ACIT., CIRCLE-5(1), HYDERABAD vs. NSPIRA MANAGEMENT SERVICES PRIVATE LIMITED, HYDERABAD

The assessee has filed its Return of Income for the Asst. Year 2018-19 on 23.10.2018 declaring total income of Rs.218,81,32,070/-. The case was selected for scrutiny and during the course of assessment proceedings, the Assessing Officer called upon the assessee to file relevant details including financial statements, books of account and supporting bills and vouchers for various expenditure. In response to the notices, the assessee company had filed details electronically on various dates. The Assessing Officer after going through the information submitted by the assessee observed that the assessee has incurred expenditure for functions and celebrations, buildings, repairs and maintenance and salary expenses and therefore, called upon the assessee to submit bills and vouchers. In response, the assessee has furnished sample bills and vouchers for expenses on functions and celebrations, buildings repairs and maintenance and salary expenses. The Assessing Officer after considering the submissions of the assessee observed that the details submitted by the assessee towards expenses on functions and celebrations include expenses on snacks, lighting, decoration, costumes, hiring of banquet halls, etc which is not related to the business of the assessee. Therefore, the Assessing Officer disallowed entire expenditure incurred for functions and celebrations of Rs.8,81,53,039/-. The Assessing Officer further noted that the bills submitted in support of buildings repairs and maintenance as sample copies without any complete details of expenditure and further the assessee has failed to file any agreement for AMC, etc. Since the assessee himself does not own any building / assets as seen from the fixed asset schedules of the financials, the cost on repairs of said buildings stand unsubstantiated. Therefore, he disallowed the entire expenditure incurred for buildings repairs and maintenance expenses of Rs.64,24,00,000/-. The Assessing Officer further noted that although the assessee has furnished details on salary payments including ledger accounts along with bank statements, but failed to submit complete details of salary expenditure. Further, the expenses on salary and marketing claimed by the assessee are huge in quantum on the one hand, and lacking concrete documents to be proven as real expenses, on the other hand. Therefore, by taking note of relevant facts, the Assessing Officer disallowed 50% of salary expenditure and marketing expenses of Rs.103,51,82,180/- and made addition of Rs.65,06,48,096/-. Thus, the Assessing Officer completed the assessment u/s.143(3) of the Income Tax Act, 1961 (the Act) on 21.04.2021 and determined the total income of the assessee at Rs.356,93,33,205/-.

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has filed detailed written submissions on the issues which have been reproduced in para 5 on pages 4 to 10 of Ld. CIT(A) order. The assessee has also furnished additional evidences in the form of Master Service Agreement between the NES and the assessee along with the details of expenditure and bills & vouchers in support of expenditure. During the appellate proceedings, the Ld. CIT(A) has forwarded additional evidences filed by the assessee to the Assessing Officer for remand report. The Assessing Officer vide his remand report dated 16.10.2024 has commented upon the additional evidences filed by the assessee in support of various expenditure disallowed by the Assessing Officer and upon considering the relevant Master Service Agreement with NES and supporting bills and vouchers submitted by the assessee observed that the expenditure incurred under the head functions and celebrations, buildings repairs and maintenance, salary expenses on marketing, infrastructure and examination support services are well documented, incurred mostly through proper banking channel and taxes were deducted wherever applicable.

The Ld. CIT(A) after considering relevant submissions of the assessee and also taking note of remand report submitted by the Assessing Officer observed that the entire expenditure incurred by the assessee during its core business activity of rendering of educational services and have a direct nexus and relating to its revenue and its business activity. Further, the Assessing Officer has examined the bills and vouchers and observed that the expenditure incurred by the assessee towards functions and celebrations are well documented, mostly incurred through banking channel and also deducted TDS wherever applicable. Therefore directed the Assessing Officer to delete the addition made towards functions and celebrations of Rs.8,81,53,039/-. The Ld. CIT(A) further noted that the assessee has also furnished relevant details in respect of repairs and maintenance of buildings by filing Master Service Agreement and as per the agreement, the assessee provided repairs and maintenance services to the buildings owned or taken on lease by the educational society to the extent of 1,91,33,653 sq. ft. Further, the assessee has agreed to render such infrastructure management services to the educational institutions at its clients at a fixed rate of Rs.50/- per sq. ft. per annum for which the assessee has incurred expenditure for maintenance and repairs. Therefore, he observed that the entire expenditure is incurred for its core business activity of rendering services in relation to Master Service Agreement with NES. Therefore, he directed the Assessing Officer to delete the additions made towards disallowance on repairs and maintenance expenses to the buildings.

