By TIOL News Service

VIZAG, OCT 26, 2018: THE Issue is - Whether one time licence fees paid for setting up of a retail outlet, and that too before commencement of business, is to be capitalized and cannot be claimed as revenue expenditure. YES IS THE ANSWER.

Facts of the case:

The assessee is an individual, owning a rice mill and also carrying on the business of retail outlet of petrol bunk. During the year under consideration, the assessee claimed a sum of Rs.3,00,000/- towards licence fee which was disallowed by AO by holding the same as capital expenditure. It is observed by the AO from the details that the assessee had got a letter of intent for Retail outlet of Reliance petrol which was agreed, accepted and signed by the assessee and paid the sum of Rs.3,00,000/- towards signing fee. Since this amount was paid in the financial year 2004-05 but not during the current financial year of 2005-06, the AO held that the expenditure was neither incurred nor accrued in the concerned assessment year, and hence the same was not allowable as revenue expenditure in the year under consideration. The AO also observed that the expenditure was incurred for the purpose of setting up of Retail outlet, therefore, the expenditure was capital in nature. On appeal, the CIT(A) confirmed the order of AO.

Tribunal held that,

++ the assessee is following the mercantile system of accounting and the assessee has paid the sum of Rs.3 lakhs as a signing fee for the training of the dealers and its staff and supervision and coordination of the construction of the retail outlet. The payment was made to the Reliance Industries in A.Y 2005-06 and the expenditure is related to the setting up of the retail outlet incurred before commencement of the business. When queried, the assessee's counsel submitted that the retail outlet of the Reliance unit was commissioned from Oct 01, 2005, whereas the expenditure was incurred on Aug 07, 2004 and the relevant assessment year was 2005-06, but not the year under consideration. Since the unit was commissioned on Oct 01, 2005 and the expenditure was incurred during the construction period before commencement of the business, the said expenditure cannot be related to the expenditure of the relevant assessment year;

++ the assessee's counsel did not provide details with regard to the dates of training given by the Reliance Industries to dealers and the staff. Similarly, no break up of the expenses incurred for the training & construction related activities were submitted. The signing fee was one time payment which was related to the setting up of construction of Reliance petrol pump unit and the expenditure was incurred prior to the commencement of the business, therefore, the contention of assessee that the expenditure be treated as revenue expenditure for the year under consideration, cannot be accepted. Since the expenditure was incurred before the commencement of business, the expenditure required to be capitalized or the same should be amortized as per section 35D.

(See 2018-TIOL-1931-ITAT-VIZAG)