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TMI Blog2012 (8) TMI 518X X X X Extracts X X X X X X X X Extracts X X X X ..... count for use of parent company’s employees is unreasonable or excessive - no concrete evidence or material to allocate the unreasonable and excessive expenses for the purpose of disallowance under Section 40A (2). Once, the CIT (A) has come to the conclusion that arrangement of expenses is correct and bonafide and is in accordance with the terms of agreement between both the parties, then no ad hoc disallowance of any amount is called for - in favour of assessee. - ITA Nos 7478/10, & 9245/10 - - - Dated:- 27-6-2012 - SHRI G.E. VEERABHADRAPPA, AND SHRI AMIT SHUKLA, JJ. Assessee by : Mr. K.Shivaram Revenue by : Mr. Parthsarathi O R D E R PER AMIT SHUKLA (J.M.) : These are the cross appeals filed by the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice of the Assessing Officer that the assessee s case in the preceding year i.e. AY 2006-2007 was completed under Section 143(3), wherein such a reallocation and reimbursement of expenses have been accepted. The Assessing Officer rejected the claim of the assessee and held that expenses incurred by the parent company cannot be held to be wholly and exclusively for the purpose of the business and held that as per Section 40A(2)(b), the assessee isrequired to prove that expenses incurred through associate companies are reasonable and at arms length, considering the services rendered by the assessee. Since the assessee has failed to discharge the onus to prove the reasonableness of the expenditure, a sum of Rs.20,00,000/- was disallowed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a case where parent company was rendering any service for which payment has been made by the assessee. iv) The entire arrangement of sharing of expenses is devoid of any tax consideration and is solely based on and guided by contractual arrangement and commercial and factual consideration. Therefore, such an adhoc disallowance is not called for. 4. The CIT(A) accepted the contentions of the assessee and admitted that parent company had incurred cost for sharing of common office premises, staff etc. by the assessee and such expenses are attributable to the assessee company which amounts to Rs.51,01,810/-. The CIT(A) has noted down the following details of expenses :- Consulting Charges Rs. 4,79,801/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and allowance expenses of Rs.11.86 crores have been incurred by the assessee itself, then what was the need of using the parent company employees for which amount of Rs.33.98 lacs was reimbursed. He was of the opinion that there was no criteria to measure the extent of benefit obtained by the assessee on account of expenses incurred by the parent company. Both the asssessee s claim and the Assessing Officer, disallowance are based on ad hoc basis, therefore, some disallowance is called for in this case. On this reasoning, he confirmed the disallowance at Rs.10,00,000/- under Section 40A(2)(b). 5. Before us, learned counsel for the assessee submitted that when the entire reimbursement of expenses are based on memorandum of understanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. From the plain reading of above, it is amply clear that the payments which are made to persons specified in sub-clause b of sub section 2 of Section 40A, if in the opinion of Assessing Officer, is excessive and unreasonable; firstly, having regard to the fair market value of the goods, services or facilities for which the payment is made; secondly, looking to the legitimate needs of the business or profession of the assessee; or thirdly, the benefit derived by or accruing to him therefrom; These three are alternative tests and the same do not necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich have been reimbursed are unreasonable or excessive looking to the fair market value of the services and expenses reimbursed. Even the reasoning of the CIT(A) on reimbursement of salary expenses that they are excessive in view of the fact that the assessee company has itself incurred salary and allowances expenses at Rs.11.86 crores, cannot be the ground for any disallowance as nowhere it has been brought on the record as to how the reimbursement of 33.98 crores on salary account for use of parent company s employees is unreasonable or excessive. To draw any adverse inference under Section 40A(2)(a), there has to be some concrete evidence or material to allocate the unreasonable and excessive expenses for the purpose of disallowance unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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