2018 (11) TMI 122 - AT - Income Tax

Disallowance of expenses incurred on support service u/s 37 - Both authorities have disallowed the expenses on the ground that, firstly, M/s. GRPL was not in a position to provide such services looking to its infrastructure; and secondly, it was a make believe arrangement from a sister concern to reduce the tax liability of the assessee, as M/s. GRPL s profits have been set off from brought forward losses. Held that - Nowhere has it been brought on record that M/s. HPL Infrastructure P. Ltd., i.e., assessee, during that period had its own office or infrastructure to carry on its business. Out of the said amount, ₹ 7,79,328/- has been paid for support services and infrastructure charges. Thus, the major expenses relate to these support services charges from where assessee was running its office. If the service has been rendered as per the work order and assessee has incurred the expenditure in the course of its business, then such an expenditure cannot be disallowed simply on the ground that payment has been made to a sister concern or there was no necessity for incurring such expenditure or it does not have much infrastructure in the form of fixed assets. Once it has been brought on record that M/s. GRPL has taken a lease on rent and also maintaining the office, who in turn is providing such office space and other infrastructure facilities to the assessee, then it cannot be held that it is a make believe arrangement, unless any contrary material is brought on record or any inquiry has been done from M/s. GRPL. - Decided in favour of assessee.

Summary

Issues:
Challenge to disallowance of expenses incurred on support services.

Analysis:
1. The appeal was filed against the order passed by the Ld. CIT (Appeals) for the assessment year 2013-14, challenging the disallowance of expenses amounting to &8377; 7,79,328 incurred on support services provided by M/s. Geoworks Realty Pvt. Ltd. The Assessing Officer (AO) raised concerns about the adequacy of infrastructure maintained by M/s. GRPL to provide support services, noting discrepancies in their fixed assets schedule.

2. The AO disallowed the entire claim based on observations that M/s. GRPL lacked sufficient infrastructure, did not have its own office, and the assessee already had assets like cars and computers. However, the assessee argued before the Ld. CIT (A) that M/s. GRPL had separate agreements for premises and maintenance, and TDS was deducted on payments made, indicating the genuineness of the expenses.

3. The Ld. CIT (A) upheld the disallowance, stating that M/s. GRPL, being a group concern, lacked the infrastructure to provide services. He also highlighted that the payments seemed to be made to reduce the assessee's taxable income, especially as M/s. GRPL's profits offset previous losses. No agreement was submitted by the assessee to support the claim.

4. Upon further review, the ITAT found that M/s. Geoworks Realty Pvt. Ltd. had a work order agreement with the assessee for various support services, including office space, reception, equipment, and staff support. Invoices were raised by M/s. GRPL, and the assessee made payments after deducting TDS. The ITAT emphasized that if services were rendered as per the work order and expenses were incurred in the course of business, disallowance based on the relationship with a sister concern or lack of necessity was unjustified.

5. The ITAT noted that the major expenses incurred related to the support services charges, essential for running the office. As M/s. GRPL provided the necessary infrastructure as per the agreement, the disallowance was deemed unwarranted unless contrary evidence was presented. Consequently, the addition of &8377; 7,79,328 was deleted, and the appeal of the assessee was allowed.

In conclusion, the ITAT ruled in favor of the assessee, emphasizing the legitimacy of the expenses incurred on support services as per the work order agreement with M/s. Geoworks Realty Pvt. Ltd. The judgment highlighted the importance of assessing the actual provision of services and the necessity of expenses in the course of business operations, rather than solely focusing on the relationship between entities or infrastructure ownership.