2014 (1) TMI 194 - AT - Income Tax

Tribunal allows expenses, limits referral fees, partly grants appeal.

Recent Insurance Services Ltd. Versus Deputy Commissioner of Income-tax

Recent Insurance Services Ltd. Versus Deputy Commissioner of Income-tax - [2013] 24 ITR 551 Issues Involved:1. Disallowance of 30% of expenses related to certified data purchase.2. Disallowance of 30% of expenses related to salary, wages, and bonus.3. Disallowance of 30% of expenses related to referral fees.Detailed Analysis:1. Disallowance of 30% of expenses related to certified data purchase:The Assessing Officer (AO) observed that the assessee had purchased data worth Rs. 70,36,440 from M/s. Shiva Fund Trust, managed by the brother of the managing director of the assessee. The AO questioned the genuineness and utility of this data, noting that similar information could be obtained from governmental and private agencies. The AO also doubted the credentials of M/s. Shiva Fund Trust. However, the assessee provided detailed records of data purchased and used for business purposes, including acknowledgment of income by M/s. Shiva Fund Trust. The Tribunal found that the assessee maintained complete details and used the data for earning business income, and the credentials of M/s. Shiva Fund Trust were genuine. The Tribunal concluded that the disallowance under this head was unjustified and deleted the addition.2. Disallowance of 30% of expenses related to salary, wages, and bonus:The AO noted that the assessee paid Rs. 4,49,63,429 under the head 'Salary and wages' but did not produce vouchers to substantiate the payments. The AO found that the assessee maintained salary records for about 12,000 entries, ranging from Rs. 2,000 to Rs. 8,000, but did not provide specific details of violations of TDS provisions. The Tribunal observed that the assessee maintained complete records and paid genuine salaries to a large number of employees for business purposes. The Tribunal also noted that in the preceding and subsequent assessment years, no disallowances were made under this head. The Tribunal concluded that the disallowance of 30% of salary expenses was unjustified and deleted the addition.3. Disallowance of 30% of expenses related to referral fees:The AO questioned the genuineness of referral fee expenses amounting to Rs. 4,03,52,970, noting discrepancies such as payments made in cash through self-made vouchers, payments received by persons other than those shown in the books, and non-production of persons for examination. The AO issued notices and summons to verify the genuineness of the expenses, but received limited responses. The Tribunal found that the assessee maintained complete details and paid referral fees for business purposes. The Tribunal noted that in the preceding assessment year, no disallowances were made under this head, and the percentage of referral fee expenses in the assessment year under appeal was reasonable. Considering certain discrepancies noted by the AO, the Tribunal concluded that a 5% disallowance under this head would be justified instead of 30%. The Tribunal partly allowed the appeal by restricting the disallowance to 5% of the referral fee expenses.Conclusion:The Tribunal deleted the disallowances of 30% of expenses under the heads of certified data purchase and salary, wages, and bonus. However, it restricted the disallowance under the head of referral fees to 5% of the expenses claimed by the assessee. The appeal of the assessee was partly allowed.