2021 (1) TMI 742 - AT - Income Tax

Disallowance on account of stamp duty charges of lease agreement pertaining to lease period of five years - AO held that as lease is for 5 years only 1/5th of lease rent charges are allowable and therefore 4/5th of such charges should be disallowed - HELD THAT - Period of lease for which property has been taken cannot be regarded as a decisive test to determine nature of expenditure. In any case it is not disputed that stamp duty amount has been paid on lease deed for purposes of carrying on assessee s business. Once aforesaid position is accepted then amount of Stamp Duty paid for has to be allowed as revenue nature. The period of lease 5 years could not be said to be such a long period that assessee could be said to have acquired or brought into existence an advantage of an enduring character. The office premises were obtained with a view to carry on business activity of assessee-company and facility so obtained could not be said to be an advantage of any enduring nature. Besides terms of lease were not on record and therefore no other considerations could be taken into account for finding out whether any asset of an enduring character was acquired. Stamp duty was required to be paid in order to bring about document of Lease. Expenses so incurred for securing premises on lease for a short period of five years were therefore allowable as revenue expenditure - Decided against revenue. Disallowance of renovation expenditure - assessee has incurred expenditure under head of repairs and maintenance expenditure of premises taken on lease - HELD THAT - The facts show that cost of renovation was incurred by assessee who is lessee in respect of premises. It is not a long lease of property but only for five years. Rent of assessee is also not concessional as LD AO himself disallowed some part of this. It is not case that by incurring this expenditure some additional floors or some extra construction was carried out. In view of this we do not find any infirmity in order of LD CIT (A) in deleting disallowance holding them to be revenue expenditure. More so decision is correct for reason that assessee out of total expenditure of 2.5 crores itself classified some of expenditure as capital expenditure and only claimed revenue expenditure of 125, 00, 000/-. Accordingly ground No. 2 of appeal is dismissed. Disallowance of excess rent paid u/s 40A(2)(a) - as during year assessee has taken a building on rent and rent agreement was entered into with one of sister concern - AO held that as rent agreement was entered with a sister concern questioned about justification - HELD THAT - Assessee company as well as sister company both are assessed to income tax at maximum marginal rate and therefore it cannot be said that rent is paid to respondent company at an unreasonable rate to evade income tax. Further In absence of any material before Assessing Officer such as comparative chart etc. to suggest that any excessive rent payment was made to sister concern and 50 % ad hoc disallowance was made on payment made under Section 40A(2)(b) of Act to Aditya Prakash entertainment private limited solely on ground that party to whom payment was made it is a sister concern and there is an attempt to evade Tax and therefore there was an element of excessive claim. Further cost price of property purchased by owner of property long back cannot be basis for making any disallowance applying provisions of Section 40 A (2) (a) - We are of opinion that Assessing Officer was not justified in making disallowance to extent of 50 % payment under Section 40 A(2)(a) For purpose of making disallowances u/s 40 A(2)(a) it is duty of revenue to show that expenditure incurred by assessee is excessive and unreasonable by drawing such inference from prevailing market price of similar kind of service or goods.Unless LD AO brings those facts on records disallowance u/s 40 A(2)(a) cannot be made. No infirmity in order of LD CIT (A) in deleting disallowance. Disallowance legal and professional fees and consultancy charges u/s 40 A (2) (a) - AO disallowed 50% of above consultancy charges - HELD THAT - As assessee has also earned consultancy income which is placed at page number 37 of paper book such income is of 201, 609, 736 also from sister concerns such as opus reality development of 90 lakhs and from Alliance Promoters Ltd of 104, 787, 858. It is in fact to be seen that assessee has not paid any sum to Opus Reality Development Or Alliance Promoters Ltd any legal and professional fees but in fact it has earned such professional fees from them and shown it as income. Thus assessee has earned income from related parties but has not paid sums to related parties. Thus expenditure incurred by assesses was not to related parties therefore application of provisions u/s 40A (2) is misplaced. Accordingly we do not find any infirmity in order of learned CIT A in deleting disallowance. Disallowance of foreign travel expenses - director of assessee has incurred an expenditure towards foreign travel expenditure for visiting various places in Malaysia Hong Kong Goa USA and Dubai - CIT-A deleted the addition - HELD THAT - On perusal of details of travelling expenditure LD AO should have clearly stated which details were not on record in respect of travelling expenses. He further held that merely on suspicion LD AO has disallowed above expenditure and that too on an ad hoc basis. He further held that in addition on estimated basis could not be sustained. Therefore he deleted above addition/disallowance. We do not find any infirmity in order of learned CIT A as learned assessing officer has disallowed only 50% of expenditure on d hoc basis without pointing out any infirmity in details submitted by assessee and assessee has also given a detailed justification for incurring such expenditure which was not found to be incorrect. Undisclosed management fee - some amount was carried forward to a subsequent year as advance received - CIT-A deleted the addition as noted that assessee has offered above amount in subsequent year as it pertained to that financial year - HELD THAT - Admittedly assessee has offered balance sum in next year as it on basis of period of consultancy services pertains to next financial year. The amount of tax deduction or its period is the responsibility of payer and it does not determine the liability of the recipient as income. For determining the income in the hands of the recipient method of accounting of recipient as well as the nature of income is required to be examined. CIT A has also given direction to Ld assessing officer to verify above aspect whether a sum of 81, 176, 086 has been offered by assessee in subsequent year or not. There is no denial from the ld DR that above sum is not offered by assessee as income in next Financial Year. Thus we do not find any infirmity in order of learned CIT A. Addition on account of consultancy charges by applying Provisions of Section 40 A (2) (a) - HELD THAT - CIT A deleted above disallowance holding that AO has not been able to show that expenditure incurred was excessive or unreasonable having regard to fair market value of services for which payment was made. Undoubtedly genuineness of expenditure is not doubted otherwise Learned-assessing officer should have disallowed whole of expenditure. The learned assessing officer has also failed to show that expenditure incurred was excessive or unreasonable having regard to market price. We have also deleted the similar disallowance made in assessment year 2010 11 as per ground number 4 of that appeal. Therefore for similar reasons we uphold order of learned assessing officer deleting above disallowance. Disallowance on account of consultancy charges paid to Signature Group India Private Limited. - HELD THAT - AO is required to show that above expenditure incurred was excessive and unreasonable which he failed. It is also to be noted that in earlier year assessee has paid a sum of 270, 58, 844 as consultancy expenditure to signature group India private limited. For current year it has only paid consultancy charges of 173, 26, 487 to that party. It is also fact that if above expenditure is unverified expenditure learned assessing officer should have disallowed 100 % of such expenditure where as he has disallowed only 50% of expenditure on estimated basis. There is no reference to market price of such services. In view of this we do not find any infirmity in order of learned CIT A in deleting above disallowance of consultancy charges. Disallowance u/s 14 A - CIT A only corrected figures of average value of investment at 146, 158, 495 and confirmed disallowance of 0.5% - HELD THAT - Principally CIT A has upheld disallowance made by learned assessing officer however directed to correct only arithmetic inaccuracy in the order. Before us learned departmental representative could not show that figure adopted by learned CIT A for confirming above disallowance are not correct.

