2018 (7) TMI 571 - AT - Income Tax

Disallowance on account of infrastructure and referral fee treating the same as non business expenses - Held that - There is no evidence that the assessee has used any other infrastructure facility located at such other places. It is also evident that the assessee till the preceding assessment year was able to do same nature of business activity from its place of business. It is also undisputed fact that the assessee did not get any referral client. There is no detail available on the record about the number of branches owned by both the companies and which the assessee was entitled to use. The assessee claimed to have used the office premises to the extent of 1800 sq feet along with other facilities of the said companies. But there are no individual details of the facility used by it has been furnished, e.g. how the area was determined, how the sitting arrangement of the assessee staff was made, how many telephone line was allotted to the assessee, what was the basis of the sharing of the expenses. Since assessee company is an NBFC registered with RBI, and it is carrying its business activity from a place other than its registered office. There was no detail filed by the assessee whether this fact was communicated to RBI intimating that it is carrying on its financial activities from a place other than its registered office. But no such detail was available on record. AO should re-examine the entire issue and therefore to verify the genuineness of the transaction, we remit the issue to the file of AO for fresh adjudication - Derided in favour of revenue for statistical purposes.

Issues Involved:
1. Disallowance of ?54,00,000/- on account of infrastructure and referral fee.

Issue-wise Detailed Analysis:

1. Disallowance of ?54,00,000/- on account of infrastructure and referral fee:

The Revenue challenged the deletion of disallowance amounting to ?54,00,000/- made by the Assessing Officer (AO) on account of infrastructure and referral fee. The AO observed that the net profit ratio of the assessee had significantly reduced from 25.1% to 3.63% of the turnover, despite no change in business activity. The fees of ?60,00,000/- were paid to Monarch Project & Finmarket Ltd. (?36 lacs) and Monarch Research & Brokerage Pvt. Ltd. (?24 lacs) for utilizing common infrastructure and client referrals. However, the AO noted that most clients were from Ahmedabad, where the assessee already had infrastructure. The agreement for infrastructure use was among three parties, but the assessee did not receive any income from the infrastructure it owned. The AO disallowed the expenses, citing lack of business expediency and the related party transactions under Section 40A(2)(b) of the Act.

The CIT(A) partially upheld the assessee's claim, noting that the payments were for common infrastructure facilities used by all three companies at Monarch House, Ahmedabad. The CIT(A) found the expenses reasonable, as they constituted only 5% of the total infrastructure costs. The CIT(A) observed that the payments were tax-neutral since the recipient companies paid taxes at the maximum marginal rate or under MAT. However, considering the possibility of excess payment, the CIT(A) restricted the disallowance to 10% of the total expenses, i.e., ?6,00,000/-.

The Revenue argued that the MOU, effective from 1st April 2012, did not apply to the relevant assessment year (2012-13). The AO's disallowance was based on Section 37(1) of the Act, not solely on Section 40A(2)(b). The assessee contended that the expenses were for business purposes and that the payments were tax-neutral.

The Tribunal noted several facts:
- No similar payments were made in the preceding year.
- The payments remained outstanding except for TDS.
- The agreement specified monthly payments, but no such payments were made.
- The agreement seemed to be an afterthought to divert profits.
- TDS was deducted and deposited at the end of the year.
- One recipient company paid taxes under MAT, not at the maximum marginal rate.

The Tribunal found that the assessee used infrastructure only in Ahmedabad, questioning the need to pay ?3,00,000 per month to Monarch Project & Finmarket Ltd., Mumbai. The agreement did not specify details of infrastructure at other locations. The assessee did not provide evidence of using other infrastructure facilities or details of shared expenses.

Given these observations, the Tribunal concluded that the AO should re-examine the issue to verify the genuineness of the transaction. The matter was remitted to the AO for fresh adjudication, allowing the Revenue's appeal for statistical purposes.

Conclusion:
The Tribunal remitted the issue of disallowance of ?54,00,000/- on account of infrastructure and referral fee to the AO for fresh adjudication, allowing the Revenue's appeal for statistical purposes. The Tribunal emphasized the need for a detailed examination of the genuineness of the transaction and the business expediency of the expenses claimed by the assessee.

← Previous Next →