TaxTMI 
TaxTMI 
TaxTMI 
2026 (1) TMI 1189
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....Rs. 10,00,000/- which it claimed as exempt income. The assessee company had suo-moto offered a disallowance u/s 14A amounting Rs. 7,67,24,357/- in the original return which was revised in the revised return of income to Rs. 5,36,73,263/-. The assessee company had invested in equity and preference shares as well as in trade investments and mutual funds. The income from trade investments and mutual funds was offered as business income and taxed under the head PGBP and therefore the same was not considered for the purpose of calculation of disallowance U/s 14A. 2.2. Thereafter, the AO in para no. 2.2 of its order recorded his satisfaction for making disallowance u/s 14A of the Act, in accordance with Rule 8D of the Income Tax Rules, 1962. Accordingly, the AO calculated the total disallowance amounting to Rs. 9,65,97,368/- as per the details in para no. 2.3 to 2.5 of his order. Further, the AO noted that the assessee company had suo- moto disallowance a sum of Rs. 5,36,73,263/- in the revised computation of income towards disallowance u/s 14A and therefore restricted the disallowance at Rs. 4,29,24,104/- (Rs. 9,65,97,368/- - Rs. 5,36,73,263/-). 3. Aggrieved with the said disallow....
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....moto disallowance u/s 14A of Rs. 5,36,73,263/- in the revised return. Since the disallowance has already been made in the return of income as additional disallowance during 143(3) proceedings is not mandated. Therefore, additional disallowance of Rs. 4,29,24,104/- made by the AO is directed to be deleted. This ground of appeal is ruled in favour of the appellant." 5. Aggrieved with the said order, the Revenue is in appeal before us, on the following ground of appeal: " 1. That on facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 4,29,24,104/- made by the AO u/s 14A of the I.T. Act, 1961, read with Rule 8d of I.T. Rules." 6. During the hearing before us, the Ld. AR supported and relied upon the order of the Ld. CIT(A). The Ld. CIT(DR) filed a written submission in support of the ground of appeal but could not bring any decisions contrary to the decision relied upon by the Ld. CIT(A) for deleting the said addition. 7. We have heard both the parties and perused the material available on record. In the given facts of the case, we agree with the finding of the Ld. CIT(A) and there is no justification for interfering with the ....
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....d reply of the assessee giving justification of the above expense given in detail has been considered but not found acceptable. It is noticed that the assessee company has not furnished the basis of computing the support services value and also not furnished the allocation sheet of entire expense and on what basis the same has been shared with other group of companies and the basis of same. ......................................xxx........................... 7.6 In the case of Eaton Industries Manufacturing Gmbh v. Deputy Director of Income-tax (International Taxation-1), Pune [2015] 53 taxmann.com 394 as decided by Pune ITAT, the facts are that the assessee company was incorporated on 01-04- 2005 and has a branch office in India. The Branch office is engaged in the business of identifying and evaluating raw material suppliers, providing quality assurance services to Eatori Group to ensure that quality goods are procured, to provide services in connection with collation and shipment of goods and to coordinate timely payments to Indian suppliers. It filed its return of income on 26-09-2009 declaring total income at Rs. 2.57,91,567/- During the course of assessment procee....
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.... of Rs. 412,260,918/- debited under this head and add back the same to the income of the assessee." 10. Aggrieved with the said order, the assessee filed an appeal before the Ld. CIT(A), who relying upon the decision of his predecessor vide order dated 28.02.2017 in A. No. 288/CIT(A)-7/Del/15-16 For A.Y. 2012-13 in the case of M/s Religare Arts Initiative Ltd. deleted the addition of Rs. 10,30,65,230/-. 11. In deciding so the Ld. CIT(A) also called for a remand report from the AO who objected to the filing of the additional documents before the Ld. CIT(A). The relevant discussion by the Ld. CIT(A) in considering the remand report of the Assessing Officer and his reliance on the order of his predecessor in deleting the said addition in para no. 5.2 to 5.5 of his order are reproduced as under: " 5.2. On this issue Remand Report was called for vide letter dated 28.09.2016 as under: "In appellate proceedings in the captioned case, the appellant has taken the following ground of appeal relating to disallowance of Rs. 10,30,65,230/ being 25% of the total expenses on account of support services of fee, Rent and incidental expenses aggregating to Rs. 41,22,84,493/- ....
