2017 (9) TMI 812 - AT - Income Tax

Disallowance of reimbursement of expenses on corporate overhead allocation - failure to furnish necessary direct and proximate evidences of nexus between reimbursement of corporate allocation expenses and income generating activity of the assessee - agreement between holding company and its group companies - Held that - It is an admitted fact that only expenditure incurred in relation to earning income wholly and exclusively for the purposes of business of the assessee is allowed, as deduction. It is the primary onus of the assessee to prove the nexus between expenditure incurred and business connection of the assessee. In this case, the assessee has reimbursed certain expenses on the basis of an agreement between holding company and its group companies. The assessee claims that the holding company has rendered certain services as listed in the agreement. However, no such evidence has been furnished to the AO to prove as to what are the services rendered by its holding company. We further observe that the assessee has furnished certain additional evidence to prove the nexus between reimbursement of corporate overhead allocation and business activity of the assessee. The assessee claims that those details are not before the AO except copy of agreement between holding company and group companies. Therefore, we are of the considered view that the issue needs to be examined by the AO in the light of the additional evidence filed by the assessee. Hence, we set aside the issue to the file of the AO for reconsideration.

Summary

Issues:
1. Disallowance of reimbursement of expenses on corporate overhead allocation.
2. Disallowance of repairs and maintenance expenses treated as capital expenditure.

Analysis:

Issue 1: Disallowance of reimbursement of expenses on corporate overhead allocation
- The assessee, engaged in real estate services, filed its return for AY 2010-11 declaring income at ?43,72,857.
- Assessment completed u/s 143(3) determined total income at ?3,26,72,825, making various additions including disallowance of reimbursement of corporate overhead allocation.
- Assessee appealed before CIT(A) challenging all additions made by AO.
- CIT(A) partly allowed the appeal, directing AO to sustain additions of ?1,89,75,259 out of total additions made of ?2,45,55,709 for reimbursement of expenses towards corporate overhead allocation.
- Assessee challenged CIT(A)'s order before ITAT Mumbai.
- AO disallowed the expenditure claimed under corporate overhead allocation as assessee failed to prove the expenses were wholly and exclusively for business purposes.
- Assessee submitted evidence before CIT(A) but failed to establish nexus between reimbursement of expenditure and income generating activity.
- ITAT observed that the issue needs further examination by AO in light of additional evidence filed by assessee.
- ITAT set aside the issue to AO for re-examination based on additional evidence, allowing the ground raised by assessee for statistical purposes.

Issue 2: Disallowance of repairs and maintenance expenses of ?5,86,004
- The assessee did not press this ground during the hearing, and hence, the same was dismissed as not pressed.
- The appeal filed by the assessee was partly allowed for statistical purposes.

In summary, the ITAT Mumbai directed the AO to re-examine the disallowance of reimbursement of expenses on corporate overhead allocation based on additional evidence provided by the assessee. The issue of disallowance of repairs and maintenance expenses was dismissed as not pressed by the assessee. The appeal was partly allowed for statistical purposes.