2015 (10) TMI 301 - AT - Income Tax

Disallowance of expenses as not being for the purpose of the business of the appellant - as per revenue assessee has not filed any documentary evidence to substantiate its claim before the AO - Held that - The correctness in the contention of the assessee that despite the fact that C-1 India incurred losses in the relevant previous year, the company had active business and the website of C-1 India also indicates the extensive business activities undertaken by them. We find that the company products and solutions in the Procurement space cover FRQ and Tender Management, vendor management, contract management, auction (reverse and forward), emarket place, sourcing services, consulting and supplier analytics etc. and the offer tailor made products and services based on the best practices specific to industry domain and the few screenshots from the company s website showing the products and services offered, awards and achievements. We observe the correctness in the contention of the assessee s counsel that these details are very much available on the internet which can be accessed by anybody. In view of the above, we find that assessee s counsel has rightly submitted that facts indicate the extent of business activities of C-1 India which is beyond doubt. Decision of the AO as well Ld. CIT(A) is not correct in disallowing the payment of ₹ 21,00,000/- by holding that the expenditure made by the assessee was not for the business purpose. We also observe that Revenue Authorities have wrongly held that there were inconsistency in the stand of the assessee for the nature of payment to C-1 India Pvt. Ltd. as well as that assessee company is controlled by Sh. Suresh Nanda for the purpose of payment and the payment appeared to have been made of set off the losses in the public company. We find that expenditure incurred by the assessee qualify as deduction u/s. 37(1) of the I.T. Act and the assessee fully established that the expenditure in dispute has been made wholly and exclusively for the purpose of business. IN view of the above, we find that there is a force in the arguments advanced by the Ld. Counsel of the assessee, hence, we delete the disallowance of ₹ 21,00,000/-. - Decided in favour of assessee.

Summary

Issues:
Disallowance of payment made to C-1 India Pvt. Ltd. by the assessee for the financial year 2003-04 under section 37(1) of the Income Tax Act, 1961.

Analysis:

Issue 1: Disallowance of Payment to C-1 India Pvt. Ltd.

The case involved an appeal by the Assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-I, New Delhi related to the disallowance of Rs. 21,00,000 paid to C-1 India Pvt. Ltd. The Assessing Officer disallowed the payment as not being for the purpose of the business of the assessee, suspecting it was done to reduce tax liability. The Ld. CIT(A) upheld this disallowance in the impugned order. The appellant contended that the expenditure was incurred for setting up a system to aid management decisions and maximize manpower utilization. The Memorandum of Understanding with C-1 India Pvt. Ltd. outlined the scope of work for Dynatron Exports Pvt. Ltd. The Tribunal found merit in the appellant's arguments, noting that the payment was for legitimate business purposes. It was observed that C-1 India had active business operations despite incurring losses, offering various products and services in the procurement space. The Tribunal concluded that the expenditure qualified for deduction under section 37(1) as it was wholly and exclusively for business purposes, overturning the disallowance.

The Tribunal highlighted that the Revenue Authorities incorrectly perceived inconsistencies in the nature of payment and control by Sh. Suresh Nanda. It was emphasized that the expenditure was legitimate and supported by documentary evidence. The Tribunal noted that the appellant had substantiated the business purpose of the payment adequately, emphasizing the extensive business activities of C-1 India. The Tribunal found that the AO and Ld. CIT(A) erred in disallowing the payment and concluded that the appellant had met the onus of establishing the expenditure's business nature. Therefore, the disallowance of Rs. 21,00,000 was deleted, and the appeal filed by the assessee was allowed.

In conclusion, the Tribunal's decision revolved around the legitimacy of the expenditure made to C-1 India Pvt. Ltd. for business purposes, emphasizing the need for expenses to be wholly and exclusively for business to qualify for deduction under section 37(1) of the Income Tax Act, 1961. The Tribunal found the appellant's explanations and documentary evidence convincing, leading to the deletion of the disallowance and allowing the appeal.