The Ld. CIT(A) has further noted that the assessee has also incurred salary expenses towards marketing support and infrastructure services and the expenditure is supported by necessary evidences. The Ld. CIT(A) further noted that the assessee has furnished all evidences in support of marketing expenses and the same has been verified by the Assessing Officer and found that the expenditure is incurred mostly through proper banking channel and are also well documented and paid after deduction of TDS applicable as per law. The Ld. CIT(A) further noted that during the year under consideration, the assessee had offered revenue of Rs.163.23 Crores from admission support services, Rs.80 Crores from infrastructure management services and Rs.54,11,00,000/- from examination support services. If we go by the revenue generated by the assessee from rendering above services and the corresponding expenditure incurred for salary, it appears that expenses incurred are in relation to business activity of the assessee. Since the Assessing Officer has not doubted the genuineness of the expenses and also given a finding that the said expenditure is fully supported by bills and vouchers, there is no reason for the Assessing Officer to make 50% adhoc disallowance of salary expenses and thus directed the Assessing Officer to delete the addition of Rs.65,06,48,096/-.

Aggrieved by the order of Ld. CIT(A), the revenue is now in appeal before the Tribunal.

The learned Department Representative Shri Narender Kumar Naik, CIT submitted that the Ld. CIT(A) erred on facts in deleting the additions, simply relying on the remand report of the Assessing Officer which did not subject to conclusive about the nature of expenses incurred by the assessee under the head ‘functions and celebrations, repairs and maintenance of buildings and salary expenses on infrastructure and marketing support services. The Ld. DR further submitted that the assessee had incurred huge expenditure under the head ‘salary, repairs and maintenance and functions & celebrations’ but has filed only sample bills for verification during the appellate proceedings and remand proceedings. The Assessing Officer on the basis of sample bills and vouchers has arrived at a conclusion that the expenditure incurred by the assessee, under the above heads are well documented, mostly incurred through banking channel and TDS has been deducted wherever applicable. However, facts remains that the assessee had failed to file complete details of expenses either before the Assessing Officer or before the Ld. CIT(A). However, the Ld. CIT(A) only on the basis of remand report had deleted the additions made by the Assessing Officer without even verifying the nature of expenses whether it is capital in nature or revenue in so far as buildings repairs and maintenance expenses. Therefore, he submitted that the order of the Ld. CIT(A) should be set aside and additions made by the Assessing Officer towards functions and celebrations, repairs and maintenance to buildings and salary expenses should be upheld.

The learned counsel for the assessee Shri A. Srinivas, CA, on the other hand, supported the orders of Ld. CIT(A) and submitted that the Ld. CIT(A) had given a categorical finding in respect of each expenditure in light of the remand report of the Assessing Officer and held that if we go by the revenue generated by the assessee company in relation to Master Service Agreement with NES and corresponding revenue reported for academic event management services, the expenditure incurred for functions and celebrations is commensurate with the revenue generated by the assessee. Further, the assessee had also furnished relevant bills and supporting vouchers in respect of repairs and maintenance and expenses incurred on buildings repairs and maintenance and the Assessing Officer has verified the expenditure with reference to Master Service Agreement and observed that the assessee company had undertaken to provide infrastructure management services to its clients at a fixed rate of Rs.50 per sq. ft. per annum and has provided services to 1,91,33,653 sq. ft. of buildings of the Educational Society either on its own or on lease. The Assessing Officer had also observed that revenue of Rs.80 Crores has been earned from infrastructure management services, as against this incurred Rs.64.24 Crores expenses on repairs and maintenance. The Assessing Officer after considering relevant agreement, bills and vouchers have categorically admitted that expenditure incurred for buildings repairs and maintenance is well documented, most incurred through banking channel and TDS has been deducted as per law. The Ld. CIT(A) after considering the relevant facts has rightly deleted the additions made by the Assessing Officer.

The learned counsel for the assessee further referring to disallowance of 50% adhoc disallowance of salary expenses submitted that, once the Ld. CIT(A) deleted the additions on the basis of remand report of the Assessing Officer dated 16.10.2024 where the Assessing Officer has categorically admitted that the additional evidences provided during the appeal proceedings (Bank statements, TDS returns and Form 16) shows that all salary expenses were properly documented and incurred through banking channels. He submitted that the Ld. CIT(A) further noted that the assessee has incurred salary expenditure of Rs.103,51,82,180/- towards marketing, admission and infrastructure support services and as against this the assessee has derived revenue of Rs.163,23,30,000/- from the above services and if we consider the revenue against expenses, the expenditure incurred by the assessee is commensurate with the revenue. The Ld. AR submitted that since the assessee has incurred expenditure towards its core business of activities of rendering services to educational institutions, the Ld. CIT(A) has rightly deleted the additions made by the Assessing Officer. Therefore, he submitted that the order of Ld. CIT(A) should be upheld and the addition made by the Assessing Officer should be deleted.

