2022 (7) TMI 951 - AT - Income Tax

Disallowance u/s 10A - allocation of expenses made by the assessee to 10A eligible units and non 10A eligible units was not appropriate - assessee has established cost codes to record every cost in its accounting system for non 10A units and 10A units. It has also common cost codes for recording common costs incurred with respect to non 10A units as well as 10A units - HELD THAT - The assessee furnished explanation / justification for allocation of expenses before the Ld. CIT(A) as also before us. CIT(A) recorded the finding that the manner of allocation of expenses between 10A units and non 10A units are based on common principles of costing and is reasonable. We agree with the findings of the Ld. CIT(A). CIT(A) further observed that the assessee is following the basis as provided by Accounting Standards-17 approved by ICAI for apportionment of expenses between different units. DR could not contradict and the above finding of the Ld. CIT(A) remained uncontroverted by the Revenue. If that be so, without bringing on record any adverse material, the accounting standard followed by the assessee for apportionment of expenses between different units cannot be faulted. We do not find any substance in the written submission filed by the DR in support of the apportionment of expenses in proportion of the revenue earned by 10A units and non 10A units done by the Ld. AO in both the AYs. Accordingly, we endorse the findings of the Ld. CIT(A) that the allocation of expenses between 10A units and non 10A units made by the assessee cannot be disturbed and therefore, the disallowance of deduction in AY 2007-08 and AY 2008-09 respectively under section 10A of the Act has rightly been deleted by the Ld. CIT(A). The grounds taken by the Revenue in this regard in both the AYs are rejected. - Decided in favour of assessee.

Issues Involved:
1. Deletion of disallowance under Section 10A of the Income Tax Act, 1961 for AY 2007-08 and AY 2008-09.
2. Allocation of expenses between 10A and non-10A units.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance under Section 10A:
The Revenue challenged the CIT(A)'s decision to delete the disallowance of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- under Section 10A for AY 2007-08 and AY 2008-09 respectively. The assessee, a private limited company engaged in human resources consulting services and other related services, had its original assessments set aside under Section 263, leading to fresh assessments where the AO disallowed parts of the deductions claimed under Section 10A. The CIT(A) deleted these disallowances, leading to the Revenue's appeal.

2. Allocation of Expenses Between 10A and Non-10A Units:
The AO contended that the allocation of expenses to 10A and non-10A units by the assessee was inappropriate. The AO observed that the assessee allocated negligible expenses to 10A units (whose income is exempt) and disproportionately higher expenses to non-10A units to reduce taxable income. The AO disallowed certain expenses claimed under non-10A units, considering the allocation methodology incorrect.

The CIT(A) held that the AO was not justified in allocating royalty, management fee, and legal and professional expenses to 10A units over and above the expenses already incurred by such units. The CIT(A) noted that royalty and management fees were paid to Hewitt Affiliates LLC based on revenue from third parties and not for captive units (10A units). The CIT(A) found that the expenses were accounted for on an actual basis and could not be allocated to 10A units.

Revenue's Argument:
The Revenue argued that the agreements for corporate overhead charges and management fees did not specify that the services were only for non-10A units. The DR emphasized that both 10A and non-10A units were engaged in similar services, and thus, the allocation of such expenses solely to non-10A units was unjustified. The DR also argued that higher business for non-10A units led to higher revenue for 10A units, making the allocation rationale flawed.

Assessee's Argument:
The assessee contended that the allocation of expenses was based on actual consumption and specific agreements. The royalty was paid only by non-10A units as per the license agreement, and management fees were charged based on the revenue contribution from consulting and human resource outsourcing divisions only. Legal and professional expenses were accounted for on an actual basis, and corporate overhead charges were allocated based on actual consumption by non-10A units.

Tribunal's Decision:
The Tribunal agreed with the CIT(A)'s findings that the allocation of expenses between 10A and non-10A units by the assessee was based on common principles of costing and was reasonable. The Tribunal noted that the assessee followed Accounting Standards-17 approved by ICAI for expense apportionment, which the Revenue did not contradict. Without any adverse material on record, the Tribunal found no substance in the Revenue's arguments for apportioning expenses based on revenue earned by 10A and non-10A units.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- under Section 10A for AY 2007-08 and AY 2008-09 respectively, and dismissed the Revenue's appeals.

Conclusion:
The appeals of the Revenue for AY 2007-08 and AY 2008-09 were dismissed, and the disallowance of deductions under Section 10A was rightly deleted by the CIT(A). The allocation of expenses between 10A and non-10A units made by the assessee was found to be appropriate and in accordance with the accounting standards.

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