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2018 (5) TMI 1574 - AT - Income TaxDisallowance made on account of management training expenses paid to MBA Graduates - allowable busniss expenditure - Held that - Once profit/income is determined, it is immaterial whether that income is offered for tax under the head Income from business or Income from other sources . As held in the case of United Commercial Bank Ltd. v. CIT 1957 (5) TMI 11 - SUPREME COURT held that the business income is broken up under different heads only for the purpose of computation of the total income; by that break up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Act for computation of income. The genuineness of impugned expenditure was not in doubt. The expenditure incurred wholly and exclusively for the purpose of business was allowable. Therefore, the assessee was entitled to deduction of salary expenses in question. Disallowance u/s 43B - service tax liability - Held that - Since these fees were not received by the assessee, naturally service tax liability also did not accrue as per the provision of section 6 of the service tax act hence not disallowable under section 43 B of the Act. Even otherwise disallowance under Section 43B was not warranted in this case, as Service Tax was not claimed as an expenditure, neither it stood debited to the P&L Account by the assessee
Issues Involved:
1. Disallowance of remuneration paid to management graduates. 2. Disallowance under Section 43B of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Disallowance of Remuneration Paid to Management Graduates: The primary issue pertains to the disallowance of management training expenses paid to MBA graduates by the assessee for the assessment years (A.Y.) 2008-09, 2009-10, and 2010-11. The assessee, engaged in rendering management consultancy services to the Hinduja Group, had hired fresh management graduates from premier institutes and paid them remuneration, which was subsequently disallowed by the Assessing Officer (AO) on the grounds that the expenditure was capital in nature and not incurred for business purposes. The AO's disallowance was based on the absence of evidence showing that the expenses were related to the assessee's business activities. The AO relied on the decision of Ram Bahadur Thakur (261 ITR 390) which pertains to disallowance under Section 40A(2) of the Income Tax Act. However, the assessee clarified that none of the payments were made to related parties, thus Section 40A(2) was not applicable. The CIT(A) upheld the AO's disallowance for A.Y. 2008-09 and 2009-10, but allowed the assessee's appeal for A.Y. 2010-11, observing that the expenses were justified and incurred for business purposes. The CIT(A) noted that the management graduates were utilized for providing services to in-house clients and group entities, and the salaries paid were lower than those payable to senior professionals. The Tribunal, after considering the rival contentions and examining the records, found that the assessee had provided sufficient evidence, including employment agreements, Form 16, and service agreements with group companies. It was noted that the expenses were not bogus and were incurred wholly and exclusively for business purposes. The Tribunal emphasized that the expenditure should be judged from the viewpoint of a businessman, not the revenue, and cited several case laws supporting this principle, including decisions from the Supreme Court in Walchand & Co. Pvt. Ltd. (65 ITR 381) and S.A. Builders Ltd. (288 ITR 1). The Tribunal concluded that the disallowance of remuneration paid to management graduates was not justified and deleted the disallowance for all three years under consideration. 2. Disallowance under Section 43B of the Income Tax Act: For A.Y. 2008-09, the AO disallowed ?10,82,059 under Section 43B, observing that the service tax payable shown in the balance sheet was not paid within the due date. The CIT(A) confirmed this disallowance, noting that the service tax component was not included as a trading receipt in the Profit and Loss Account. The Tribunal referred to its own decision in the assessee's case for A.Y. 2007-08, where the matter was restored to the AO for verification. The Tribunal observed that service tax is payable only upon receipt of the service fees, as per Rule 6(1) of the Service Tax Rules. Since the service tax liability had not crystallized due to non-receipt of fees, the disallowance under Section 43B was not warranted. The Tribunal also cited the decision of the Bombay High Court in CIT vs. Ovira Logistics (P.) Ltd. (377 ITR 129), which held that service tax liability arises only upon receipt of consideration. The Tribunal concluded that the disallowance under Section 43B was unjustified and deleted the disallowance for A.Y. 2008-09. Conclusion: The appeals for A.Y. 2008-09 and A.Y. 2009-10 were allowed, and the appeal for A.Y. 2010-11 was dismissed. The Tribunal found that the disallowance of remuneration paid to management graduates and the disallowance under Section 43B were not justified based on the evidence and legal principles presented.
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