2025 (2) TMI 645 - AT - Income Tax

Retainership fees qualify as legitimate business expenditure under section 14A despite lack of immediate profits

ITAT Lucknow allowed the assessee's appeal regarding addition under section 14A, holding that retainership fees paid to entities constituted legitimate ... Addition u/s 14A - assessee submitted that there was no exempt income in the hands of the assessee and therefore, there was no case for any disallowance u/s 14A - HELD THAT:- We agree with the contention of learned A.R. for the assessee that the mere fact that the payment made to the aforesaid entities by way of retainership fee did not result in commensurate business in USA in the year relevant to assessment year 2008-09 does not imply that the expenditure incurred was not for the purpose of the assessee’s business. We are further persuaded to take this view considering that the retainerships were terminated by the assessee within a short time when the assessee realized that the services provided by the aforesaid entities were not satisfactory. There is no requirement in law that every expenditure incurred by the assessee must result in profit. It is sufficient if the expenditure not being in the nature of capital expenditure or personal expenses is laid out or expended wholly and exclusively for the purposes of business Credit for TDS - HELD THAT:- Assessee submitted that the Assessing Officer be directed to give credit for TDS in accordance with law. D.R. for Revenue expressed no objection to this. Accordingly, we direct the AO to give credit to the assessee for tax deducted at source in accordance with law. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered two primary issues in the appeal:1. The addition of Rs. 64,88,451/- made by the Assessing Officer under section 14A of the Income Tax Act, 1961.2. The claim for credit of Tax Deducted at Source (TDS) amounting to Rs. 92,20,398/- by the assessee.ISSUE-WISE DETAILED ANALYSIS1. Addition under Section 14A of the Income Tax ActRelevant Legal Framework and Precedents: Section 14A of the Income Tax Act deals with the disallowance of expenditure incurred in relation to income not includible in total income. The Tribunal referenced the legal principle that disallowance under this section is not applicable when no exempt income is claimed.Court's Interpretation and Reasoning: The Tribunal noted that the assessee did not have any exempt income during the relevant year, making any disallowance under section 14A unwarranted. The Tribunal emphasized that the genuineness of the expenditure was not disputed, and the services provided by the foreign entities were evidenced by documentation.Key Evidence and Findings: The assessee provided agreements, invoices, and correspondence with the foreign agents, ASP Services LLC and Tekorigin LLC, to substantiate the expenditure. The Tribunal found that these documents supported the assessee's claim that the expenditure was for business purposes.Application of Law to Facts: The Tribunal applied the principle that expenditure need not result in immediate profit, but must be incurred wholly and exclusively for business purposes. The Tribunal found that the payments, though not resulting in substantial business during the year, were legitimate business expenses.Treatment of Competing Arguments: The Revenue argued that the payments were disproportionate to the business secured. However, the Tribunal accepted the assessee's explanation that the services, while unsatisfactory initially, led to business gains in subsequent years.Conclusions: The Tribunal concluded that the addition under section 14A was unwarranted and directed the Assessing Officer to delete the addition of Rs. 64,88,451/-.2. Claim for TDS CreditRelevant Legal Framework and Precedents: The Income Tax Act allows for the credit of TDS against the tax payable by the assessee.Court's Interpretation and Reasoning: The Tribunal noted that the Revenue had no objection to the assessee's claim for TDS credit, provided it was in accordance with law.Key Evidence and Findings: The Tribunal did not delve into specific evidence for this issue, as the Revenue agreed to the claim subject to legal compliance.Application of Law to Facts: The Tribunal directed the Assessing Officer to grant TDS credit in accordance with the law, acknowledging the procedural nature of this claim.Treatment of Competing Arguments: There was no significant opposition from the Revenue on this point, simplifying the Tribunal's decision.Conclusions: The Tribunal directed the Assessing Officer to provide the TDS credit as claimed by the assessee.SIGNIFICANT HOLDINGSCore Principles Established: The Tribunal reiterated that disallowance under section 14A is not applicable in the absence of exempt income. Additionally, it emphasized that business expenditure need not result in immediate profit, provided it is incurred wholly and exclusively for business purposes.Final Determinations on Each Issue: The Tribunal allowed the appeal in part, directing the deletion of the addition under section 14A and granting the claim for TDS credit.