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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VP:
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-3, Chennai in ITA No.54/14-15/CIT(A)-3, vide order dated 31.03.2017. The assessment was framed by the DCIT, Company Circle V(1), Chennai for the relevant assessment year 2011-12 vide order
I.T.A. No.1684/Chny/2017 2 dated 21.03.2014 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’).
The only issue in this appeal of Revenue is as regards to the order of deleting the disallowance of expenditure to the tune of Rs.3,25,01,491/- considered as capital-work-in-progress by the AO. For this Revenue has raised following effective grounds:- 2.1 The ld.CIT(A) erred in deleting the disallowance of expenditure to the tune of Rs.3,25,01,491/- [subject to his observation made on the disallowance u/s 40A(2)(b)], considered as Capital-Work-in-Progress and accordingly capitalized by the Assessing Officer, holding that they are allowable u/s 37, incurred for the purpose of business.
2.2 The ld.CIT(A) ought to have noted that the AO had capitalized the entire amount as no income had been offered by the assessee from the impugned project during the year.
2.3 The ld.CIT(A) failed to note that according to the ‘Revenue-Cost Matching Concept’ of the Accounting Principles, the assessee has to claim only those expenses which related to the revenue recognized during the year and accordingly the Assessing Officer is justified in capitalized the impugned expenditure to which no relatable income was shown during the year by the assessee.
Brief facts are that the assessee is engaged in infrastructure projects and the AO during the course of assessment proceedings noticed from the profit & loss account statement furnished by assessee that it has claimed consultancy charges of Rs.1,69,68,285/-, legal and professional charges of Rs.47,78,554/-
I.T.A. No.1684/Chny/2017 3 and marketing expenses of Rs.1,07,54,652/-. The AO required the assessee to explain as to how these expenses are allowable. According to him, these expenses did not pertain to the receipt shown for the current year and according to Revenue-Cost Matching Concept, the assessee can claim only those expenses which are related to the revenue recognized during the year. Further, according to AO, the expenses are relating to services rendered by the assessee to the sister concerns. Therefore, the AO capitalized these expenses and noted that the same should have been shown as capital-work-in-progress. Accordingly, he disallowed the expenses of Rs.3,25,01,491/-. The AO also applied the provisions of section 40A of the Act. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after considering the submissions of the assessee and the details filed before him in regard to expenses incurred by assessee on consultancy charges, legal and professional charges and marketing expenses viz-a-viz services rendered to alleged sister concerns, he noted that the AO has not brought out any basis for applying the provisions of section 40A(2)(b) of the Act and according to him the expenditure incurred by assessee is found not to be reasonable and once this is the position, the AO cannot disallow the same. For this, the CIT(A) recorded his finding in para 5.9 to 5.12 as under:-
I.T.A. No.1684/Chny/2017 4 I.T.A. No. “5.9 On perusal of assessment order, of assessment order, I find that AO has not brought out basis to disallow the said expenditure u/s 40A(2)(b). If If the the said expenditure, according to AO, is found to be unreasonable, then AO could ture, according to AO, is found to be unreasonable, then AO could ture, according to AO, is found to be unreasonable, then AO could have disallowed after giving reaso isallowed after giving reasons of unreasonableness. This aspect ns of unreasonableness. This aspect has been found absent in been found absent in the assessment order. In my considered ed opinion, as admitted by the ld. AR, d. AR, EID Parry India Ltd. to whom an amount of an amount of Rs. 1,40,38,461/ - has been has been paid, could be brought u/ s 40A 2)(b). Further, it is noticed that, for an amount amount of Rs. 1,20,00,000/ -, appellant has has entered into an agreement on 04.11. 2010 with BID Parry India Ltd. 04.11. 2010 with BID Parry India Ltd. for specific services specific services which have been provided as per the agreement and also which have been provided as per the agreement and also agre agreed payment was made by the appellant. In this regard, AO as made by the appellant. In this regard, AO has not made any effort as to any effort as to whether the appellant has not been provided whether the appellant has not been provided services specified specified in the agreement or not. In my opinion, In my opinion, without bringing such facts on record, the bringing such facts on record, the disallowance u/s 40A(2 A(2)(b) may not be proper.
