2009 (10) TMI 53 - HC - Income Tax

Proof of expenses consultancy service - The Assessee come out with the plea that the real motive of the licensor was that Assessee firm should not have complete control on the usages of the premises in question and with a view to accomplish the aforesaid objective the Assessee had no option but to accept the the condition to pay an amount in the name to consultancy service to M/s Raas Consultants & Company Finding that in fact no consultancy services were provided by the said consultants the Assessing Officer disallowed the aforesaid expense held that - even when one has to go into the nature of the agreement it is clearly a consultancy services agreement - it is clear that the consultants had agreed to provide consultancy services in connection with the administration and management of the showroom. The appointment was in connection with the running of the music shop on the terms and conditions as set out in the said agreement expenses allowed.

Summary

Issues:
1. Disallowance of business expenses claimed for consultancy services.
2. Interpretation of consultancy agreement and its relation to business expenses.
3. Reversal of CIT(Appeal) decision by ITAT.

Issue 1: Disallowance of business expenses claimed for consultancy services
The appellant, engaged in trading music/video/audio cassettes, claimed business expenses for consultancy services from M/s Raas Consultants & Company. However, upon investigation, it was found that no consultancy services were provided by Mrs. Hina Jetha, the proprietor of the consultancy firm. The Assessing Officer disallowed the expense due to lack of services rendered.

Issue 2: Interpretation of consultancy agreement and its relation to business expenses
The CIT(Appeal) reversed the decision, stating that the consultancy fee was part of the rent for the premises, considering the agreement's clauses. It was argued that the agreement was co-terminus with the lease agreement, making the payment akin to rent. However, the ITAT disagreed, emphasizing that since no services were provided, the expenditure could not be considered a legitimate business expense. The Tribunal highlighted that the onus was on the assessee to prove the expenditure was wholly and exclusively for business purposes, which was not met.

Issue 3: Reversal of CIT(Appeal) decision by ITAT
The ITAT overturned the CIT(Appeal) decision, emphasizing that the consultancy charges were not akin to rent and the lack of services rendered made the expense unjustifiable. The Tribunal stressed that the agreement did not compel payment to Mrs. Hina Jetha, and without services provided, the expenditure could not be linked to the business purpose. The Tribunal reinstated the Assessing Officer's order, dismissing the appeal.

In conclusion, the High Court dismissed the appeals, noting that the Tribunal correctly analyzed the consultancy agreement's nature and the lack of evidence supporting the appellant's claim of being forced into the agreement. The Court found no legal issue and upheld the Tribunal's decision, ultimately denying the appeals.