2020 (12) TMI 974 - AT - Income Tax

ITAT directs reassessment of disallowed legal fees and security charges, emphasizing business necessity and continuity.

The ITAT partially allowed the appeal, directing the reassessment of disallowed expenses on legal fees and security charges by the AO. Emphasizing the ... Disallowance of expenditure on account of professional charges and security services - no business during the year - As per AO assessee does not have any income during the year and consequently no premises were available with the assessee - HELD THAT:- With respect to security services it was stated that the assessee has not paid any rent but has moved into basement of Thapar House being the premise of its group company. The assessee carried out its work from that premises and therefore, security personal continued to be deployed. For the above proposition the assessee has only produced the copies of the bills and ledger account of the expenditure. With respect to the legal expenditure as not known that what for the above legal expenditure were paid by the assessee. The narration of the bills speaks that it is professional fees for providing legal opinion and drafting of various legal documents for the clients of the assessee ₹ 10 lakhs are charged. With respect to ₹ 20,000/- the same were paid for the certification related to the companies law filing with MCA. Therefore out of professional fees ₹ 1020,000/- disallowance of ₹ 20,000/- requires to be deleted. But for the legal fees/professional charges, assessee needs to show that whether these expenditure are wholly and exclusively incurred for the purposes of business. Assessee also needs to elaborate the facts about the fact business of the assessee has not ceased to exist. Further, with respect to the security charges a sum of ₹ 60450/- per month were paid to one agency for providing security charges, but assessee needs to establish that those premises are used for the purposes of the business of the assessee. Assessee must show that it operates from that premises and why it bears whole of the security charges. In view of this, we set aside issue back to the file of the ld AO with respect to legal fees of ₹ 10 Lakhs and Security charges with direction to the assessee to prove that same - Decided partly in favour of assessee. Issues involved:Assessment of disallowed expenses on professional charges and security services for a company engaged in trade finance activities.Detailed Analysis:1. Background and Assessment by AO:The assessee, a trade finance company, filed a return declaring a loss for the year. The AO disallowed expenses on professional charges and security services, citing lack of business activity and rent payment. The AO found no revenue generation and disallowed a total of Rs. 1886568, resulting in a loss of Rs. 253144.2. Appeal before CIT(A):The assessee appealed to the CIT(A), who upheld the disallowances. The CIT(A) noted the absence of business receipts and justification for the expenses, emphasizing the lack of evidence of any business setup by the company.3. Arguments and Evidence Presented:The assessee's representative submitted a detailed paper book with invoices and ledger accounts. Citing legal precedents, the representative argued that genuine business expenses should not be disallowed solely due to a lack of revenue generation in a given year.4. Contentions by the Department:The Department supported the lower authorities' orders, questioning the nature and justification of the expenses. Concerns were raised regarding the purpose and beneficiaries of the fees paid for legal advisory and security services.5. ITAT Decision and Directions:The ITAT considered both parties' contentions and the evidence presented. It observed that the legal fees and security charges needed further substantiation regarding their business necessity and utilization. The ITAT directed the assessee to establish the expenses' business purpose and continuity, especially for the legal fees and security charges.6. Outcome and Conclusion:The ITAT partially allowed the appeal, setting aside the issues of legal fees and security charges for reassessment by the AO. The ITAT emphasized the need for the assessee to demonstrate the business relevance and continuity of these expenses. Other grounds of appeal were deemed supportive in nature, and the appeal was partly allowed with specific directions for further assessment.This detailed analysis encompasses the assessment, appeal process, arguments presented, departmental contentions, ITAT decision, and the final outcome of the case regarding the disallowed expenses on professional charges and security services for the trade finance company.