5.10 On consideration of .10 On consideration of totality of facts, in my considered considered opinion, payments made to EID Parry payments made to EID Parry India Ltd. for supply of manpower manpower on deputation basis amounting amounting to Rs.20,38,461/- could be brought u/s 40A(2)(b) as there is not much A(2)(b) as there is not much of material available to substantiate of material available to substantiate reasonableness. Considering all these facts, I reasonableness. Considering all these facts, I am of the opinion opinion that AO should disallow an amount of should disallow an amount of Rs.20,38,461/- u/s 40A(2)(b) as appellant could not substantiate reasonableness for making such payment to holding not substantiate reasonableness for making such payment to holding not substantiate reasonableness for making such payment to holding company. Other than that, I company. Other than that, I find that there is no scope scope to invoke Sec.40A(2)(b) on other payments. It is a fact that appellant has been into the ec.40A(2)(b) on other payments. It is a fact that appellant has been into the ec.40A(2)(b) on other payments. It is a fact that appellant has been into the business of infrastructure projects such as business of infrastructure projects such as taking land on lease and giving it on Sub-lease, construction of lease, construction of flats, etc. As rightly argued by the ld. AR, the flats, etc. As rightly argued by the ld. AR, the expenditures has been expenditures has been incurred for the purpose of business and business and same had to be allowed u/ s 37.
5.11 I agree with the arguments of the Id. AR that appellant 5.11 I agree with the arguments of the Id. AR that appellant has received various services from different perso various services from different persons for which payments were made. During the year, appellant appellant had incurred expenditure on Consultancy Charges, Legal & Professional Charges and Marking Charges, Legal & Professional Charges and Marking Expenses Expenses which are meant for business purposes. Moreover, I have also noticed that AO has meant for business purposes. Moreover, I have also noticed that AO has meant for business purposes. Moreover, I have also noticed that AO has not made out any case that such expenditures are case that such expenditures are not genuine without any evidence.
5.12 In the circumstances, I hold that an amount of Rs.3,04,63,030/ In the circumstances, I hold that an amount of Rs.3,04,63,030/ In the circumstances, I hold that an amount of Rs.3,04,63,030/- is incurred for the purpose of business and allowable u/s 37 of Income Tax incurred for the purpose of business and allowable u/s 37 of Income Tax incurred for the purpose of business and allowable u/s 37 of Income Tax Act, 1961. Therefore, the AO is directed to delete the addition of Act, 1961. Therefore, the AO is directed to delete the addition of Act, 1961. Therefore, the AO is directed to delete the addition of
I.T.A. No.1684/Chny/2017 5 Rs.3,04,63,030/-. However, as I discussed in earlier paragraphs, I sustain the addition made by the AO of Rs.20,38,461/- u/s.40A(2)(b). The grounds are partly allowed.
Aggrieved, now the Revenue is in appeal before the Tribunal.
Before us the ld. Senior DR heavily relied on the assessment order and stated that the AO has rightly applied the provisions of section 40A(2)(b) of the Act, as the assessee has paid unreasonable payments to its sister concerns on account of expenses incurred for consultancy charges, legal and professional charges and marketing expenses. She stated that the assessee is unable to file any detail before AO and could not substantiate the claim of expenses. Hence, she relied on the assessment order and asked before the Bench for the order of CIT(A) be reversed and matter can be remanded back to the file of AO for fresh adjudication.
Per contra, the ld.counsel for the assessee took us through the grounds raised by Revenue and stated that the Revenue has not challenged the invocation of provisions of section 40A(2)(b) of the Act by the AO. He read out the ground Nos.2.1, 2.2 & 2.3 and stated that at the threshold once the issue is not raised by the
I.T.A. No.1684/Chny/2017 6 Revenue, the matter stand concluded at this stage only and appeal should be dismissed at the very threshold.
Apart from the above, the ld.counsel for the assessee took us through the order of CIT(A) on merits, wherein submissions of the assessee are quoted verbatim. The ld.counsel for the assessee took us through the details of expenses, which are brought by the AO under the purview of section 40A(2)(b) of the Act, from the related parties and ld.counsel for the assessee drew our attention to page 11 & 12 of the CIT(A) order wherein the entire details, payments made, services rendered and relationship with the assessee by that party i.e., 3rd party is given. In view of the above, the ld.counsel for the assessee stated that the CIT(A) has restricted the disallowance to the extent of Rs.20,38,461/- which are directly related to the services rendered by the assessee to the sister concern of the assessee and the assessee could not substantiate the reasonableness of the expenses claimed or payments made under the provisions of section 40A(2)(b) of the Act. He stated that the CIT(A) has rightly deleted the disallowance of Rs.3,04,63,030/- has incurred for the purpose of business and allowable u/s.37 of the Act. According to him, these amounts in no way hit by the provisions of section 40A(2)(b) of the Act and
I.T.A. No.1684/Chny/2017 7 moreover, the AO has nowhere held that the payments are unreasonable or more than the market rate of services provided by the assessee and in lieu of that payment made. In view of the above, the ld.counsel for the assessee supported the order of CIT(A).
