2019 (10) TMI 349 - AT - Income Tax

Proportionate disallowance of interest on advances to assessee s related concern DTTIPL - AO disallowed the interest mainly on the ground that the assessee firm had used interest-bearing funds for the purpose of providing interest free advances - CIT-A deleted the addition - HELD THAT - In the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT had held that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. Once it is established that there is nexus between the expenditure and the purpose of business, the revenue cannot assume the role to decide as to how much is reasonable expenditure. FAA has also noted that the assessee firm had its own funds which were more than the amount of advances given to DTTIPL and, therefore, there was no occasion for the assessing officer to make disallowance on account of interest. While deleting the disallowance, it has also been noted by the Ld. First appellate authority that both the concerns pay tax at the same rates and, therefore, there was no loss of revenue. We are in full agreement with these observations and findings of the Ld. first appellate authority in this regard. DR could not point out if there was any perversity in these factual findings recorded by the Ld. first appellate authority - disallowance has been rightly deleted by the Ld. first appellate authority - Decided against revenue. Disallowance pertaining to subscription payments @ 25% - reason for AO for making the disallowance was that the same were excessive and not wholly and exclusively incurred for the purpose of the professional activities of the assessee - HELD THAT - FAA while deleting the disallowance, has noted that the assessee firm contributes by way of subscription fees to Deloitte Global Services Holding Ltd and Deloitte Shared Services India (Pvt.) Ltd which is a global network of International Association of firms and companies rendering professional services. CIT (Appeals) had accepted the assessee s contention that the assessee s firm being a member of this global network and having Deloitte in its name brings in professional work in the form of reference by other member firms. CIT (Appeals) has also noted that a similar disallowance had been made in assessment year 2010 11 which had been deleted by the Ld. first appellate authority. We also note that the Department did not file any further appeal against this deletion made by the Ld. CIT (Appeals) in assessment year 2010 11. - Decided against revenue. Payment made to the retired partners - HELD THAT - We find that an identical issue had come up before ITAT Chennai bench in the case of a related concern of the assessee in assessment year 2011 12 after relying on an order of CC Chokshi Co. 2010 (5) TMI 698 - ITAT MUMBAI for assessment years 2000 01 and 2001 02 had held the issue in favour of the assessee. Also in the case of DCIT versus Wadia Ghandy Company 2019 (2) TMI 1283 - BOMBAY HIGH COURT also upheld an identical order of ITAT Mumbai and noted that payment to the partner would amount to diversion of income at source by overriding title. - Decided against revenue

Issues Involved:
1. Disallowance of interest expenditure.
2. Disallowance out of subscription payments.
3. Disallowance of interest on service tax.
4. Addition in respect of payments made to retired partners deducted from professional receipts (specific to AY 2014-15).

Detailed Analysis:

1. Disallowance of Interest Expenditure:
The primary issue was the disallowance of interest expenditure claimed by the assessee firm, which had provided interest-free loans and advances to its associate concern, DTTIPL. The assessing officer disallowed the interest expenditure on the grounds that the firm used interest-bearing funds for these advances and failed to establish the commercial expediency of the transaction. However, the Ld. CIT (Appeals) deleted the disallowance, noting that the assessee and DTTIPL were part of a global network of professional firms, and the advances were adjusted against services received from DTTIPL. The Ld. CIT (Appeals) also observed that the assessee had sufficient own funds and both entities were taxed at the same rate, resulting in no revenue loss. The Tribunal upheld the Ld. CIT (Appeals)'s decision, agreeing that the commercial expediency was established and there was no diversion of funds for personal benefit.

2. Disallowance Out of Subscription Payments:
The second issue was the disallowance of 25% of the subscription payments made by the assessee to Deloitte Global Services Holding Ltd and Deloitte Shared Services India (Pvt.) Ltd. The assessing officer made the disallowance due to a lack of specific details regarding the services received. The Ld. CIT (Appeals) deleted the disallowance, noting that the subscription fees were paid to a global network that brought professional work to the assessee. The Tribunal upheld this decision, citing similar favorable decisions by ITAT benches in Kolkata and Delhi and noting that the disallowance was ad hoc.

3. Disallowance of Interest on Service Tax:
For AY 2013-14, the issue was the disallowance of interest on delayed payment of service tax. The Ld. CIT (Appeals) deleted the disallowance, relying on judicial precedents that treated such interest as compensatory in nature and thus allowable. The Tribunal agreed with the Ld. CIT (Appeals)'s reliance on these precedents and upheld the deletion of the disallowance.

4. Addition in Respect of Payments Made to Retired Partners Deducted from Professional Receipts:
Specific to AY 2014-15, the issue was the disallowance of payments made to retired partners, which the assessing officer treated as capital outgo. The Ld. CIT (Appeals) deleted the disallowance, noting that the payments were made as per the partnership deed and were allowable. The Tribunal upheld this decision, citing several judicial precedents that treated such payments as allowable and noting that the payments were made in accordance with the partnership deed and offered to tax by the retired partners.

Conclusion:
The Tribunal dismissed the Department's appeals for both assessment years, upholding the Ld. CIT (Appeals)'s decisions to delete the disallowances and additions made by the assessing officer. The Tribunal found no reason to interfere with the Ld. CIT (Appeals)'s findings, which were based on established judicial precedents and factual observations.

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