2014 (4) TMI 668 - AT - Income Tax

Addition of commission - Deletion of compensation charges Held that - CIT(A) was of the view that the expenditure of commission payment was incurred by the assessee wholly and exclusively for the purpose of its business and therefore was allowable as an expenditure and accordingly deleted the addition - CIT(A) agreed with the assessee that office/infrastructure and other facilities of holding company were used for the purpose of its business - The CIT(A) was convinced that the payment of compensation charges to the holding company was wholly and exclusively for the purpose of business - the total income computed by the holding company for the year under consideration is at Rs. 84,09,900 - The returned income of the assessee is at Rs. 11,99,832 - Both the assessee and its holding company come within the same tax brackets - there is no benefit to the assessee by inflating its expenditure and diverting it towards its holding company as both parties are subject to same rate of tax and both parties are showing positive income - The entire exercise is tax neutral thus, there is no reason to interfere with the findings of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Deletion of addition of commission of Rs. 8,33,606/-
2. Deletion of the addition of compensation charges of Rs. 7,95,000/-

Analysis:
1. The first issue revolves around the deletion of the addition of commission amounting to Rs. 8,33,606/-. The appellant, engaged in financial services, paid this commission to its holding company. The Assessing Officer (AO) disallowed this expense, citing lack of evidence that the holding company provided clients as claimed. The AO concluded the commission was not an allowable expenditure. However, the Ld. CIT(A) found the commission payment was incurred for the business's purpose and allowed it as an expenditure, deleting the addition.

2. The second issue concerns the deletion of the addition of compensation charges totaling Rs. 7,95,000/-. The appellant explained these charges were for using infrastructure facilities provided by the holding company. The AO disallowed these charges due to lack of supporting evidence on the facilities used. Contrary to the AO's decision, the Ld. CIT(A) accepted the explanation, stating the facilities were used for business purposes, and hence, the compensation charges were allowable. The Ld. CIT(A) deleted the addition based on the business purpose of the payment.

3. The Revenue appealed the decisions, arguing that the expenditure was aimed at tax evasion. The Ld. Departmental Representative relied on judicial decisions to support this claim. However, the Tribunal reviewed the submissions and lower authorities' orders. They noted that both the appellant and the holding company fell within the same tax brackets, rendering the expenditure neutral in terms of tax implications. Considering this, the Tribunal upheld the Ld. CIT(A)'s findings and dismissed the Revenue's appeal.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decisions to allow the commission and compensation charges as legitimate business expenditures, emphasizing the tax neutrality of the transactions between the appellant and its holding company.