2023 (10) TMI 768 - AT - Income Tax

Lease rental payments to a non-resident party - assessee claimed this expenditure as allowable expenditure u/s 37(1) - HELD THAT - As keeping in view the fact that the lease rentals have been indeed paid for the accommodation of the employees and the recipient is a tax resident of USA with no PE in India, we hold that no disallowance is called for under this head. Pre-operative Expenses - assessee claimed the expenses pertaining to financial consultancy and investment advisory in relation to mutual fund investments as a deductible revenue expenditure - HELD THAT - As is evident that the decisive test to determine if the two businesses of the assessee (IT enabled support services and financial consultancy and investment advisory in relation to mutual fund investments) constitute the same business or not, is not the nature of two businesses but whether two businesses are inter-connected and inter-dependent, which can be demonstrated through existence of common management common business organizations, common funds, etc. Since, there is a complete unity of control, management and funds between the IT-enabled services and financial consultancy and investment advisory in relation to mutual fund investments, carried out by assessee be construed as one business of the assessee. Hence, keeping in view the ratio laid down by B.R. Limited Vs. Gupta (VP) 1978 (5) TMI 3 - SUPREME COURT we hold that the directions of the ld. DRP cannot be supported.

Issues Involved:
1. Disallowance of lease rental payments.
2. Addition on account of pre-operative expenses.
3. Non-grant of full credit in respect of Tax Deducted at Source (TDS) and advance tax.
4. Levy of interest under section 234C of the Act.
5. Initiation of penalty proceedings under section 271(1)(c).

Summary:

Issue 1: Disallowance of Lease Rental Payments
The assessee challenged the disallowance of Rs. 3,244,083/- under section 37(1) of the Income Tax Act, 1961, for lease rental payments made to a non-resident party. The AO disallowed the expenses due to lack of evidence and non-deduction of TDS under section 40(a)(i). The Tribunal found that the payments were indeed made for the accommodation of employees traveling to the USA for business purposes. The recipient was a tax resident of the USA with no Permanent Establishment in India. Therefore, the Tribunal held that no disallowance was called for under this head.

Issue 2: Addition on Account of Pre-Operative Expenses
The assessee contested the addition of Rs. 11,278,603/- towards pre-operative expenses for its mutual fund operations. The AO and DRP disallowed the expenses on the grounds that the business activity had not commenced, and the expenses were pre-operative. The Tribunal, however, noted that the financial consultancy and investment advisory services were an extension of the existing business of IT-enabled back-office services. Citing various judgments, including those of the Hon'ble Supreme Court and jurisdictional High Court, the Tribunal concluded that the two businesses were interconnected and interdependent, thus constituting the same business. Therefore, the expenses were allowable as revenue expenditure.

Issue 3: Non-Grant of Full Credit in Respect of TDS and Advance Tax
The assessee claimed that the AO erred in granting credit for TDS and advance tax. The Tribunal noted that the assessee had filed a rectification application before the AO for these mistakes and stated that the ground would not be pressed if the application was allowed by the AO.

Issue 4: Levy of Interest Under Section 234C of the Act
The assessee argued against the levy of interest under section 234C. Similar to the TDS and advance tax issue, the Tribunal noted the rectification application filed by the assessee and stated that the ground would not be pressed if the application was allowed by the AO.

Issue 5: Initiation of Penalty Proceedings Under Section 271(1)(c)
The assessee contended that the AO erred in initiating penalty proceedings under section 271(1)(c) based on the adjustments made in the assessment order. The Tribunal did not provide specific details on this issue but implied that it would be addressed based on the outcomes of the other issues.

Conclusion:
The Tribunal allowed the appeal of the assessee, overturning the disallowance of lease rental payments and the addition of pre-operative expenses. The issues regarding TDS, advance tax credit, and interest under section 234C were contingent on the rectification application filed by the assessee. The initiation of penalty proceedings under section 271(1)(c) would be reconsidered based on the final adjustments.

← Previous Next →