2021 (10) TMI 563 - AT - Income Tax

Disallowance of service expenses - said expense was not supported by evidences - Allowable business expenses or not? - HELD THAT - Although agreement entered between assessee and M/s. Sundaram Finance Ltd., was on 14.03.2013, but the services has been availed for the entire financial year on PAN India basis, which is evident from the fact that except shared cost and service expenses, no other expenses was incurred by the assessee in its business - when the assessee has demonstrated with evidence that it does not have any permanent establishment and other infrastructure facilities to carry out its business operations and further, it had availed services of M/s. Sundaram Finance Ltd., through network of its branches across the country, the AO was erred in disallowing expenses merely for the reason that said expense was not supported by evidences, more particularly when the assessee has filed agreement between the parties and debit note raised by M/s. Sundaram Finance Ltd. It is not a case of the AO that expenditure incurred by the assessee is not genuine. In fact, the AO has not questioned genuineness of expenses, but what was doubted is necessity and rationale behind incurring expenditure. It is a well settled principle of law that AO cannot question rationale behind incurring any expenditure. We further noted that in the subsequent financial year relevant to assessment year 2014-15, the AO has accepted the claim of the assessee towards reimbursement of shared cost and service expenses to M/s. Sundaram Finance Ltd. Therefore, we are of the considered view that when expenditure was considered as genuine and further, it was incurred wholly and exclusively for the purpose of business, then there is no reason for the AO to disallow said expenditure without assigning proper reasons. The ld.CIT(A) after considering relevant facts, has rightly deleted addition made by the AO - Appeal filed by the Revenue is dismissed.

Summary

Issues:
- Disallowance of service expenses
- Validity of agreement for sharing expenses
- Justification of expenses incurred by the assessee
- Disallowance based on lack of evidence
- Business purpose of expenses incurred
- Disallowance by AO without proper reasons

Analysis:

Issue 1: Disallowance of service expenses
The Revenue challenged the deletion of disallowance of service expenses amounting to ?2,19,95,966/- by the ld. CIT(A). The Revenue contended that the agreement for sharing expenses was made late in the year and monthly debit notes were not raised as per the agreement. The Revenue raised concerns about the huge expenditure incurred by the company as manpower outsourcing cost and other costs, questioning the legitimacy of the service expenses paid to another company.

Issue 2: Validity of agreement for sharing expenses
The Revenue argued that the agreement for sharing of expenses was made towards the end of the year and that monthly debit notes were not raised as per the agreement conditions. The Revenue further highlighted the lack of proper documentation and accurate break-up of costs reimbursed to the companies, emphasizing the importance of evidence in justifying the expenses.

Issue 3: Justification of expenses incurred by the assessee
The assessee justified the expenses by stating that they had entered into agreements with other companies for availing various services, including administrative and infrastructure facilities. The assessee explained that the expenses were shared based on revenue earned by the companies and provided evidence to support the reimbursement payments. The CIT(A) accepted the assessee's explanation and deleted the additions made by the AO.

Issue 4: Disallowance based on lack of evidence
The AO disallowed the expenses reimbursed by the company to another entity, suspecting it to be a shifting of profit within the group. However, the CIT(A) found the explanation provided by the assessee to be satisfactory, especially considering the absence of a permanent establishment and the outsourcing of activities to sister concerns.

Issue 5: Business purpose of expenses incurred
The Tribunal noted that the expenses were incurred for the business purpose of the assessee, as evidenced by the cost-sharing agreement and the nature of services provided. The Tribunal emphasized that the expenses were revenue in nature and necessary for the business operations of the assessee, and hence, upheld the CIT(A)'s decision to delete the additions made by the AO.

Issue 6: Disallowance by AO without proper reasons
The Tribunal criticized the AO for disallowing the expenses without proper justification or questioning the genuineness of the expenses. The Tribunal highlighted that the AO cannot question the rationale behind incurring any expenditure and noted that in the subsequent year, the AO accepted similar claims. Therefore, the Tribunal upheld the CIT(A)'s decision and dismissed the appeal filed by the Revenue.