Consultant's fees = Revenue or capital expenses

This query is : Resolved

V. P. Vidwans (Querist)
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30 April 2010 Dear friends,
Pl accord yr opinon ont he following:

FACTS :

The Assessee is an unlisted public ltd. Company operating in Mumbai. It has formed an SPV in the US with one US Company. Shareholding in this SPV is 50:50. SPV acquired about 51% stakes in another running US Company in the US. The Assessee has availed of services of one consultant in Mumbai for this transaction. The investment made in SPV will be classified as ‘Investments’ in the Balancesheet of the Assessee.

QUERY :

- Please advise whether the fees paid to the consultants for the above transaction are to be capitalized in the ‘Investment’ or to be expensed out fully to Profit & Loss Account, for the purpose of compiling the Accounts as per the Schedule VI to the Companies Act.
- Please advise whether the said fees is ‘fully deductible’ for Income Tax purpose in the year of accrual or to be capitalized & to be added to the cost of shares.
- Please support your advice with suitable sections / case laws etc.

PHANI

PHANI (Expert)
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13 May 2010 Hi

Please refer to the Companies Accounting Standard rules, 2006 wherein it has a standard that deals with the accounting for investments. (ICAI AS-13)where it states that "the cost of investment should include acquisition charges such as brokerage, fees and duties." In case the fee for the services rendered by the Mumbai consultant is in connection with acquiring 50% of stake in the SPV, then the cost of investments should include that fee as well.