2019 (5) TMI 200 - HC - Income Tax

Addition u/s 40A(2) - administrative service expenditure from sister concern as per agreement - documentary evidences not provided or given for the expenses claimed - AO disallowed the claim on the ground that there was no specific service which could be attributed to the Assessee and also on the ground of excessive payment in terms of Section 40A(2) - Tribunal was of the opinion that the business expediencies for incurring such expenditure cannot be questioned by the Revenue and in relation to Section 40A(2)(b) and there was no material on record to suggest that such expenditure was excessive or unreasonable having regard to the market value of the services for which the payment was made - HELD THAT - No error in the view of the Tribunal. As pointed out by the learned Counsel for the Assessee the Assessee and such other sister concerns would proportionately internally allocate administrative expenditure which allocation would be based on scientific distribution. Instead of different companies incurring such expenditure the same would be commonly undertaken by one company and different sister concerns would undertake a portion of such expenditure. Apart from the expenditure being motivated by business decision we do not discern any element of transfer of profit particularly when it is pointed out that the payee had also paid cash at the tax rate as that of the Assessee. - Decided against revenue.

Summary

Issues involved:
1. Disallowance of expenses claimed by the Assessee
2. Interpretation of Section 40A(2) of the Income Tax Act, 1961

Issue 1: Disallowance of expenses claimed by the Assessee

The Appeals in this case arose from a common background and were heard together. The main issue for consideration was whether the Income Tax Appellate Tribunal (ITAT) was correct in deleting the disallowance of expenses claimed by the Assessee amounting to ?4,74,29,222, as documentary evidence for the expenses was not provided. The Respondent Assessee, a Private Limited Company engaged in the business of manufacturing and selling automobile-related machinery, had claimed administrative service expenditure of ?3.72 Crores in its return of income for the Assessment Year 2009-10. The expenditure was related to services provided under an agreement with Tata Autocomp Ltd., including salary payments, advertisement, marketing staff training, sales promotion, and audit fees. The Assessing Officer disallowed the claim citing lack of specific attribution of services to the Assessee and excessive payment under Section 40A(2) of the Income Tax Act, 1961.

Issue 2: Interpretation of Section 40A(2) of the Income Tax Act, 1961

The Tribunal, in its judgment, allowed the expenditure claimed by the Assessee. It held that the Revenue did not dispute the terms of the agreement and that the business expediency for incurring the expenditure could not be questioned. Regarding Section 40A(2)(b) of the Act, the Tribunal found no evidence to suggest that the expenditure was excessive or unreasonable based on the market value of the services. It concluded that the expenditure was legitimate and necessary for the business. The Tribunal emphasized that the internal allocation of administrative expenditure among sister concerns was a valid business decision and did not involve any improper profit transfer. The Tribunal dismissed the Income Tax Appeals, upholding its decision to allow the claimed expenses.

In conclusion, the High Court of Bombay upheld the Tribunal's decision, finding no error in its view. The Court agreed that the Assessee had provided sufficient evidence to support the claimed expenses and that the expenditure was justified as being for legitimate business needs. The Court also concurred with the Tribunal's interpretation of Section 40A(2) of the Income Tax Act, 1961, and dismissed the Income Tax Appeals accordingly.