2025 (4) TMI 272 - AT - Income Tax

Management consultancy charges allowed as business expense despite substantial amounts due to proven commercial benefits

ACIT, Circle-10 (1), New Delhi Versus Jindal Poly Films Ltd. And (Vice-Versa) And Jindal Poly Films Ltd. And ACIT, Circle-10 (1), New Delhi

ITAT Delhi allowed the assessee's appeal on multiple grounds. The Tribunal reversed disallowance of management consultancy charges, finding sufficient ... Disallowance of management consultancy charges paid - assessee has failed to establish the correctness of the payments and the nexus of expenditure with business operations - HELD THAT:- The detailed economic analysis of the nature of benefits derived by the assessee from profession of each of the services rendered by Soyuz have not been disturbed on the basis of any factual determination of the issue, but, in a very arbitrary manner the services have been found to be not justified. Counsel has also mentioned of the fact that certain additional evidences have been filed before this Tribunal inter alia including e-mail correspondences exchanged between the assessee company and Soyuz to further corroborate services rendered during the year. However, without these evidences otherwise also the material on record is sufficient to conclude that without sufficiently countering the evidences, the expenses have been alleged to be not incurred wholly and exclusively for the purpose of business. On the contrary, establishing the commercial expediency for availing services from Soyuz we find that the nature of services is such that they have held the assessee to cost savings increase revenue/profits and in the TP report the same have been quantified to a lot of extent. It may be appreciated that the turnover of the assessee company increased from Rs. 479.73 crores in 2002 i.e., the year in which services of Soyuz was first availed to Rs. 2,871.10 crores in 2017, owing to the continuous professional advise and services provided by Soyuz. The settled position of law is that the reasonableness of the expenditure has to be seen from the point of view of businessman and not that of the Revenue. See MALAYALAM PLANTATIONS LIMITED [1964 (4) TMI 9 - SUPREME COURT]. Ground determined in favour of the assessee. Sales tax subsidy/incentive availed under the Package Scheme of Incentives (PSI) (Maharashtra) 2001/2007 - Addition as capital subsidy receivable by the appellant on the ground that though IND AS-20 permits postponement of recognition of subsidy till the point of actual receipt, the same does not hold good for ICDS-VII - HELD THAT:- As established that there is uncertainty of receipt of subsidy until the stage of complete verification of documents by concerned authorities post issuance of provisional sanction, which is followed by its disbursement. Therefore, the subsidy amount crystallizes and actually accrues as ‘income’ in favour of the appellant only on the happening of the said events and not prior thereto. Thus, it is not a situation where the appellant is guaranteed or even for that matter assured that subsidy applied for, will in effect be automatically sanctioned/received by the appellant despite having an operational Eligibility Certificate since the monitoring agency is empowered to cancel the Eligibility Certificate, or direct recovery of the incentives drawn / availed in the instance any of the stipulated conditions of the Eligibility Certificate issued under the Scheme stands violated by the appellant. As a matter of fact, provisional sanction letter in respect of subsidy receivable during the relevant assessment year 2017-18 was received by the assessee only in AY 2018-19 vide sanction letter dated 23.10.2017 that too only for part of the amount claimed and which too was subject to submission of further documentation by the assessee which was to be verified by the concerned authorities. On verification of the documents submitted by the assessee, the subsidy amount was disbursed only in AY 2019-20 and the balance amount was thereafter sanctioned and disbursed in AY 2020-21. Accordingly, as and when the amount was received after approval by the authorities, the same was offered for taxation. We are inclined to accept the case of assessee that the aforesaid treatment being in accordance with the provisions of ICDS and the Act the alleged income can be said to accrue when the assessee acquires vested right to receive the amount, on fulfilment of condition of scheme to the satisfaction of competent government. As undisputed that the appellant has ultimately offered the entire amount of subsidy to tax in the subsequent assessment year(s) 2019- 20 and 2020-21. Thus, the only academic issue which remains is with respect to the year of taxability