2021 (2) TMI 68 - AT - Income Tax

Disallowance of subscription fees paid - Deloittee Touche Tohmatsu (DTT) charges subscription fees to Deloitte Hasking Sells, Mumbai - AO observed that, the same is not in the nature of revenue expenditure and is also not expenses wholly exclusively related to the business and therefore not allowable u/s section 37(1) - HELD THAT - The issue of disallowance of subscription fees is concerned, we agree with the contentions of the Ld. Authorized Representative that this issue stands covered by the order of the Co-ordinate bench of this Tribunal in Assessment Year 2009-10 wherein held said amount was towards the reimbursement of the expenses, which was in fact incurred on behalf of the assessee and there was no profit element. Similar decision was taken for Assessment Years 2013-14 2014-15 2019 (10) TMI 349 - ITAT AHMEDABAD and assessment years 2011-12 and 2012-13 2021 (1) TMI 738 - ITAT DELHI - That being so, we decline to interfere with the order of Ld. CIT (A) deleting the aforesaid addition. we allow ground No.1 in both the years under consideration and direct the Assessing Officer to delete the disallowance. Allowability of legal and professional fees - whether the fees paid for defending the act of a partner can be considered to be an act committed during the ordinary course of business of the firm and whether the said expenditure can be said to have been incurred for the purpose of the business of the assessee? - HELD THAT - Assessee firm is a firm of Chartered Accountants and Shri Deepak Roy, while working in the capacity of the partner of the firm, had signed an audit report. The Registrar of Companies, Uttar Pradesh and Uttaranchal lodged a complaint against Shri Deepak Roy in terms of Section-233 of the Companies Act, 1956 and it was under these circumstances that the assessee company decided to defend the case of Mr. Deepak Roy. Although, the assessee company was defending a case which was in the name of the partner Mr. Deepak Roy, it cannot be said that defending the said case was not a part of the business activity for the company in as much as the reputation and goodwill of the assessee company was at stake. It is also beyond the doubt that the criminal complaint was filed against Mr. Deepak Roy in a matter which was related to the business of the company. In such circumstances, it is our considered view that the impugned expenditure incurred by the assessee company towards defending the suit in the name of the partner is deductible business expenditure.

Summary

Issues Involved:
1. Disallowance of subscription fees paid to Deloitte Touche Tohmatsu.
2. Disallowance of legal and professional fees paid to M/s Dua & Associates.

Issue-Wise Detailed Analysis:

1. Disallowance of Subscription Fees:
The assessee, a Chartered Accountant firm, had debited ?3,14,24,019/- towards subscription fees paid to Deloitte Touche Tohmatsu (DTT). The Assessing Officer (AO) disallowed this amount, arguing that the subscription fee was not wholly and exclusively for the purpose of business/profession. The AO's objections included the lack of a specific clause in the partnership deed regarding the payment to DTT and the nature of the payment being fees for professional or technical services, which required tax deduction at source (TDS) under section 194J of the Act.

The Tribunal noted that the issue was covered in favor of the assessee by previous orders of the Tribunal in similar cases, including the assessee's own case for Assessment Year 2009-10. The Tribunal emphasized that the subscription fees were essential for maintaining the global network, which facilitated international cooperation and business opportunities. The Tribunal also referenced decisions from other coordinate benches and the Ahmedabad Bench of ITAT, which had allowed similar claims.

The Tribunal concluded that the subscription fees were incurred wholly and exclusively for business purposes and directed the AO to delete the disallowance. The decision was based on the understanding that the fees were necessary for the firm's operations and were not merely a transfer of profit to the principal entity.

2. Disallowance of Legal and Professional Fees:
The assessee had paid ?17,41,389/- to M/s Dua & Associates to defend Mr. Deepak Roy, a partner, in criminal proceedings under Section 482 of the Criminal Procedure Code. The AO disallowed this amount, arguing that it was a personal expense and not incurred for business purposes.

The Tribunal examined the context of the legal fees, noting that Mr. Deepak Roy signed the audit report as a partner of the firm. The criminal complaint was related to his professional actions, and the firm's reputation and goodwill were at stake. The Tribunal held that the legal fees were incurred to defend the firm's interests and were thus deductible as business expenditure.

The Tribunal referenced the Gujarat Agro Oil Enterprises Ltd. v. CIT decision to support the contention that defending a partner in professional matters is a business expense. The Tribunal directed the deletion of the disallowance, concluding that the expenditure was incurred wholly and exclusively for the firm's business purposes.

Conclusion:
Both disallowances were set aside, and the appeals were allowed. The Tribunal directed the AO to delete the disallowances of the subscription fees and legal and professional fees, recognizing them as necessary business expenditures. The decision emphasized the importance of these expenses in maintaining the firm's operations and reputation.