2012 (8) TMI 518 - AT - Income Tax

Disallowance of reimbursement of expenses u/s 40A (2) (b) - Held that - As the assessee is sharing staff, office premises, etc. with its parent company the allocation of the expenses have been identified as per the memorandum of understanding which were to be borne out by the parent company and to be reimbursed by the assessee. Nowhere the AO has spelled out as what were the expenses, which have been reimbursed are unreasonable or excessive looking to the fair market value of the services and expenses reimbursed - nowhere it has been brought on the record as to how the reimbursement of 33.98 crores on salary account for use of parent company s employees is unreasonable or excessive - no concrete evidence or material to allocate the unreasonable and excessive expenses for the purpose of disallowance under Section 40A (2). Once, the CIT (A) has come to the conclusion that arrangement of expenses is correct and bonafide and is in accordance with the terms of agreement between both the parties, then no ad hoc disallowance of any amount is called for - in favour of assessee.

Summary

Issues:
Disallowance of expenses under Section 40A(2)(b)

Analysis:
The case involved cross-appeals by the assessee and the department against an order related to the disallowance of expenses amounting to Rs.20,00,000 under Section 40A(2)(b) for the assessment year 2007-2008. The Assessing Officer disallowed the expenses shared by the parent company with the assessee, citing lack of proof of reasonableness and arm's length nature of the expenses. The CIT(A) partially allowed the claim, reducing the disallowance to Rs.10,00,000, which was challenged by both parties.

The assessee argued before the CIT(A) that the expenses shared were overhead expenses identified in a memorandum of understanding and were reasonable. They contended that Section 40A(2)(b) did not apply as the expenses were incurred by the parent company and reimbursed by the assessee. The CIT(A) accepted the assessee's contentions to some extent but still upheld a disallowance of Rs.10,00,000, questioning the need for reimbursement of certain expenses when the assessee had already incurred substantial salary and allowance expenses.

Upon review, the tribunal analyzed the provisions of Section 40A(2)(a) and emphasized the need for the Assessing Officer to prove the excessive or unreasonable nature of the expenses shared. It was noted that the expenses shared were based on a genuine agreement and there was no evidence of unreasonableness or excessiveness in the expenses reimbursed. The tribunal concluded that without concrete evidence of excessive or unreasonable expenses, no disallowance under Section 40A(2)(a) was warranted. Therefore, the tribunal allowed the assessee's appeal and dismissed the revenue's appeal.

In summary, the tribunal ruled in favor of the assessee, emphasizing the importance of proving the excessive or unreasonable nature of shared expenses before disallowing them under Section 40A(2)(a). The tribunal found no grounds to sustain any portion of the disallowance, ultimately allowing the assessee's appeal and dismissing the revenue's appeal.