2018 (10) TMI 799 - AT - Income Tax

Ad-hoc disallowance of employee cost, administrative expenses, depreciation and interest expenses - Held that - A.O loosing sight of the fact that expenses would also have been incurred by the assessee in earning of royalty income and undertaking marketing and business development activities, therein most arbitrarily related the entire employee cost (Rs. 4,59,46,708/-); 50% of administrative expenses (Rs. 95,26,140/-); Interest cost (Rs. 24,00,419/-);and depreciation (Rs. 49,726/-) to earning of service income by the assessee. As the A.O had without any basis dislodged the claim of the assessee, wherein he had related specific expense to earning of the service income, thus, his view cannot be upheld. Further, we find that the CIT(A) also failed to appreciate that the A.O had whimsically allocated the expenses to earning of the service income by the assessee. The CIT(A) adopting the amount of ₹ 5,79,22,993/- as the expenditure allocable to earning of the service income, as determined by the A.O, had thus on the basis of such misconceived facts drawn adverse inferences in the hands of the assessee. We thus, are unable to persuade ourselves to subscribe to the observations of the lower authorities. Still further, we find that as observed by the CIT(A), disallowances of expenses involving identical facts was made by the A.O in the case of the assessee for A.Y 2009-10 and A.Y 2010-11, which were upheld by the CIT(A). - Decided in favour of assessee. Computing the tax liability of the assessee - not allowing credit for the tax deducted at source - application under Sec. 154 seeking rectification of the said mistake with the A.O, however, the same despite a specific direction by the CIT(A) to dispose of the same, is still pending - Held that - CIT(A) had vide his order dated 26.05.2016 directed the A.O to dispose off the rectification application of the assessee by way of speaking order in a time bound manner. We are of the considered view, that as the failure on the part of the A.O to comply with the directions of the CIT(A) emerges from the impugned order, and has been assailed by the assessee before us, thus, in all fairness direct that the A.O while giving appellate effect to our order shall allow credit of the TDS, if any, as per law.

Summary

Issues Involved:
1. Ad-hoc disallowance of employee cost, administrative expenses, depreciation, and interest expense.
2. Credit for tax deducted at source (TDS).

Issue-wise Detailed Analysis:

1. Ad-hoc Disallowance of Employee Cost, Administrative Expenses, Depreciation, and Interest Expense:

The appellant challenged the CIT(A)'s confirmation of the AO's ad-hoc disallowance totaling ?2,54,61,231/- for employee cost, administrative expenses, depreciation, and interest expense. The appellant argued that these expenses were incurred wholly and exclusively for business purposes and should not have been disallowed.

The assessee, engaged in providing technical know-how for manufacturing chemical products, had declared an income of ?10,93,203/- for A.Y 2011-12. During scrutiny, the AO noted various income streams including royalty, service fees, and other income. The AO allocated 50% of administrative expenses to earning royalty income and concluded that expenses of ?2,29,88,380/- were incurred for earning royalty income of ?2,62,72,942/-.

The AO did not accept the assessee's bifurcation of expenses related to service income and arbitrarily allocated the entire employee cost, 50% of administrative expenses, interest cost, and depreciation to service income, leading to a disallowance of ?2,54,61,231/-. The CIT(A) upheld this disallowance, reasoning that the allocation was scientific and aligned with decisions from previous years.

The Tribunal found that the AO's basis for recomputing costs attributable to service income lacked confidence and was arbitrary. The Tribunal noted that the assessee had provided bifurcated details of expenses which were summarily rejected by the AO. It concluded that the AO's allocation lacked basis and the CIT(A) failed to appreciate this arbitrariness. The Tribunal referred to its own decisions in the assessee's case for A.Y 2009-10 and A.Y 2010-11, where similar disallowances were deleted. Consequently, the Tribunal deleted the disallowance of ?2,54,61,231/-.

2. Credit for Tax Deducted at Source (TDS):

The appellant contended that the AO erred in not allowing credit for TDS of ?28,97,906/- deducted on royalty income of ?2,62,72,942/- by M/s Connel Brothers Company (India) Pvt. Ltd. The CIT(A) had directed the AO to dispose of the rectification application regarding this issue in a time-bound manner, but the AO failed to comply even after more than two years.

The Tribunal acknowledged the CIT(A)'s direction and observed the AO's non-compliance. It directed the AO to allow credit for the TDS while giving effect to its order, as per law.

Conclusion:

The Tribunal allowed the appeal, deleting the disallowance of ?2,54,61,231/- and directing the AO to allow credit for TDS of ?28,97,906/- as per law. The order was pronounced in the open court on 10.10.2018.