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....basis on which the amount has been charged has been calculated by the party and the details of tax deducted thereon by the appellant was furnished Copy of submission furnished before the AO dt. 24.03.2015 and 18/19 02 2015 alongwith submissions dt. 26.09.2016 is enclosed. 4. You are directed to examine the submissions with reference to the assessment records and confirm whether the said details/records were filed before the AO during the assessment proceedings Copy of the submissions filed, if any, may also be forwarded alongwith your report. 5. Your report in respect to the above may be furnished within 2 weeks of issue of this letter 5.3 The AO furnished his report vide letter dated 08.03.2018 as under 2. With reference to the subject cried above it is submitted that your goodself has requested to examine the submission with reference to the assessment records and confirm whether the details/records filled by the assessee were filed before the AO during the assessment proceedings The AO in the assessment order has disallowed an amount of Rs. 10,30,65,230/- being 25% of the total expenses of Rs 41,22,60,918/- on account of support servi....
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.... admitted under Rule 46A of the IT Rules, 1962 Hence, the additional evidence submitted by the assessee should be rejected." 5.4 It is noted that appeal was instituted on similar facts in the appellant's group cases on this ground and the issue has been decided by my predecessor in favour of the appellant The Ld. CIT(A) vide order dated 28.02 2017 in A No. 288/CIT(A)-7/Del/15-16 for A. Y. 2012-13 in the case of M/s Religare Arts Initiative Ltd decided as under. 5.2 The AO disallowed 25% of Rs. 5,24,93,310/- on the ground that the appellant company did not furnish justification and basis of sharing of the expenditure with group companies. He was of the view that the appellant company had failed to provide a cost allocation fee for the expenditure claimed. Further, no list of expenses reimbursed by the company was provided and in some cases of reimbursement, even TDS was not deducted. He therefore, held that in respect of entire expenditure paid to the group concern on account of cost sharing and reimbursement of expenses, justification of allocation of expenses was not explained properly Further, since the appellant company had not discharged the test of reason....
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....ms of the aforesaid section, the AO before while invoking provisions of this section has to clearly state that the expenditure incurred is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for the which payment is made or the legitimate needs of the business or profession of the appellant. 5.6 The AO has merely stated that the appellant has not proved that the expenses incurred on account of rent payment to the group concerns are not discharged properly This cannot be sufficient ground for making disallowance u/s 40A(2)(b) of the Act. The genuineness of the payment is not doubted. In effect, there is no finding to conclusively establish that the payment made to the parties was excessive or unreasonable with reference to the fair market value of the services received. This essential precondition for invoking provision for section 40A(2)(b) is not satisfied on the facts of the case. In view thereof, the addition of Rs. 1,31,23,328/- cannot be sustained and is therefore, deleted. The ground of appeal is ruled in favour of the appellant." 5.5. Since the facts are similar, following the decision of the CIT(A), relief ....
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....Control Associated P. Ltd., 225 Taxman 56 (Guj.)]. No Comparative Evidence Provided by Assessee The assessee failed to furnish any market comparables, cost break-up for mark-up, or independent valuation; reliance on internal policy alone is insufficient [Modi Xerox Ltd., 199 Taxman 271 (SC)]. Rent Payment Requires Arm's Length Benchmarking Rent of 13.09 cr for Noida, Mumbai, Pune premises must be tested against prevailing market rates; absence of rent comparables justifies AO's 25% estimate [ITO v. Karnavati Petrochem Pvt. Ltd., ITA No. 2282/Ahd/2012). 4. Conclusion 4.1 The CIT(A) Order erred in law and fact in deleting legitimate additions under sections 14A and 40A(2)(b)." (emphasis supplied by us) 14. On the other hand, the Ld. AR filed a written submission, the relevant extract of which is reproduced as under: "Assessee's submission During the previous year relevant to assessment year 2012-13, the appellant had made the following payment to Religare Enterprises Ltd for support services provided by it to the assessee: S. No. Particulars Amount (Rs. ) 1 Support Service Fee 15,33,73,982/- ....
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....in REL. The rationale behind centralization of the said functions within the Religare group was to ensure that all operating companies focused wholly and solely on their business operations. Had each of the subsidiary company had its own division for support functions, it would have resulted not only in draining the group's resources resulting in lower taxable profit for it but also in underutilization of employees working in such functions in all companies. Accordingly, to ensure that efforts are not repeated, the administration of day-to- day affairs of all the subsidiaries, including the appellant, such as business strategy, finance, accounts and taxation, HR, IT systems, legal, compliance and secretarial were centralized at REL's level and were not replicated in any of its subsidiary companies. For discharging the aforesaid functions, REL had employed 301 employees who were engaged in providing support service functions to the subsidiary companies, including the appellant. Pertinently, since the support services were being provided by REL, the appellant had employed staff only for carrying out the operating business activities. The appellant, it will be appreci....
