2022 (9) TMI 1030 - AT - Income Tax

Limited Scrutiny under CASS - AO jurisdiction in making huge disallowances on issues which were not the basis for initiating Limited Scrutiny - High ratio of refund to TDS - HELD THAT - If the arguments of Revenue is sustained that scrutiny for high ratio of refund to TDS entitles even examination of expenditures, which have no relationship with the TDS, then that will in a way give arbitrary powers to the Assessing Officer to do complete scrutiny of all the expenses in a limited scrutiny and thus circumvent the provision of Act which require mandatory approval of competent authority to convert limited scrutiny to complete scrutiny. CIT(A) has tried to justify the act of AO by observing that legal and professional expenses, business promotion expenses, professional expenses for seeking legal opinion would be included under the head of High ratio of refund to TDS. No reason was cited as to how the TDS credit shown in the return has impact on the expenditure and would affect the refund of assessee. Thus, the Bench is of considered opinion that, the very exercise of jurisdiction to examine the disputed expenses under limited scrutiny on ground of High ratio of refund to TDS , was vitiated and that made all the additions illegal. Ground deserves to be allowed. Disallowance of business promotion expenses and disallowance of professional expenses for seeking legal opinion - The Bench is of considered opinion that if that was so then the Ld. CIT(A) had wide powers u/s 250(4) of the Act to call for comments of the AO or make an enquiry himself, as assessee was pressing that it had filed all the document/evidences during assessment. The assessment order shows that AO had taken note of the fact that the payment was being made as a fee for assistance in connection with seeking clarification from RBI on applicability of CIC Guidelines and applicability of FEMA on subscription of RPS and evaluating tax implications of unwinding RPS held by the Assessee. Thus certainly relevant evidence was on record. The Bench is of considered opinion that Redeemable Preferences Shares (RPS) held by the assessee being long term in nature may be capital expenditure but the expenses paid to legal and professionals for an opinion about legal and tax consequences of the prospective investment cannot be considered to be a capital expenditure. The legal expenses were merely to avoid panel provisions and to assure that there is no breach of any regulatory guidelines of investment. These expenses did not added any value to the investment nor would have reduced the risk of investment, but merely made the investment in consonance with the law of the land. Therefore, disallowance by calling them, capital expenditure cannot be sustained. Both grounds deserve to be allowed. Disallowing Legal Professional expenses - No supporting evidence to prove that the expenses claimed were pertaining to relevant A.Y. 2015-16 - as argued CIT deleted the addition taking into evidence of the assessee without calling for any remand report in regard to disallowances - HELD THAT - When the expenditures are in the nature of professional services they may not have immediate impact or relationship with the revenue and the purpose of this expenditure is more to run the business in a law observant and subject to regulatory measures. The same do not add to the revenue as such but only ensure that no penal liabilities are created out of that business activity. Thus the findings of ld. AO were incorrect and rightly interfered by Ld CIT(A). Thus, there is no force in the ground no 1 raised by the revenue and the ground is disallowed. Disallowing Business Promotion expenses - CIT-A deleted the addition - The assessee had explained that as it had set up business of online Gaming by providing Gaming Gears to Gamers and promoting E-Sports in India. Consequently, the assessee had incurred promotion expenses for the same. The AO has observed that no evidence has been tendered on the other hand, on the basis of submissions dated 20.12.2018 which referred to expenditures in support of submissions were mentioned by the ld. AO and Ld. CIT(A) has considered all this evidence. Accordingly, the ld. CIT(A) has distinguished the findings of Ld AO on same terms as sallowing Legal Professional expenses and for which the Reveune s appeal ground no 1 has been dealt above and there is no distinction. The observations of this Bench as made above apply mutatis mutandis to this ground no 2 as well. Thus the findings of ld. AO were incorrect and rightly interfered by Ld CIT(A). Appeal of assessee is allowed and the appeal of Revenue is dismissed.

Issues Involved:
1. Jurisdictional error in converting limited scrutiny to complete scrutiny.
2. Disallowance of professional expenses of Rs. 18,07,142/-.
3. Deletion of addition of Rs. 57,19,037/- on account of legal and professional expenses.
4. Deletion of addition of Rs. 1,42,90,200/- on account of business promotion expenses.

Issue-wise Detailed Analysis:

1. Jurisdictional Error in Converting Limited Scrutiny to Complete Scrutiny:
The assessee contended that the Ld. AO exceeded his jurisdiction by converting the limited scrutiny into complete scrutiny without obtaining the mandatory approval from the Principal Commissioner of Income Tax/Commissioner of Income Tax as required under the Board's Instruction No. 5/2016. The Bench agreed with the assessee, stating that the examination of expenditures unrelated to TDS in a limited scrutiny case circumvents the provision requiring mandatory approval for such a conversion. The Ld. CIT(A)'s justification was found inadequate as no reason was cited to show how TDS credit impacted the expenditure and refund. Thus, the exercise of jurisdiction by the Ld. AO was deemed vitiated, making all additions illegal.

2. Disallowance of Professional Expenses of Rs. 18,07,142/-:
The Ld. CIT(A) sustained the addition on the grounds that relevant invoices were not presented during the assessment proceedings. However, the Bench noted that the Ld. CIT(A) had wide powers under Section 250(4) of the Act to call for comments from the AO or make an enquiry himself. The assessment order indicated that the Ld. AO acknowledged the payment for professional services related to legal and tax implications of investments. The Bench opined that expenses for legal opinions on regulatory compliance are not capital expenditures as they do not add value to the investment but ensure legal conformity. Therefore, the disallowance was not sustained.

3. Deletion of Addition of Rs. 57,19,037/- on Account of Legal and Professional Expenses:
The Revenue argued that the Ld. CIT(A) erred in deleting the addition without calling for a remand report. The Bench observed that the assessee had placed on record invoices and agreements related to professional services from Ernst & Young LLP, J. Sagar Associates, and KPMG India Pvt. Ltd. The Ld. AO disallowed these expenses citing lack of evidence and non-revenue generation. However, the Bench noted that professional expenses ensure business compliance with laws and do not necessarily generate immediate revenue. The Ld. CIT(A) correctly interfered with the Ld. AO's findings, and thus, the Revenue's ground was disallowed.

4. Deletion of Addition of Rs. 1,42,90,200/- on Account of Business Promotion Expenses:
The Revenue contended that the Ld. CIT(A) erred in deleting the addition without adequate evidence. The Bench noted that the assessee provided detailed invoices and audit finance statements for business promotion expenses, including participation charges and promotional activities for online gaming. The Ld. AO disallowed these expenses due to lack of evidence, but the Ld. CIT(A) considered all relevant documents. The Bench found that the expenses were incurred for legitimate business promotion and were correctly allowed by the Ld. CIT(A). Consequently, the Revenue's ground was disallowed.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Bench pronounced the order in the open court on 20th September 2022.

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