In a recent judgment, the Delhi High Court ruled that not all expenses resulting in an enduring benefit qualify as capital expenditure and dismissed a penalty appeal filed by the Income Tax Department.
The case arose from a penalty imposed on Genpact Services LLC for Assessment Year 2010–11, concerning a disallowed claim of Rs. 16.62 crore as revenue expenditure. The company acquired customer contracts, assembled a workforce as part of a business acquisition, and claimed a portion of the cost as revenue expenditure. The Assessing Officer disagreed, treating it as capital expenditure and allowing only partial depreciation. Penalty proceedings were initiated because the assessee furnished inaccurate particulars of income.
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The company challenged the penalty before the Commissioner of Income Tax (Appeals), who ruled in the company’s favor. The CIT(A) found that the nature of the expenditure was debatable and referred to judicial precedents, including the Supreme Court’s ruling in Empire Jute Co. Ltd. v. CIT, which held that an enduring benefit does not automatically mean an expenditure is capital in nature.
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The CIT(A) ruled that the assessee had disclosed all relevant facts and made a bona fide claim based on an arguable interpretation of the law. The Income Tax Department appealed this decision to the ITAT, which upheld the CIT(A)’s order but did so solely on the technical ground that the penalty notice issued under Section 274 read with Section 271(1)(c) was vague.
Before the Delhi High Court, the revenue reiterated its position, but the court observed that the issue was already settled through several binding decisions.
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The bench comprising Justice Vibhu Bakhru and Justice Tejas Karia observed that no substantial question of law arose. The court held that vague penalty notices violate principles of natural justice, especially when the underlying claim is legally debatable and factually disclosed in tax filings. The court dismissed the Revenue’s appeal and upheld the relief granted to Genpact Services LLC.
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