We have heard both the parties, perused the material available on record and had gone through the orders of authorities below. The Assessing Officer disallowed the expenses on functions and celebrations on the ground that the assessee has furnished sample copies of bills and vouchers in support of expenses and further the expenditure incurred by the assessee is not in relation to its business activity of rendering services to the educational institutions. The assessee has furnished Master Service Agreement with NES and as per the agreement with the society, the assessee company providing various services including catering services which includes functions and celebrations organised by the educational institutions on various dates. The assessee had also rendered event services to its clients as per the agreement and the assessee has earned revenue of Rs.33,08,00,000/-. Further, it has incurred expenditure of Rs.8,81,53,079/. The assessee has furnished supporting bills and vouchers of expenditure and the same has been vetted by the Assessing Officer during remand proceedings, where the Assessing Officer in the remand report dated 16.10.2024 categorically observed that upon reviewing the additional evidences, it was found that all expenses were incurred through banking channel, supported by proper documentation, reflected in the books of account of the assessee and taxes were deducted wherever applicable. The Ld. CIT(A) after considering the relevant evidences submitted by the assessee including Master Service Agreement between the assessee and NES coupled with remand report of the Assessing Officer dated 16.10.2024 has rightly deleted the additions made by the Assessing Officer towards expenditure of functions and celebrations by holding that the assessee has incurred said expenditure for its core activity of rendering services to its clients and has a direct nexus in relation to its business activity. The revenue has failed to counter the findings of Ld. CIT(A) in this regard. Therefore, we are inclined to uphold the findings of Ld. CIT(A) and direct the Assessing Officer to delete the addition of Rs.8,81,53,079/- made by the Assessing Officer towards disallowance of expenses on functions and celebrations.

Coming back to disallowance of repairs and maintenance expenditure on buildings. The assessee had incurred expenditure of Rs.64.02 Crores. The assessee had furnished supporting bills and vouchers and the same has been vetted by the Assessing Officer during remand proceedings. The assessee had also furnished Master Service Agreement with NES and as per the said agreement, the assessee has agreed to render infrastructure management services to its clients at a fixed rate of Rs.50/- per sq. ft. per annum and derived revenue of Rs.80 Crores for the year under consideration. As against this revenue, the assessee has incurred expenditure of Rs.64,24,00,000/- for maintenance of school and college buildings to an extent of 1,91,33,653 sq. ft. and if we consider the revenue generated from above service and corresponding expenditure incurred by the assessee for repairs and maintenance, in our considered view, the expenditure incurred by the assessee is in accordance with the revenue generated from said services. Therefore, we are of the considered view that the Assessing Officer is erred in disallowing entire expenditure incurred for repairs and maintenance of buildings. The Ld. CIT(A) after considering the relevant supporting evidences filed by the assessee and also taking note of the remand report of the Assessing Officer dated 16.10.2024, where the Assessing Officer categorically admitted that upon reviewing the additional evidences, it was found that all expenses were incurred through banking channel, supported by proper documentation and also reflected in the books of account. Further, taxes were deducted by the assessee wherever applicable, has deleted the additions made by the Assessing Officer towards disallowance of repairs and maintenance expenses of Rs.64,24,00,000/-.

In so far as the argument of the Ld. DR that the Assessing Officer has not examined the nature of expenditure, whether it is capital or revenue in nature and simply accepted the genuineness of the expenditure without verifying the nature, in our considered view, it was not the case of the Assessing Officer that the expenditure incurred by the assessee towards buildings, repairs and maintenance is capital in nature or revenue expenditure. The Assessing Officer disallowed expenditure only on the ground that the assessee has not furnished complete bills and vouchers in support of expenditure. However, the very same Assessing Officer during remand proceedings, has verified the complete details of expenditure and has accepted the expenditure incurred by the assessee as genuine and well documented. Therefore, in our considered view, the arguments of the Ld. DR does not hold good and thus, rejected. Therefore, for above reasons, we are inclined to uphold the findings of the Ld. CIT(A) and direct the Assessing Officer to delete the additions made towards disallowance of repairs and maintenance expenses of buildings and infrastructure of Rs.64.24 Croes.