Summary

Issues Involved:
1. Deletion of disallowance of stamp duty charges on lease agreement.
2. Deletion of disallowance of renovation expenditure.
3. Deletion of disallowance of excess rent under Section 40A(2)(a).
4. Deletion of disallowance of legal and professional fees and consultancy charges under Section 40A(2)(a).
5. Deletion of disallowance of foreign travel expenses.
6. Deletion of addition of undisclosed management fee.
7. Deletion of disallowance of excess rental expenses under Section 40A(2)(a).
8. Deletion of disallowance under Section 14A read with Rule 8D.

Detailed Analysis:

1. Deletion of Disallowance of Stamp Duty Charges on Lease Agreement:
The Assessing Officer (AO) disallowed ?12,48,000/- out of ?15,60,000/- paid as stamp duty for a five-year lease, treating it as a capital expenditure. The CIT(A) allowed the full amount as revenue expenditure, noting that the stamp duty was necessary for registration and thus, revenue in nature. The Tribunal upheld the CIT(A)'s decision, stating that the stamp duty paid for securing premises for business purposes is revenue expenditure, not capital expenditure, referencing the Supreme Court's decision in Madras Industrial Investment Corporation Ltd Vs. CIT.

2. Deletion of Disallowance of Renovation Expenditure:
The AO disallowed ?1,25,87,414/- incurred on repairs and maintenance of leased premises, treating it as capital expenditure. The CIT(A) allowed it as revenue expenditure, noting that the expenditure was necessary to make the premises operational and did not create a new asset of enduring nature. The Tribunal upheld the CIT(A)'s decision, stating that the expenditure was for making the premises functional and was correctly classified as revenue expenditure.

3. Deletion of Disallowance of Excess Rent under Section 40A(2)(a):
The AO disallowed ?93,00,000/- out of ?1,86,00,000/- rent paid to a sister concern, considering it excessive. The CIT(A) deleted the disallowance, noting that the AO failed to show that the rent was excessive or unreasonable compared to the market rate. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO must prove the excessiveness of the payment with comparative market data, which was not done in this case.

4. Deletion of Disallowance of Legal and Professional Fees and Consultancy Charges under Section 40A(2)(a):
The AO disallowed 50% of the legal and consultancy charges, considering them excessive and unreasonable. The CIT(A) deleted the disallowance, stating that the AO did not provide evidence that the charges were excessive compared to the market rate. The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to substantiate the claim of excessiveness with relevant market data.

5. Deletion of Disallowance of Foreign Travel Expenses:
The AO disallowed 50% of the foreign travel expenses, considering them as personal trips. The CIT(A) deleted the disallowance, noting that the AO did not provide specific reasons for the disallowance and that the expenses were justified for business purposes. The Tribunal upheld the CIT(A)'s decision, stating that the AO's disallowance was based on mere suspicion without concrete evidence.

6. Deletion of Addition of Undisclosed Management Fee:
The AO added ?81,176,086/- as undisclosed management fees, considering it as income for the current year. The CIT(A) directed the AO to verify if the amount was offered in the subsequent year, as claimed by the assessee. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided evidence that the income pertained to the subsequent year and was offered for taxation accordingly.

7. Deletion of Disallowance of Excess Rental Expenses under Section 40A(2)(a):
The AO disallowed ?3,00,000/- out of ?6,00,000/- rent paid to a sister concern, considering it excessive. The CIT(A) deleted the disallowance, noting that the AO failed to show that the rent was excessive or unreasonable compared to the market rate. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO must prove the excessiveness of the payment with comparative market data, which was not done in this case.

8. Deletion of Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?1,180,642/- under Section 14A, considering it as expenditure incurred to earn exempt income. The CIT(A) corrected the figure to ?730,642/- based on the average value of investments. The Tribunal upheld the CIT(A)'s decision, noting that the AO did not challenge the corrected figures provided by the CIT(A).

Conclusion:
The Tribunal dismissed the appeals filed by the AO for the assessment years 2010-11, 2011-12, and 2012-13, upholding the CIT(A)'s decisions on all grounds. The Tribunal emphasized the need for the AO to provide concrete evidence and comparative market data to substantiate claims of excessiveness or unreasonableness in expenses and disallowances.