of such income, which, it is submitted, is merely a timing difference. Since the appellant is a company, assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of taxability of such income is, in any case, revenue neutral. Accordingly, even on this ground, the assessing officer has erred in bringing to tax the aforesaid amount of subsidy, disregarding the regular and consistent method of accounting followed thereafter. Lastly the aforesaid method of recognition of subsidy in accordance with the provisions of the Act and ICDS has been duly accepted by the assessing officer in the succeeding assessment year(s) 2020-21. We find that specific queries were raised by the AO during the course of assessment and on appreciating that it is merely a timing issue and the entire exercise is revenue neutral, accepted the position adopted by the appellant, being in accordance with the provisions of the Act and ICDS. Consequently we are inclined to hold that subsidy being correctly offered to tax by the appellant, the addition of made by the assessing officer and confirmed by the CIT(A) on this account is liable to be deleted in toto. Accordingly the issue with respective grounds as raised in respective appeals stands sustained. Addition u/s 14A - assessee held investments in equity shares of various companies and mutual funds. However, no exempt income was earned on such investments - HELD THAT:- We find no error in the findings of the CIT(A) that as the assessee has not earned any exempt income from investments in the mutual funds held by it, thus, no question of expenses incurred could have been disallowed u/s 14A of the Act. Reliance can be placed on the judgement of Maxopp Investment’s [2018 (3) TMI 805 - SUPREME COURT]. Apart from that there is substance in the assertion of the assessee that without recording any satisfaction for applying Rule 8D, the disallowance was made in a mechanical manner. Thus, the issue deserves to be decided against the Department. Gain arising due to exchange difference on transaction/settlement of long-term foreign currency loans for acquisition of fixed assets - Admittedly, the gain on account of foreign exchange fluctuation was deducted by the assessee while computing its taxable income - AO has made addition of this amount on the ground that the assessee had failed to furnish details of loan taken, purchase agreement, etc., and no corresponding adjustment was made to the value of fixed assets on account of change in rate of exchange - HELD THAT:- The case of the assessee is that as the foreign currency fluctuation gain was purely on capital account being related to fixed assets, the said gains were reduced from the income of the assessee for the purpose of computing taxable income. The ld. AR has pointed out that the AO has in appeal giving effect order dated 21.02.2024, deleted the addition after due verification. Thus, this ground becomes superfluous and, accordingly, determined against the Department. Ad hoc disallowance of expenses - HELD THAT:- CIT(A) has deleted the same and we find no error in the findings of the ld.CIT(A) that without putting forward any specific reason for making disallowance, such ad hoc disallowance is not in conformity with the principles of the Act. We find that the ld. AO has not examined any aspect of the business expediency and merely on ad hoc basis made the disallowance. MAT u/s 115JB computation - Disallowance u/s 14A and the issue of subsidy have been decided against the Department, no adjustment u/s 115JB can be sustained. ISSUES PRESENTED and CONSIDEREDThe Tribunal considered several core legal questions arising from the appeals by both the Revenue and the Assessee. These issues were:1. Justification of disallowance of management consultancy charges paid to M/s Soyuz Trading Company for assessment years 2017-18, 2018-19, and 2019-20.2. Taxability of sales tax subsidy/incentive availed under the Package Scheme of Incentives (PSI) (Maharashtra) 2001/2007 in the current year for assessment years 2017-18, 2018-19, and 2019-20.3. Deletion of disallowances under Section 14A read with Rule 8D for the years 2017-18 and 2019-20.4. Deletion of addition made by the AO on account of foreign exchange fluctuation gain in AY 2017-18.5. Deletion of ad hoc disallowances of certain expenditure in AY 2017-18.6. Deletion of an upward adjustment under Section 14A to book profits under Section 115JB for AY 2019-20.7. Deletion of upward adjustment of subsidy to book profits under Section 115JB for 2019-20.ISSUE-WISE DETAILED ANALYSISIssue No.1: The Tribunal examined whether the disallowance of management consultancy charges paid to M/s Soyuz Trading Company was justified.