2023 (10) TMI 1362 - HC - Income Tax

Court Affirms ITAT Ruling: Disallowance of Service Charges to Hospital's Holding Company Unjustified.

The Court upheld the ITAT's decision, dismissing the Revenue's appeal and ruling in favor of the assessee, a multi-specialty hospital. The Court confirmed ... Disallowances u/s 40A(2) - service charges paid to own holding company - HELD THAT:- AO has recorded that assessee company is ‘unduly benefitting’ the holding company and derives the legitimate profits of the company through a colorable device termed as service agreement. AO has clearly made no efforts to demonstrate as to why payment made is excessive and unreasonable having regard to the market value of the services for which such payment was made. Thus, the disallowance made under Section 40A(2) of the Act is based on surmises and hence, unsustainable. ITAT has rightly held that the AO has not doubted the payment nor held the payment as excessive even though in terms of Section 40A (2) only ‘legitimate needs of the business’ is allowable as expenditure. Thus there is no material on record to support AO’s opinion. Therefore, we find no error in the order passed by the ITAT. Decided in favour of the assessee Issues:The judgment involves the interpretation of Section 40A(2) of the Income Tax Act, 1961 regarding the disallowance of service charges paid to a related party by an assessee.Issue 1:The primary issue is whether the Tribunal was correct in setting aside the disallowance made under Section 40A(2) of the Act, concerning the service charges paid by the assessee to its holding company, M/s. MEMGIIPL.The assessee, a multi-specialty hospital, filed returns for Assessment Year 2009-10, with the AO disallowing Rs. 66,54,726 under Section 40A(2) for service charges paid to its holding company. The CIT(A) partly allowed the appeal, while the ITAT set aside the disallowance, leading to the Revenue's appeal. The Revenue contended that the disallowance was justified as per the Act's provisions on legitimate business needs. On the other hand, the assessee argued that the payment was for legitimate services rendered, and the charges were within fair market value. The ITAT found in favor of the assessee, emphasizing the lack of evidence supporting the AO's view that the payment was excessive or unreasonable. The Court upheld the ITAT's decision, noting the absence of material to support the AO's opinion on the payment's legitimacy.Issue 2:The second issue pertains to whether the conditions for invoking Section 40A(2) were met in the case of the assessee regarding the service charges paid to M/s. MEMGIIPL.The Court examined the AO's order, which accused the assessee of unduly benefiting the holding company without providing substantial evidence to justify the disallowance under Section 40A(2). The ITAT correctly observed that the AO did not question the payment's legitimacy or excessiveness, as required by the Act. Since the AO failed to demonstrate why the payment was unreasonable or excessive compared to fair market value, the disallowance was deemed baseless. The Court upheld the ITAT's decision, affirming that the AO's opinion lacked substantiation, and thus, the disallowance was unsustainable.In conclusion, the Court dismissed the appeal, ruled in favor of the assessee, and confirmed the ITAT's order dated June 27, 2018 in ITA No.1667/Bang/2016, without imposing any costs.