Payments to associate and unbilled revenue treatment: allocations accepted, 10% estimate rejected and reversal disallowance overturned.

Disallowance of payments to an associate was contested on basis that facility and support costs were allocated by area and headcount and professional indemnity and fees were allocated by revenue and specific service usage; because the assessing officer did not point to any specific defect and related parties were taxed at the same rate, the estimated 10% addition was held unjustified. Challenge to reversal of unbilled revenue rested on mercantile revenue recognition and the assessee's accounting records showing the amounts as income in the relevant year; absent demonstration of omission or suppression, the disallowance of the reversal was held unjustified.

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Issues: (i) Whether disallowances of 10% under section 40A(2)(b) of the Income-tax Act, 1961 on payments to related KPMG entities (facility costs, professional indemnity insurance, professional fees) were justified; (ii) Whether the addition of Rs. 1,88,00,034 by denying write-off of opening unbilled revenue (WIP) was justified and whether AO/first appellate authority erred in upholding that disallowance.

Issue (i): Disallowance of 10% of amounts paid to related KPMG entities under section 40A(2)(b) of the Income-tax Act, 1961.

Analysis: The Tribunal examined the material on record including invoices, basis of allocation (area/headcount/revenue), comparative allocation to unrelated sub-licensee, breakdowns of occupancy, utilities, communication, consumables and supporting accounting entries, and tax filings showing both entities assessed at the same tax rate. The AO did not specify further information required nor produce material to demonstrate that the payments were excessive or unreasonable; the assessee had furnished allocation methodology and supporting documents. Relevant authorities were considered on the requirement that Revenue must point to specific indicia of excessiveness before making an estimate.

Conclusion: The disallowances under section 40A(2)(b) are not justified and are allowed in favour of the assessee.

Issue (ii): Addition of Rs. 1,88,00,034 by denying write-off of opening unbilled revenue (WIP).

Analysis: The Tribunal reviewed the assessee's accounting treatment: mercantile system, recognition of unbilled revenue on percentage-completion/time-spent basis (consistent with applicable revenue recognition standard), party-wise schedules, reconciliations and supporting audited financial statement disclosures. The AO and the CIT(A) did not controvert the supporting material nor demonstrate deficiency or suppression warranting the addition; the write-off related to amounts previously accounted and offered to tax.

Conclusion: The addition of Rs. 1,88,00,034 is not justified and is allowed in favour of the assessee.

Final Conclusion: The Tribunal allowed the assessee's appeals on the decided issues, setting aside the disallowances under section 40A(2)(b) and the disallowance relating to reversal/write-off of unbilled revenue; identical issues in connected appeals were disposed of by applying the same findings.

Ratio Decidendi: Where the Revenue seeks to disallow related-party reimbursements or reverse accounting entries as excessive or unreasonable, the assessing authority must point to specific deficiencies or adduce material showing excessiveness; general or unsupported estimation is not sufficient where the assessee has furnished verifiable allocation methodology, invoices and reconciliations and where revenue has not demonstrated suppression or defect.

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