Appeal Granted: Ad-Hoc Disallowance Deleted, TDS Credit to be Allowed

The Tribunal allowed the appeal, deleting the ad-hoc disallowance of Rs. 2,54,61,231/- for various expenses and directed the AO to allow credit for TDS of Rs. 28,97,906/- as per law. The decision was pronounced on 10.10.2018.

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Issues Involved:
1. Ad-hoc disallowance of employee cost, administrative expenses, depreciation, and interest expense.
2. Credit for tax deducted at source (TDS).

Issue-wise Detailed Analysis:

1. Ad-hoc Disallowance of Employee Cost, Administrative Expenses, Depreciation, and Interest Expense:

The appellant challenged the CIT(A)'s confirmation of the AO's ad-hoc disallowance totaling Rs. 2,54,61,231/- for employee cost, administrative expenses, depreciation, and interest expense. The appellant argued that these expenses were incurred wholly and exclusively for business purposes and should not have been disallowed.

The assessee, engaged in providing technical know-how for manufacturing chemical products, had declared an income of Rs. 10,93,203/- for A.Y 2011-12. During scrutiny, the AO noted various income streams including royalty, service fees, and other income. The AO allocated 50% of administrative expenses to earning royalty income and concluded that expenses of Rs. 2,29,88,380/- were incurred for earning royalty income of Rs. 2,62,72,942/-.

The AO did not accept the assessee's bifurcation of expenses related to service income and arbitrarily allocated the entire employee cost, 50% of administrative expenses, interest cost, and depreciation to service income, leading to a disallowance of Rs. 2,54,61,231/-. The CIT(A) upheld this disallowance, reasoning that the allocation was scientific and aligned with decisions from previous years.

The Tribunal found that the AO's basis for recomputing costs attributable to service income lacked confidence and was arbitrary. The Tribunal noted that the assessee had provided bifurcated details of expenses which were summarily rejected by the AO. It concluded that the AO's allocation lacked basis and the CIT(A) failed to appreciate this arbitrariness. The Tribunal referred to its own decisions in the assessee's case for A.Y 2009-10 and A.Y 2010-11, where similar disallowances were deleted. Consequently, the Tribunal deleted the disallowance of Rs. 2,54,61,231/-.

2. Credit for Tax Deducted at Source (TDS):

The appellant contended that the AO erred in not allowing credit for TDS of Rs. 28,97,906/- deducted on royalty income of Rs. 2,62,72,942/- by M/s Connel Brothers Company (India) Pvt. Ltd. The CIT(A) had directed the AO to dispose of the rectification application regarding this issue in a time-bound manner, but the AO failed to comply even after more than two years.

The Tribunal acknowledged the CIT(A)'s direction and observed the AO's non-compliance. It directed the AO to allow credit for the TDS while giving effect to its order, as per law.

Conclusion:

The Tribunal allowed the appeal, deleting the disallowance of Rs. 2,54,61,231/- and directing the AO to allow credit for TDS of Rs. 28,97,906/- as per law. The order was pronounced in the open court on 10.10.2018.

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