2018 (9) TMI 949 - AT - Income Tax

Additions on account of professional fees paid to a member of the assessee Association of Person AOP - CIT(A) concluded that the income was transferred without actual receipt of any services and ITD was merely name lending entity and therefore the payments under question were mere appropriation of profits - business expediency - Held that - Upon perusal of documents on record, we find that the entity namely ITD was merely a name lending entity whose association was vital to the award of the contract. The whole responsibility / obligations arising out of the contract lay on the other entity, which is also not in dispute. No material has been placed on record to suggest that ITD has provided any real services under the contract except lending its association / name against which it has been paid impugned leadership fees @3.5%. The assessee, all along has justified the same on the ground of commercial expediency. However, we find that the assessee was an AOP and the provisions of Section 40(ba) specifically disallow payment made by AOP to its member on account of interest, salary, bonus, commission or remuneration, by whatever name called. Secondly, upon careful consideration of the factual matrix, we find that the impugned payment were mere appropriation of profits and could not be allowed as a deductible expenditure. The share of the contract receipts was predetermined and the same was nothing but the profit sharing ratio only. So far as the contentions that no such additions have been made in earlier AYs, we find no strength in the same since each AY was independent unit of assessment and the principle of res-judicata were not applicable to income tax proceedings. - appeal dismissed

Summary

Issues involved:
1. Confirmation of additions on account of professional fees paid to a member of the assessee Association of Person [AOP].
2. Deductibility of payment of leadership fees.
3. Disallowance of payment made by AOP to its member.
4. Appropriation of profits as deductible expenditure.
5. Applicability of principle of res-judicata in income tax proceedings.

Detailed analysis:
1. The appeal contested the order confirming additions on professional fees paid to a member of the AOP for Assessment Year 2012-13. The AOP, engaged in a construction project, faced a sole addition of ?46.24 Lacs by the AO, which was the subject matter of the appeal.
2. The consortium agreement revealed ITD as a name lending entity, with Pratibha executing the project. The contract receipts were to be disbursed in predetermined ratios, with a leadership fee of 3.5% paid to ITD. The deductibility of this payment was the primary issue in the appeal.
3. The AO disallowed the payment based on Section 37(1) as mere appropriation of profits. The CIT(A) upheld this view, stating the income was transferred without actual receipt of services. The AOP defended the payment on grounds of business expediency.
4. The Tribunal found the payment to ITD as an appropriation of profits, not a deductible expenditure. Section 40(ba) disallows payments by AOP to its members, and the contractual terms indicated profit-sharing ratios, not genuine service payments.
5. The argument that no such additions were made in earlier years was dismissed, emphasizing the independence of each assessment year. The Tribunal upheld lower authorities' decisions, stating no reason to interfere. The appeal was dismissed on all grounds.

The judgment highlighted the importance of genuine service payments, disallowing mere profit appropriations as deductible expenses. It clarified the applicability of specific provisions regarding payments by AOP to its members and emphasized the independence of each assessment year in income tax proceedings.