2020 (5) TMI 648 - AT - Income Tax

Expenditure incurred towards maintenance / upkeep of inventories - being part of trading operations - allowable revenue expenditure - HELD THAT - Assessee has incurred expenditure towards maintenance of inventories. The payment is duly supported by the debit note issued by M/s Sharan Co. It is also evident that said entity has made further payment to another entity i.e. M/s First Canvass towards rendering of services, which fact AO has also accepted in the alternative and proposed that the payment to that extent could be allowed to the assessee. From perusal of Tribunal order for AY 2009-10, as placed on record, it is also noted that similar payment was paid by the assessee to avail similar services in that year. The Ld. AO termed the payment to be excessive and allowed partial claim to the extent of ₹ 37.97 Lacs. CIT(A) deleted the disallowance as proposed by Ld.AO which was agitated by the revenue before this Tribunal. Tribunal, inter-alia, noting that the payment was in accordance with the agreed terms, it was not correct on the part of AO to question the correctness of the decision taken by the assessee out of commercial expediency. Therefore, the revenue s appeal was dismissed. We find that an expenditure has been incurred by the assessee towards maintenance / upkeep of inventories and the same being part of trading operations, would constitute allowable revenue expenditure. Therefore, by deleting the impugned disallowance - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of professional fees paid to M/s. Sharan & Co.
2. Disallowance of professional fees paid for services not rendered.
3. Disallowance amount restriction.
4. Allowability of professional fees as capital expenditure.

Analysis:
1. The appeal contested the disallowance of professional fees of ?1,40,01,500 paid to M/s. Sharan & Co. for the AY 2011-12. The appellant argued that the disallowance was wrongly made and should be deleted.
2. The CIT(A) upheld the Assessing Officer's conclusion that services were not rendered by M/s. Sharan & Co. during the year. The appellant contended that professional services were provided and the fees should be considered as a legitimate expense.
3. The CIT(A) upheld the disallowance of professional fees but did not restrict it to ?99,63,020, which was the difference paid by M/s. Sharan & Co. to another entity. The appellant argued for the disallowance to be restricted to this amount.
4. The CIT(A) did not adjudicate on the ground raised by the appellant regarding the allowability of professional fees as capital expenditure. The appellant asserted that the entire professional fees should be considered as revenue expenditure.

Detailed Analysis:
1. The assessee, engaged in trading, was assessed for the year under consideration with a disallowance of ?1,40,01,500 paid to M/s. Sharan & Co. The AO doubted the rendering of services due to no purchase of paintings during the year, leading to the disallowance.
2. The CIT(A) upheld the disallowance, citing no trading activity in paintings and no scope for services. The appellant referenced a favorable Tribunal decision for AY 2009-10 but did not find favor with the CIT(A).
3. The Tribunal noted the purchase and sale of paintings by the assessee in previous years, indicating the expenditure was related to trading operations. The payment was supported by documentation, and the AO accepted the payment to another entity for services.
4. Referring to the Tribunal order for AY 2009-10, where a similar payment was allowed as a revenue expenditure, the Tribunal dismissed the revenue's appeal, emphasizing commercial expediency. The expenditure incurred by the assessee was deemed allowable towards maintenance of inventories.

This judgment highlights the importance of establishing a direct connection between expenses and business activities for their allowability as revenue expenditure, even in the absence of immediate purchase or sale transactions.