2018 (1) TMI 1489 - AT - Income Tax

Allowable business expenses u/s 37 - wholly and exclusively for the purpose of business - amount paid to Lok Foundation , an entity registered in Mauritius - agreement with Lok Foundation to help them identify certain investors and influence them to participate in Lok II - assessee provided services to the two overseas funds Lok I and Lok II and received advisory fees Held that - It is because the services provided by Lok Foundation that the increase in committed funds took place which consequently increased the assessee s advisory fees from ₹ 4.7 crore in the preceding year to ₹ 9.21 crore in the current year, which is roughly 93%. As against this, the assessee paid only a sum of ₹ 2.88 crore to the Lok Foundation. When the assessee received a composite amount of advisory fee which covered not only the services rendered by it alone, but also by Lok Foundation, by no standard, the payment made for securing services of Lok Foundation can be considered as not incidental to business. But for such services, the assessee would not have earned the revenue of this magnitude. Since such payment is incidental to carrying on of business. We are satisfied that the ld. CIT(A) rightly appreciated the facts in deleting the addition. - Decided against revenue

Summary

Issues:
Deletion of addition of ?2,88,43,934 made by the Assessing Officer.

Analysis:
The appeal filed by the Revenue challenged the order passed by the CIT(A) regarding the assessment year 2012-13. The sole ground raised in the appeal was against the deletion of the addition of ?2,88,43,934 made by the Assessing Officer. The case involved the assessee providing managerial, technical, consultancy, and investment research services to two overseas funds, receiving service income, and claiming a deduction of the said amount paid to 'Lok Foundation', a Mauritius-based entity. The Assessing Officer disallowed the deduction, stating it was not wholly and exclusively for the purpose of business. However, the CIT(A) overturned this decision, leading to the Revenue's appeal against the deletion.

Upon reviewing the facts and material on record, it was observed that the assessee was obligated to provide services to two overseas funds, Lok I and Lok II. The advisory fees received by the assessee from these funds included consideration for services rendered by both the assessee and Lok Foundation. The payment of ?2.88 crore to Lok Foundation resulted in an increase in committed funds and subsequently raised the assessee's advisory fees significantly. The increase from ?4.7 crore to ?9.21 crore, approximately 93%, was attributed to the services provided by Lok Foundation. Considering that the payment to Lok Foundation was crucial for the revenue generation, it was deemed to be incidental to the business operations. The Tribunal concluded that the payment was directly linked to the business activities and upheld the CIT(A)'s decision to delete the addition.

In conclusion, the Tribunal dismissed the appeal, affirming the CIT(A)'s decision to delete the addition of ?2,88,43,934. The judgment emphasized the essential connection between the payment to Lok Foundation and the substantial increase in revenue, establishing the payment as a legitimate business expense.