2019 (5) TMI 1310 - AT - Income Tax

Disallowance of legal professional fees - assessee was advertising agency rendering various services - payment to a marketing and PR consultants - HELD THAT - We find that the assessee, during assessment proceedings, had placed on record the copies of bills issued by Ms.Sharon Dias indicating the nature of expenditure etc. The copy of agreement entered into with Percept Ltd. for provision of services was also placed before Ld. AO. However, the Ld. AO, completely disregarding the same, proceeded on wrong footing that the assessee had not carried out any business during the year and therefore, the expenditure was not allowable either u/s 37(1) or u/s 57(iii). The stated facts also controvert the argument of the revenue that the Ld. first appellate authority erred in admitting additional evidences. Another undisputed fact is that the assessee has made similar payments to these payees in AY 2009-10 which has been allowed as business expenditure by revenue in an assessment u/s 143(3) and therefore, the additions, in our opinion, on similar facts, was not justified. No infirmity in the stand of Ld. first appellate authority, in this regard. Accordingly, ground Nos. 1 to 3 stands dismissed. Addition u/s 41(1) - substantial accounts of Sundry Creditors have been squared off by the assessee during impugned AY itself - HELD THAT - The balance amount has been paid in subsequent years. Therefore, under the circumstances, nothing would suggest that there was remission or cessation of liability within the meaning of Sec. 41(1), in any manner. In fact, AO, in the process of making addition u/s 41(1), has disallowed entire expenditure claimed by the assessee against those Sundry Creditors, which was never the case of AO. No material has been brought on record to establish that the assessee s liability with respect to Sundry Creditors ceased to exist, in any manner. Further, during assessment proceedings, the assessee had placed on record most of the account confirmations from these parties. This being the case, no infirmity could not be found in the impugned order with respect to this addition. By upholding the stand of Ld. first appellate authority, we dismiss the revenue s grounds of appeal.

Summary

Issues involved:
1. Disallowance of legal and professional fees under section 37(1)
2. Addition of unexplained sundry creditors under section 41(1)

Analysis of the judgment:

1. Disallowance of legal and professional fees under section 37(1):
The appeal by the Revenue contested the order of the Ld. Commissioner of Income-Tax (Appeals) regarding the disallowance of legal and professional fees amounting to ?52,30,000. The Revenue argued that the Ld. CIT(A) erred in allowing the deductions without proper evidence to support the claim of the assessee. The Revenue contended that the expenses were not wholly and exclusively for business purposes as required by Section 37(1). However, the Ld. CIT(A) found in favor of the assessee, noting that the professional fees were paid for services rendered against projects undertaken by the assessee. The Ld. CIT(A) observed that the expenses were rightly claimed and could not have been disallowed by the assessing officer. The appellate tribunal upheld the decision of the Ld. CIT(A) based on the evidence provided by the assessee and the fact that similar payments in the previous assessment year were accepted by the revenue.

2. Addition of unexplained sundry creditors under section 41(1):
The second issue revolved around the addition of ?3,14,66,127 as unexplained sundry creditors under section 41(1). The assessing officer added back this amount as the assessee could not provide details regarding the deposits received from these creditors. The Ld. CIT(A) found that there was no remission or cessation of liability within the meaning of Section 41(1) and that the entire outstanding liability was squared off by the assessee in the subsequent financial year. The Ld. CIT(A) observed that no inquiry was made by the assessing officer and the additions were made without fulfilling the conditions of Section 41(1). The tribunal upheld the decision of the Ld. CIT(A), stating that substantial accounts of sundry creditors were squared off during the impugned assessment year itself, and there was no evidence to suggest a remission or cessation of liability. The tribunal dismissed the revenue's appeal in this regard.

In conclusion, the appellate tribunal upheld the decisions of the Ld. CIT(A) regarding the disallowance of legal and professional fees under section 37(1) and the addition of unexplained sundry creditors under section 41(1), dismissing the Revenue's appeal.