenue.

Facts of the case

The assessee company is engaged in the business of generation, transmission and distribution of electricity in the State of Gujarat. The erstwhile Gujarat Electricity Board in a process of restructuring was demerged into seven different companies. Gujarat Urja Vikas Limited [GUVNL] was assigned the function of bulk purchase and sale of power. The return of income filed by the

assessee for the A.Y 200607 declaring Nil income and the book profit was shown which was revised later on account of some error in computation and the same was reduced. Return was processed under Section 143 (1) but later scrutinized. In scrutiny assessment, income and book profit under Section 115JB of the Act was computed. The Assessing Officer was of the opinion that an expenditure claimed under "Legal & Professional Fees" pertained to re-organization of the business of erstwhile Gujarat Electricity Board by way of demerger and also included expenditure pertaining to issue of allotment of shares; expenditure pertaining to Internet Bandwidth, supply and installation of software, legal and professional fees in respect of restructuring, etc. These expenses according to the Assessing Officer were not the business expenditures, but, were capital in nature, hence were disallowed.

In appeal, CIT [A] held that M/s C and F were paid certain amounts for preparation, finalization and for filing of the annual revenue requirement [ARR], petitions before GERC, for preparation of short termpower purchase agreements and for formulating strategies for demand side management. Moreover, other expenses were neither covered nor could be categorized as capital in nature. CIT [A] allowed the appeal of the assessee thereby holding that the payments made were not capital in nature.

The Tribunal concurred with the findings of CIT [A] and dismissed the appeal of the Department.

On appeal, the Court held that,

++ except for a sum of Rs 1.10 Crores [rounded off] said to have been expended towards IT system maintenance, counsel for the Department has hardly any resistance in treating such amount as business expenditure. As could be noticed, the particulars at serial nos. 1 & 2 represent expenditure of Rs. 90.61 lacs and Rs. 86.25 lacs [rounded off] are towards consultancy charges. Item No. 4 is "Filing Fees" given to GERC. Item No. 5 is the legal consultancy fees to advocate. Likewise, particulars in item nos. 6 & 9 are again respectively toward "Finance consultancy and IT consultancy charges". Likewise, Item Nos. 7 & 8 are also "advocate fees" paid to counsel to represent the assessee before the Gujarat High Court in Letters Patent Appeal as well as Special Civil Suits. Wherever, there was a legal consultancy or fees paid to the advocates, there is hardly any dispute that such fees cannot be said to have been capital in nature. The only emphasis is on the sum of Rs. 1.10 Crores which has been spent towards IT system by Gujarat Info Petro Limited. As could be noticed, this was for the purpose of supporting LAN networking for providing IT professional facility management service and also for coordination with BSNL for internet connectivity and providing IT providing and upgrading internet bandwith. It can be noted that such consultancy work and preparation of ARR can be said to be connected with the business of the assessee;

++ considering the principle of commercial trading, when the question is to be addressed, both the CIT [A] as well as the Tribunal rightly held it to be revenue in nature and the same cannot be said to be capital. It is quite apparent that the fees paid for support for LAN work; providing and upgradation of Internet Bandwidth, or for coordination with BSNL for internet connectivity, etc are not having any enduring benefit. If any consultancy is required for the said purpose, the amount clearly would come under the head of Consultancy and that surely could not be considered as capital in nature. In the present form, the expenditure made was at the best for continuing the benefit for one year. Resultantly, such payment cannot be categorized as capital in nature as no asset is brought into existence on account of such payment.