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.... a payment of Rs. 13,09,83,398 to REL, which represented the rent paid by the assessee to REL for letting out of office spaces owned by it at Noida, Mumbai and Pune. On a perusal of the aforesaid facts, it will be appreciated that the payment for services made to the group entities were in respect of regular business functions which were essential for smooth day-to-day functioning of any company. It was only to reduce cost and enjoy benefit of synergy among the group that the provisions of support services were centralized rather than each company employing their own resources for similar business functions, thereby leading to overall increase in the group operating cost as a whole. The assessing officer, merely on conjectures and surmises, has held that the entire expenditure incurred on support service payment cannot be considered reasonable and accordingly disallowed 25% of the expenditure incurred. In this regard, it is respectfully submitted that the assessing officer erred in not considering the following corroborative evidence placed on record by the assessee to demonstrate that the services were rendered for the smooth functioning of the business ....
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....case of M/s Religare Arts Initiative Ltd. In the relied upon decision, it was submitted by the Ld. AR that except for payment of rent of Rs 49,821/- to Religare Enterprises Ltd, which was holding company of M/s Religare Arts Initiative Ltd., the other rental expenses were not governed by Section 40(a)(2)(b) of the Act and therefore, disallowance of 25% of rental payment made by the AO, was not in order. However, in the present case, as submitted by the assessee in its written submission reproduced above and duly highlighted by us, the assessee during the year had made a payment of Rs. 13,09,83,398/- to M/s Religare Enterprises Ltd., towards rent, for letting out of office spaces owned by it at Noida, Mumbai and Pune. Therefore, the facts in the present case of the assessee are distinguishable in this case. The Ld. CIT(DR) in her submission as duly highlighted by us has also submitted that in absence of rent comparables, the rent for the said premises should be tested against the prevailing market rates. Therefore, the necessity of the payment of the said rent Rs. 13,09,83,398/- and its reasonableness paid by the assessee to Religare Enterprises Ltd. were not examined by the Ld. CIT....
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....tal to provision of support services" - Rs. 13,09,83,398/- without examining the basis and its reasonableness cannot be sustained. On similar facts, wherein the Ld. CIT(A) had confirmed the adhoc disallowance without examining the explanation submitted by the assessee towards the basis and the reasonableness of the said disallowance, the Co- ordinate Bench of Tribunal in the case of M/s Religare Finvest Ltd. vs. DCIT in ITA No .- 4796/Del/2017 & ors. vide order dated 13.07.2017 had set aside this issue to the file of the Assessing Officer with a direction to adjudicate the issue afresh after verifying the documents produced by the assessee in accordance with law. It may be mentioned that in the cited case similar adhoc disallowance of support service fee and reimbursement of expenses was made in the case of M/s Religare Finvest Ltd for A.Y. 2012-13 (being the lead case) It may be mentioned that in the cited case during the year in respect of the support service fee amounting to Rs. 63,55,67,850/- paid by various companies (as listed out in para no. 17 of the said order) an amount of Rs. 3,786/- was also paid by the assessee company i.e. Religare Security Ltd. to M/s Religare Finves....
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....tational error in the assessment order, the CIT(A) directed the assessing officer to re-compute the disallowance under section 37(1) of the Act at 25% of the correct amount of Rs. 79.81 crores. Aggrieved, by the same the assessee raised Ground No. 3 to 3.3 before us in ITA No. 4796/Del/2017 for A.Y. 2012-13. 19. The Ld. Counsel for the assessee has filed detailed submission by explaining the services received from each of the group companies and further submitted that the payment for services made to group entities were in respect of regular business functions which were essential for smooth day to day functioning of any company, it was only reduce cost and enjoy benefit of energy among the group over provisions of support services were centralized rather than each company employing their own resources for similar business functions, thereby leading to overall increase in the group operating cost as a whole. Further submitted that the ld. CIT(A) on the basis of incorrect observation held that the entire expenditure incurred on support service payment cannot be considered to be expenditure incurred wholly and exclusively for the purpose of business within the meaning of Sec....
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....cuments. Considering the fact that the CIT(A) had observed in its order that payment has not been wholly and exclusively for the purpose of business of the assessee without referring to the documents produced by the assessee (mentioned above), we are of the opinion that, if the issue involved in Ground No. 3 to 3.3 is remanded to the file of CIT(A) for adjudicating the same afresh after considering all the documents produced by the Assessee, the substantial to 3 to 3.3 of the assessee is remanded to the file of CIT(A) with a direction to adjudicate the issue afresh after verifying the documents produced by the assessee in accordance with law. Needless to say, the assessee shall be provided with an opportunity of being heard. Accordingly, the Ground No. 3 to 3.3 of the assessee in I.T.A. No.4796/Del/2017 is allowed for statistical purpose." 16.3 As discussed above, the necessity of the payment of the said rent Rs. 13,09,83,398/- and its reasonableness paid by the assessee to Religare Enterprises Ltd. was not examined by the Ld. CIT(A), which was required to be done by him and it requires factual verification. Further, the Ld. CIT(A) also did not examine details and the justificat....