Coming back to 50% adhoc disallowance of salary expenses on infrastructure, marketing and support services of Rs.65,06,48,096/-. The Assessing Officer had once again disallowed expenses on the ground that the assessee has not furnished complete bills and vouchers and supporting evidence for salary expenditure. However, the fact remains that during remand proceedings, the Assessing Officer has verified the salary expenses incurred by the assessee in light of Master Service Agreement between the assessee and NES along with other evidences and had recorded a categorical finding that all salary expenses were properly documented and incurred through banking channel and also the assessee has deducted TDS wherever applicable. The Ld. CIT(A) after considering the relevant facts and also taking note of remand report of the Assessing Officer observed that the assessee has incurred salary expenses to its core business activity of rendering educational support services, infrastructure management services, admissions support services and examination support services, from which the assessee has derived revenue of Rs.297.35 Crores, for which the assessee is required to have sufficient man power for rendering above services. Further, as per the Master Service Agreement between the assessee and NES, the assessee is providing examination support services @ Rs.1,656/- per student per annum, and admission support services for Rs.4,956/- per student per annum. Similarly, the assessee renders services to its clients for infrastructure support services @ 50 per sq. ft. per annum. The assessee received Rs.163.23 Crores from admission support services, Rs.80 Crores from infrastructure management services and Rs.54.11 Crores from examination support services. If we go by the revenue generated from the services rendered with corresponding salary expenses, the expenditure incurred by the assessee is commensurate with revenue derived from said services and also fully supported by necessary bills and vouchers. The Ld. CIT(A) after considering relevant facts and also by taking note of remand report of the Assessing Officer has rightly deleted the additions made by the Assessing Officer towards 50% adhoc disallowance of salary expenses of Rs.65,06,48,096/-. Thus, we are inclined to uphold the findings of Ld. CIT(A) and direct the Assessing Officer to delete additions made towards disallowance of salary expenses of Rs.65,06,48,096/-.

In the result, the appeal filed by the revenue is dismissed.

The issues involved in this appeal filed by the revenue is similar to the issues which we had considered in assessee’s own case for A.Y. 2018-19 in ITA No.01/Hyd/2025. In the year under consideration, the Assessing Officer has disallowed the expenditure incurred for functions and celebrations of Rs.2,35,66,200/-; on identical reasons and further has disallowed sum of Rs.76,63,36,988/- towards repairs and maintenance expenses on buildings. The Ld. CIT(A) deleted the additions made by the Assessing Officer towards repairs and maintenance expenses on buildings and the expenses incurred for functions and celebrations on the basis of bills and vouchers submitted by the assessee and remand report of the Assessing Officer, where the Assessing Officer vide his remand report dated 13.12.2024 had categorically admitted that the expenditure incurred towards repairs and maintenance of buildings were well documented and incurred through banking channels and taxes were deducted wherever applicable. The Assessing Officer had given similar findings in respect of expenses related to functions and celebrations of Rs.2,35,66,200/- and observed that upon reviewing the additional evidence, it was found that all expenses were incurred mostly through banking channel, supported by proper documentation and reflected in the books of account of the assessee. Further, taxes were deducted by the assessee wherever applicable. The Ld. CIT(A) after considering relevant evidences coupled with remand report of the Assessing Officer observed that the expenditure incurred by the assessee towards repairs and maintenance of buildings is commensurate with revenue derived by the assessee for the said services and further supported by bills and vouchers. The Ld. CIT(A) had given similar finding in respect of expenditure incurred for functions and celebrations and observed that no adverse finding has been reported by the Assessing Officer in the remand report.

We have considered an identical issue of disallowance of expenses on functions and celebrations and disallowance of expenses on repairs and maintenance of buildings, in assessee’s own case for Asst. Year 2018-19. But for the figures the reasons given by us in preceding paragraph nos. 12 to 15 of order for the Asst. Year 2018-19, shall apply mutatis mutandis to this assessment year as well. Therefore, for similar reasons, we are inclined to uphold the findings of Ld. CIT(A) and direct the Assessing Officer to delete the additions made towards disallowance of functions and celebration expenses of Rs.2,35,66,200/- and repairs and maintenance expenses to the buildings for Rs.76,63,36,988/-.

In the result, the appeal filed by the revenue is dismissed.

To sum up, both the appeals of revenue are dismissed.