2016 (11) TMI 735 - AT - Income Tax

Adhoc disallowance of expenditure - Held that - Both the parties fairly agreed that the decision taken by the Tribunal for A.Y. 2010-11 can be applied in this year. Under these circumstances, the disallowance is restricted to 2% against 5% sustained by the Ld. CIT(A) Disallowance of professional fee paid to an interior designing consultant - addition on the ground that it was not incurred for the running of the business - Held that - Merely because the assessee could not get the real benefit out of it, it cannot be said that the expenses were not incurred for the purposes of business of the assessee. Rendering of services and receipt of actual benefit are two different ends. What is important for allowability of an expense as business expense is that the assessee must receive service from the service provider and it should be meant for the purpose of business of the assessee. Both of these conditions are undisputedly fulfilled here. Thus, in our view, the disallowance has been wrongly made by the Assessing Officer and the same is, therefore, directed to be deleted. Disallowance of commission fee paid - Held that - Complete documentary evidences have been brought on record by the assessee evidencing the payment and availment of services rendered by the payee. In our view, the Tribunal has rightly allowed the claim of the assessee. No different decision can be taken in the year before us. The payee remains the same; all the facts and circumstances also remain the same. Thus, respectfully following the order of the Tribunal for A.Y. 2007-08, we allow the payment of commission

Summary

Issues Involved:
1. Adhoc Disallowance
2. Disallowance under Section 14A
3. Disallowance of Professional Fee
4. Disallowance of Conducting Fee/Commission Fee

Issue-Wise Detailed Analysis:

1. Adhoc Disallowance:
- Background: The Assessing Officer (AO) made an adhoc disallowance of ?1,75,267, being 10% of the total expenditure, suspecting personal use without supporting evidence. The Commissioner of Income-tax (Appeals) [CIT(A)] reduced this to 5%.
- Tribunal’s Decision: Referring to the Tribunal's decision for A.Y. 2010-11, where the disallowance was further reduced to 2%, the Tribunal noted that the AO had not pinpointed specific personal expenses. The Tribunal emphasized that the assessee provided ledger accounts and all expenses were incurred for business purposes. Therefore, the disallowance was restricted to 2% for consistency and to end litigation.

2. Disallowance under Section 14A:
- Background: The AO made an adhoc disallowance of ?2,58,650 under Section 14A, which was confirmed by CIT(A) using Rule 8D of the Income Tax Rules. The assessee argued that no expenses were incurred to earn tax-free dividend income.
- Tribunal’s Decision: Following the Tribunal's earlier decision for A.Y. 2010-11, where the disallowance was reduced to ?1 lakh from ?3,41,763, the Tribunal reiterated that Rule 8D applies only if the AO is not satisfied with the assessee's claim. The Tribunal directed reducing the disallowance to ?1 lakh, emphasizing that disallowance should be reasonable.

3. Disallowance of Professional Fee:
- Background: The AO disallowed ?4 lakhs paid as professional fees to an interior designing consultant, arguing it was not incurred for business purposes. The assessee contended that the payment was for consultancy on refurbishing the office, paid by cheque with TDS deducted.
- Tribunal’s Decision: The Tribunal noted that the payment was made by cheque, TDS was deducted, and services were rendered by the consultant. The Tribunal emphasized that the genuineness of the transaction was not disputed, and rendering of services was sufficient for the expense to be considered business-related. Therefore, the disallowance was directed to be deleted.

4. Disallowance of Conducting Fee/Commission Fee:
- Background: The AO disallowed ?15,78,624 paid as a commission to M/s Northpoint Training & Research Pvt. Ltd., alleging misappropriation of profit. The CIT(A) upheld this, despite the Tribunal allowing similar payments in A.Y. 2007-08.
- Tribunal’s Decision: The Tribunal referred to its decision for A.Y. 2007-08, where the commission was allowed, noting that services were rendered, and payments were made for business purposes. The Tribunal criticized the CIT(A) for not considering the complete facts and emphasized that the same facts and circumstances prevailed in the current year. Therefore, the Tribunal allowed the commission payment, following the precedent set in A.Y. 2007-08.

Conclusion:
The appeal was partly allowed, with the Tribunal providing relief by reducing or deleting the disallowances based on precedents and the genuineness of the transactions. The order was pronounced on September 21, 2016.