2023 (8) TMI 1616 - AT - Income Tax

Addition on account of facility management service - HELD THAT - The agreement was admittedly entered into with an unrelated party and the same was claimed to have been executed with an intention of further business activities of the assessee in the long run and contribute to its revenue and profits. The action of the AO was based on analyzing the agreement by applying the yardstick of business expediency and commercial prudence accordingly the AO held the same to be colorful device to buy loss by the assessee company. CIT(A) on analyzing the facts also found that the agreement with PBC was between two independent unrelated parties on an Arm s length basis. To question any agreement on the ground of business expediency or prudence of an agreement entered with the independent unrelated party during the ordinary course of business which is beyond power vested on the A.O. Hon ble Courts have time and again held that when an attempt by the Department to judge any transaction by applying yardstick of business expediency or commercial prudence has not found favour of the Revenue. We observed that the AO in scrutiny process u/s 143(3) of the Act for Assessment Year 2014-15 allowed the Facility Management Charges to the assessee company. Decided against revenue. Disallowance as allocation expenses - DR submitted that the expenses claimed by the Mumbai Bangalore Branches under the head of conveyance and travelling expenses reported and maintenance etc. cannot be viewed as revenue expenses - HELD THAT - The assessee company operates with its head office located at Gurgaon and Branches at Mumbai and Bangalore. It also operates with unified structure for the head office and Branches with a common management and complete unity of control inter communication business organization and management. Merely because no revenue were recorded in the books of the branches cannot lead to a conclusion that those branches are not carrying out any business. It is settled law that once a business has been set up the entire revenue expenditure incurred is allowable irrespective of whether any revenue is generated there from or not. It is not in dispute that the entire expenditure has been incurred by the assessee company on running its business irrespective of head office or branches. It is not the case that the Branches of Mumabi and Bangalore are independent undertaking/unit for which independent balance sheet required to be drawn. In-fact the nature of the expense which inter alia includes expenses like repair and maintenance has not been found to be capital in nature whereas travelling expenditure cannot be held to be capital expenditure. Disallowance of expenses claimed as Bad Debts - assessee could not produce any documentary evidence to show that the amount became Bad Debts and added the same to the income of the assessee in terms of Section 36(1)(vii) - HELD THAT - Assessee had provided services of I Love British for the Financial Year 2013-14 in which the same was considered as revenue and amount recoverable as Sundry Creditors. Company had made full effort to recover the amount and sent various communications for such recovery though the Company could not recover the amount despite of continuous reminders and follow up finally the same has been considered as Bad Debts and claimed as expenses. Considering the fact that the assessee company had made full effort to recover the amount and sent various communications for such recovery but could not recover the same despite continuous follow up and reminders and the said debt has been written off in its account which meets requirement of provision of Section 36(1)(iii) of the Act. As relying on Morgan Securities and Credits Pvt. Ltd. 2006 (12) TMI 106 - DELHI HIGH COURT and T.R.F. Ltd. 2010 (2) TMI 211 - SUPREME COURT we find no error or infirmity in the order of the CIT(A) in deleting the above said disallowance. Disallowance for delayed payment of provident fund and ESI - HELD THAT - Disallowance made by the A.O. for delayed payment of provident fund and ESI is hereby reversed and the addition made by the A.O. on the said ground is sustained.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in deleting the addition made by the Assessing Officer (AO) on account of facility management services.
Whether the CIT(A) was justified in deleting the addition claimed by the assessee as allocation of expenses despite no revenue generation.
Whether the CIT(A) was justified in deleting the addition made under Section 36(1)(vii) for bad debts.
Whether the CIT(A) erred in deleting the disallowance for delayed payment of provident fund and ESI.

ISSUE-WISE DETAILED ANALYSIS

1. Facility Management Services

The relevant legal framework involves the assessment of business expenses under the Income Tax Act. The AO disallowed the expenses related to facility management services, suspecting them to be a colorable device to buy losses. The CIT(A) deleted this addition, finding the agreement with Pacific Business Centre Pvt. Ltd. to be at arm's length and commercially prudent. The Court upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in SA Builders Ltd. vs. CIT(A) that the revenue cannot question the business expediency of an agreement between unrelated parties. The Court noted consistency in the treatment of similar expenses in the previous assessment year, supporting the CIT(A)'s decision.

2. Allocation of Expenses

The AO disallowed the allocation of expenses due to the absence of revenue generation from the Mumbai and Bangalore branches, treating them as capital rather than revenue expenses. The CIT(A) found these expenses to be revenue in nature, incurred after business commencement and necessary for business operations. The Court agreed, emphasizing that once a business is set up, revenue expenses are allowable regardless of revenue generation. The unified structure of the head office and branches supported the CIT(A)'s conclusion that the expenses were not capital in nature.

3. Bad Debts

The AO disallowed the bad debts claim, citing a lack of evidence for efforts to recover the amount. The CIT(A) found that the assessee had made sincere efforts to recover the debt, which was written off in the accounts, meeting the requirements of Section 36(1)(vii). The Court supported the CIT(A)'s decision, referencing precedents such as Commissioner of Income-tax Vs. Morgan Securities and Credits Pvt. Ltd. and T.R.F. Ltd. Vs. Commissioner of Income-tax, which allow for the deduction of bad debts if written off in the accounts.

4. Delayed Payment of Provident Fund and ESI

The AO disallowed the deduction for delayed payments of provident fund and ESI, which the CIT(A) had allowed based on prior judgments. However, the Court reversed this decision, aligning with the Supreme Court's recent ruling in Checkmate Services Pvt. Ltd. vs. CIT-1, which mandates timely payment of employee contributions to qualify for deductions. The Court emphasized the distinction between employer and employee contributions, with the latter requiring deposit by the due date for deduction eligibility.

SIGNIFICANT HOLDINGS

The Court upheld the CIT(A)'s decisions on facility management services, allocation of expenses, and bad debts, emphasizing the principles of business expediency and the unified business structure. However, it reversed the CIT(A)'s decision on the delayed payment of provident fund and ESI, citing the Supreme Court's ruling in Checkmate Services Pvt. Ltd. vs. CIT-1. The Court's determinations reflect adherence to established legal principles and recent judicial interpretations.

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