We have heard rival contentions and gone through facts and circumstances of the case. We have perused the gorunds raised by the assessee and admit that the Revenue ground is not clear whether they have challenged the deletion of disallowance by invoking the provisions of section 40A(2)(b) of the Act. The only challenge to the order is deleting the disallowance of expenditure of Rs.3,04,63,030/- considered by the AO as capital-work-in- progress and accordingly capitalized by the AO. As we have noted that this ground is not clear and according to us, the Revenue has not challenged the disallowance made by the AO u/s.40A(2)(b) of the Act, as is clear from the Ground No.2.1 raised by Revenue. Coming to merits of the case, we noted that the assessee has filed complete details of consultancy charges, legal and professional charges and marketing expenses to the tune of Rs.3,25,01,491/- and the relevant details reads as under:-
I.T.A. No.1684/Chny/2017 8 A. Consultancy Charges Party Amount – Rs. Services Relationship with the appellant Mr.R.K. Dhawan 17,64,800 Marketing Third Party Service Provider Mr. Shamsuddin 10,46,715 Legal Third Party Service Provider R S Consultancy 1,13,250 Legal Third Party Service Provider P.S. Narayanaswamy 11,36,520 Advisory Third Party Service Provider V Ramabhoopathy 7,67,000 Consultancy Third Party Service Provider Natraj Rao Raghu 1,40,000 Legal Third Party Service Provider E.I.D Parry India 1,20,00,000 Business Advisory Holding Company – Limited Services Related Party u/s. 40A Subtotal - A 1,69,68,285
A. Legal and Professional Charges Party Amount – Rs. Services Relationship with the appellant Mr. V. Ramabhoopathy 7,25,000 Legal Third Party Service documentation Provider Ms. S. Lalitha 6,000 Secretarial Services Third Party Service Provider Mr. K. Vaitheeswaran 2,00,000 Opinion on Indirect Third Party Service Provider Tax Mr. R. Sanjeevi 3,000 Audit Services Third Party Service Provider M/s. ICRA 17,95,063 Survey Third Party Service Provider R. Sridharan & 11,030 Secretarial Services Third Party Service Provider Associates E.I.D Parry India Limited 20,38,461 Manpower Supply Holding Company – & Deputation Related Party u/s. charges 40A Subtotal – B 47,78,554
I.T.A. No.1684/Chny/2017 9 A. Marketing Expenses Party Amount – Rs. Services Relationship with the appellant M/s. Coromandel 1,07,54,652 Marketing A Group Company Engineering and not a related Company Limited party covered (CECL) under section 40A* Subtotal – C 1,07,54,652 Grand Total A,B & C 3,25,01,491
From the above, we noted that the assessee is engaged in the business of infrastructure development and real estate related projects and the assessee prior to launching of real estate project i.e., “Centralis @ ABM Avenue”, it is engaged in the business of real estate as it has taken lease of around 81 acres of land from Coramandel Fertilizers Ltd., vide lease dated 27.03.2008, which was notified under SEZ Act, 2005 as Special Economic Zone. This land was sub-leased to Silk Road Sugars Pvt. Ltd., for setting up of sugar refinery. The assessee received lease rental from SEZ and has offered to tax. The assessee has actually incurred an expenditure of Rs.1,84,63,030/- to third party service providers out of the total expenditure of Rs.3,25,01,491/-. As regards to the bifurcation of expenditure given by the assessee and the payment made by the assessee, we noted that the payment made to EID Parry India Ltd., being holding company should be considered u/s.40A(2)(b) of the Act but no other payments as they are not
I.T.A. No.1684/Chny/2017 10 related to the assessee. The assessee has made a payment of Rs.1.2 crores to EID Parry India Ltd., as per the Business Advisory Agreement dated 04.11.2010 but these cannot be disallowed because these are paid according to agreement and actual services rendered and even the AO has not given any finding as regards to unreasonableness of the payment. Further, the only amount disallowed by AO of Rs.20,38,461/- the CIT(A) has held only as falling under the provisions of section 40A(2)(b) of the Act which are not challenged by the assessee. Hence, we confirm the order of CIT(A) and appeal of Revenue is dismissed.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the court on 22nd February, 2022 at Chennai.
Sd/- Sd/- (महावीर �सह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य /ACCOUNTANT MEMBER
चे�ई/Chennai, �दनांक/Dated, the 22nd February, 2022 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.