2017 (2) TMI 783 - AT - Income Tax

Disallowance of certain professional fees - Held that - It is an admitted position that the payee was non-professional entity to which the success based fees has been paid. So far as the legality of the payment is concerned, a perusal of the case laws cited by the Ld. AR, give rise to conclusion that there was no illegality in such mode of payment to non-professional entities. The impugned payments were incurred by the assessee against services rendered and for the purposes of the assessee s business and hence, allowable. The appeal of the assessee stands allowed.

Issues Involved:
1. Confirmation of disallowance of professional fees.
2. Legality of 'success-based' fees to non-professional entities.
3. Genuineness of the professional fees expenditure.
4. Penalty under Section 271(1)(c) related to disallowed professional fees.
5. Admissibility of expenditure under Section 37(1) in view of alleged illegality.

Detailed Analysis:

1. Confirmation of Disallowance of Professional Fees:
The primary issue revolves around the disallowance of professional fees amounting to ?2,78,33,048/- for AY 2003-04 and ?2,90,75,574/- for AY 2004-05 paid to 'M/s P.A. Shah & Associates' (PASA). The AO disallowed these expenses, deeming them excessive, unreasonable, and unsubstantiated. The assessee contended that similar payments had been allowed in the preceding year under the same agreement, but the CIT(A) distinguished the facts and upheld the disallowance.

2. Legality of 'Success-Based' Fees to Non-Professional Entities:
The assessee argued that the payments were legal and in accordance with a 'success-based' fee structure, which is permissible for non-professional entities. The Tribunal reviewed judicial precedents, including the Supreme Court ruling in Mr. G and Kerala High Court's decision in Damodar Kilikar, concluding that such payment structures are legally unobjectionable for non-professional entities.

3. Genuineness of the Professional Fees Expenditure:
The assessee provided various documents, including invoices, certificates, and bank statements, to substantiate the payments. The Tribunal noted that the payee firm was registered and had filed income tax returns reflecting the payments. The Tribunal also referenced its own decision from the preceding year, where similar payments were allowed. After reviewing the evidence, the Tribunal concluded that the payments were genuine and incurred for business purposes, thus allowable under Section 37(1).

4. Penalty under Section 271(1)(c) Related to Disallowed Professional Fees:
For AY 2003-04 and 2004-05, the assessee faced penalties of ?1,02,28,645/- and ?1,04,30,862/- respectively due to the disallowance of professional fees. Since the Tribunal allowed the quantum appeal in favor of the assessee, the penalties were deleted.

5. Admissibility of Expenditure under Section 37(1) in View of Alleged Illegality:
The revenue argued that the agreement with PASA was a colorable device to evade taxes and that the payments were opposed to public policy. However, the Tribunal found no illegality in the payments and noted that due TDS had been deducted. The Tribunal dismissed the revenue's cross appeals, which contested the admissibility of the expenditure under Section 37(1), citing the lack of substance in the revenue's arguments.

Conclusion:
The Tribunal allowed all four appeals filed by the assessee, confirming the legitimacy and business purpose of the professional fees paid to PASA. The penalties under Section 271(1)(c) were deleted, and the revenue's cross appeals were dismissed. The judgment emphasized the legality of 'success-based' fees for non-professional entities and the importance of substantiating business expenditures with adequate documentation.

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