- Legal Framework and Precedents: The Tribunal considered the principle of consistency and the requirement for the Revenue to demonstrate a lack of business expediency for such disallowances.- Court's Interpretation and Reasoning: The Tribunal noted that the services provided by Soyuz were critical for the business operations of the assessee, and the agreements for these services had been consistently accepted in prior and subsequent years.- Key Evidence and Findings: The Tribunal found that the services were documented through agreements and transfer pricing reports, which were not sufficiently countered by the AO.- Application of Law to Facts: The Tribunal concluded that the disallowance was unwarranted, given the established business necessity and consistency in treatment over the years.- Treatment of Competing Arguments: The Tribunal rejected the AO's argument due to lack of specific evidence against the services' necessity.- Conclusions: The disallowance was quashed, favoring the assessee.Issue No.2: The Tribunal analyzed whether the sales tax subsidy/incentive should be taxed in the current year.- Legal Framework and Precedents: The Tribunal referred to ICDS-VII and Section 2(24)(xviii) of the Income Tax Act, which govern the recognition of government grants.- Court's Interpretation and Reasoning: The Tribunal emphasized that the subsidy was contingent on various conditions and was not ascertainable in advance.- Key Evidence and Findings: The Tribunal noted that the subsidy was linked to fixed capital investment and relevant taxes over a seven-year period, with disbursement subject to verification and acceptance by authorities.- Application of Law to Facts: The Tribunal found that the subsidy should be recognized as income only upon actual receipt or when the right to receive is vested.- Treatment of Competing Arguments: The Tribunal dismissed the AO's approach of taxing the entire subsidy in the relevant year, highlighting the revenue-neutral nature of the timing difference.- Conclusions: The Tribunal deleted the addition, supporting the assessee's treatment of the subsidy.Issue No.3: The Tribunal addressed the deletion of disallowances under Section 14A read with Rule 8D.- Legal Framework and Precedents: The Tribunal referred to the Supreme Court's judgment in Maxopp Investment for guidance on disallowances under Section 14A.- Court's Interpretation and Reasoning: The Tribunal found that no exempt income was earned, and thus no disallowance was warranted.- Key Evidence and Findings: The Tribunal noted the absence of exempt income from the investments held by the assessee.- Application of Law to Facts: The Tribunal concluded that the disallowance was made mechanically without recording satisfaction, thus unjustified.- Conclusions: The Tribunal upheld the deletion of the disallowance.Issue No.4: The Tribunal considered the deletion of addition on account of foreign exchange fluctuation gain.- Key Evidence and Findings: The Tribunal noted that the foreign exchange gain was capital in nature and related to fixed assets.- Application of Law to Facts: The Tribunal found that the AO had verified the documentary evidence, leading to deletion of the addition.- Conclusions: The Tribunal determined the issue against the Department.Issue No.5: The Tribunal examined the deletion of ad hoc disallowances of certain expenditures.- Court's Interpretation and Reasoning: The Tribunal emphasized that ad hoc disallowances without specific reasons are not in conformity with the principles of the Act.- Key Evidence and Findings: The Tribunal found no examination of business expediency by the AO.- Conclusions: The Tribunal upheld the deletion of the disallowances.Issue No.6 & 7: The Tribunal addressed the deletion of adjustments under Section 115JB.- Application of Law to Facts: The Tribunal found that as the issues of disallowance under Section 14A and subsidy were decided against the Department, no adjustment under Section 115JB could be sustained.- Conclusions: The Tribunal decided these issues against the Department.SIGNIFICANT HOLDINGS- The Tribunal established that the principle of consistency should be upheld in the disallowance of management consultancy charges.- It was determined that the taxability of government grants should align with the provisions of ICDS and the Income Tax Act, recognizing income only upon actual receipt or when the right to receive is vested.- The Tribunal confirmed that disallowances under Section 14A require satisfaction and cannot be made mechanically.- Ad hoc disallowances without specific reasons are not justified under the Act.- Adjustments under Section 115JB cannot be sustained if the underlying issues are resolved against the Department.The appeals of the assessee were allowed, and those of the Revenue were dismissed.