2015 (7) TMI 1374 - AT - Income Tax

Disallowance u/s 40(a)(ia) - payment of operation and management charges AND reimbursement of expenses - CIT-A not applying the provisions of Section 40(a)(ia) of the Act in view of his findings that the above referred payments were Revenue in nature, being fees or rent paid for uses of infrastructural facilities and Brand - HELD THAT - As a look at the agreement between the assessee and the Adarsh Foundation Trust clearly reveals, the payment of 40% of profits each year - whichever is less, is paid by the assessee for grant of operation and management rights under clause 4.1 of the agreement. This is not for acquiring a brand but for use of a brand. The benefit is clearly in the revenue field since the benefit of this payment is on year to year basis and does not result in any enduring or lasting benefit beyond the relevant assessment year - CIT(A) was thus quite justified in holding that the expenses are revenue expenses in nature as these expenses are incurred to earn profits for the year. As regards the Assessing Officer s grievance that the CIT(A) ought to have disallowed the amount under section 40(a)(ia), it was never the case of the Assessing Officer. In any event, in view of the fact that second proviso to Section 40(a)(ia) has been held to be retrospective in effect, in the case of decision of Rajeev Kumar Agarwal 2014 (6) TMI 79 - ITAT AGRA It is an undisputed position that the Adarsh Foundation has duly accounted for these payments in computation of its taxable income, section 40(a)(ia) does not come into play on the facts of this case. DR has not pointed out any infirmity in the same. In view of these discussions, and bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. - Decided against revenue.

Summary

Issues:
Challenge to correctness of the order dated 19th April, 2012, passed by the CIT(A) regarding assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2009-10.

Detailed Analysis:

1. Disallowance of Expenses:
The Assessing Officer disallowed payments made for operation and management charges and reimbursement of expenses, treating them as capital expenses. The payments were made under an agreement granting the right to use the brand "SAL HOSPITAL." The Assessing Officer considered these expenses as capital in nature, leading to disallowance of a specific amount. The CIT(A) disagreed, deeming the expenses as revenue expenses. The main contention was whether the expenses were capital or revenue in nature. The Tribunal analyzed the agreement and concluded that the payments were for the use of the brand, not for acquiring it as a capital asset. The benefit derived was on a yearly basis, indicating a revenue nature. The Tribunal upheld the CIT(A)'s decision that the expenses were revenue expenses meant to earn profits for the year.

2. Disallowance under Section 40(a)(ia):
The Assessing Officer argued that even if the expenses were revenue in nature, they should have been disallowed under Section 40(a)(ia) due to non-deduction of tax at source. However, the Tribunal noted that the Assessing Officer did not raise this issue initially. Moreover, considering the retrospective effect of the second proviso to Section 40(a)(ia) and the proper accounting of payments by the recipient, the disallowance under this section was deemed unnecessary. The Tribunal referred to a previous decision supporting this interpretation. The Tribunal reviewed the relevant documents and found no fault. Consequently, the Tribunal upheld the CIT(A)'s decision and dismissed the appeal.

In conclusion, the Tribunal affirmed the CIT(A)'s ruling that the expenses were revenue in nature and declined to interfere in the matter. The appeal was dismissed on 21st July 2015.