2016 (5) TMI 280 - AT - Income Tax

Disallowance of the payment of professional fees to Preroy AG ( PAG ) - Appellant has claimed income earned by PAG as exempt from tax in India - Held that - The agreement merely states, at clause E 1, that for the services rendered by PAG under this agreement, STPL shall pay fees to PAG at rates to be agreed by the parties on a case to case basis and that the fees in respect of any assignment will be agreed upon by the parties before PAG commence work on the said assignment . There is, however, no evidence lead before us which suggests that the fees for any assignment was agreed to before any assignment commenced. There is hardly any basis for the billing work done. There seems to a charge of US 10,000 on every billing point. There is no evidence for any work done by a person other than SKP and the SKP has done this work, during his visits abroad, in the capacity of director in the STPL (i.e. the assessee)- as is clearly discernible from the details of foreign travelling expenses on record. The justification for the impugned payment does not, in our considered view, does not exists, as there are no independent services rendered by the assessee. Learned counsel for the assessee has laid lot of emphasis on the contention that the assessee was in the business of making investments and, therefore, even expenses incurred in connection with the business of his subsidiary, OKS India , will also be eligible for deduction as these expenses are to protect his investment. There does not seem to be any issue with the legal principles embedded in this proposition but this proposition will be relevant only when we come to a conclusion that legitimate and genuine business expenses are so incurred for the services rendered by Preroy AG. We are yet to reach this stage. As there are no independent services rendered by Preroy AG, in our opinion, it is wholly irrelevant whether the services, for which billing is done by Preroy AG, are for the purposes of business of the assessee. As regards learned counsel s contention that the income in question, in the hands of Preroy AG, has been brought to tax in India, and, therefore, it cannot be said that no services are rendered, we are of the view that merely because an income has been taxed in the hands of recipient of an income, does not mean that it s a deductible expenditure in the hands of the person making the payment. The deduction is required to be examined and adjudicated upon in accordance with the law, and, when we do so, we donot find legally sustainable merits in the claim of the assessee. As regards the observations made by the CIT(A), which have been challenged in this appeal, we are not inclined to deal with the same individually. What matters is that the disallowance in question, for the detailed reasons set out in this order, is confirmed and even if the CIT(A) made some extraneous observations, that does not affect the outcome of this appeal. All the specific issues have been dealt with in this order anyway. - Decided against assessee Disallowance in respect of the travelling expenses - Held that - As no evidence has been lead before us to demonstrate and establish that the travel by director s wife was wholly and exclusively for the purposes of business of the assessee , and in the light of Hon ble Kerala High Court s full bench decision in the case of Ram Bahadur Thakur Ltd Vs CIT 2003 (1) TMI 66 - KERALA High Court , the action of the authorities below deserves to be confirmed.- Decided against assessee

Summary

Issues Involved:
1. Disallowance of professional fees paid to Preroy AG.
2. Disallowance of travelling expenses for Mrs. Neeta Premchand.

Issue-wise Detailed Analysis:

1. Disallowance of Professional Fees Paid to Preroy AG:
Material Facts and Arguments:
The assessee, engaged in financing and investments, paid professional fees to Preroy AG, a Switzerland-based company, for services such as locating new business opportunities and coordinating joint ventures. The Assessing Officer (AO) disallowed these expenses, questioning the genuineness of the services rendered, citing lack of evidence and the involvement of Sushil K Premchand (SKP), who was a major shareholder and director in both the assessee company and Preroy AG. The AO noted that invoices were vague and that the services were essentially rendered by SKP to himself, suggesting a siphoning of profits to an overseas account.

CIT(A) Observations:
The CIT(A) upheld the AO's disallowance, noting that Preroy AG had no other business or clients except the assessee, and there was no evidence of technical expertise or actual services rendered. The CIT(A) also highlighted the lack of supporting agreements or documents to substantiate the services claimed.

Tribunal's Analysis:
The Tribunal found that the services purportedly rendered by Preroy AG were actually performed by SKP in his capacity as a director of the assessee company. The evidence, such as invoices and travel documents, did not demonstrate independent work by Preroy AG. The Tribunal noted that SKP’s travel expenses were claimed as business expenses of the assessee, yet the same work was billed by Preroy AG. The Tribunal concluded that there was no independent existence of services rendered by Preroy AG and upheld the disallowance.

Conclusion:
The Tribunal dismissed the appeal, confirming the disallowance of professional fees paid to Preroy AG for all three assessment years (1995-96, 1996-97, and 1997-98).

2. Disallowance of Travelling Expenses for Mrs. Neeta Premchand:
Material Facts and Arguments:
The AO disallowed travelling expenses incurred for Mrs. Neeta Premchand, wife of the director, who accompanied him on official tours. The AO noted the lack of evidence that her travel was for business purposes.

CIT(A) Observations:
The CIT(A) confirmed the disallowance, agreeing with the AO's findings.

Tribunal's Analysis:
The Tribunal upheld the disallowance, citing the absence of evidence to demonstrate that the travel was "wholly and exclusively for the purposes of business of the assessee." The Tribunal referred to the Hon’ble Kerala High Court's decision in Ram Bahadur Thakur Ltd Vs CIT, which supports the disallowance in such cases.

Conclusion:
The Tribunal dismissed the appeal, confirming the disallowance of travelling expenses for Mrs. Neeta Premchand for all three assessment years (1995-96, 1996-97, and 1997-98).

Final Judgment:
The Tribunal dismissed all three appeals, confirming the disallowances made by the AO and upheld by the CIT(A) for both professional fees paid to Preroy AG and travelling expenses for Mrs. Neeta Premchand.