TaxTMI 
TaxTMI 
2026 (3) TMI 1606
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....ing total income at Rs. 2,18,000/-. The case was selected for scrutiny under CASS and statutory notices under sections 143(2) and 142(1) of the Act were issued. In response, the authorised representative of the assessee appeared and furnished details from time to time. 3. During the course of assessment proceedings, the Assessing Officer examined the profit and loss account and observed that the assessee had claimed an amount of Rs. 21,06,749/- under the head "cost allocated from group company". The assessee was called upon to explain the nature and basis of such expenditure. In response, the assessee submitted that the said amount represented cost allocation charges paid to its group entity, namely Regus Business Centre Pvt. Ltd., towards centralized services such as HR, finance, taxation, marketing and IT support. It was explained that such costs were incurred centrally and allocated to various group entities, including the assessee, on a reasonable basis such as number of workstations and without any markup. The assessee also furnished inter-company agreement and working of allocation. 4. The Assessing Officer, however, was not satisfied with the explanation furnished by t....
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....of the learned CIT(A), the assessee is in appeal before the Tribunal and has raised the following grounds: 1. Ground No. 1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in partly allowing the appeal of the Appellant and in sustaining the disallowance of cost allocation expenses amounting to Rs. 21,06,749 incurred/payable to the group company. 2. Ground No. 2 - Disallowance of cost allocated from group company of Rs. 21,06,749 2.1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of the learned assessing officer ('Ld. AO') of disallowing the expenses of Rs. 21,06,749, being cost allocated by a group company of the Appellant. 2.2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) / Ld. AO has erred in disallowing cost allocation expenses despite the Appellant furnishing detailed justification of services rendered by the group entity and the basis of cost allocation charged to the Appellant, which were incurred wholly and exclusively for business purposes. 2.3. On the facts and in the circumstances....
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....llocation, as submitted, has been carried out on the basis of number of workstations utilized by each entity, which constitutes an appropriate and rational allocation key. 10. The learned AR further submitted that the assessee has entered into a formal inter-company agreement with Regus Business Centre Pvt. Ltd. for availing such common services and the same has been placed on record. It was contended that the expenditure has been incurred wholly and exclusively for the purpose of business and the benefit thereof has directly accrued to the assessee. 11. Referring to the objections raised by the Assessing Officer, the learned Authorised Representative submitted that the observation of the Assessing Officer that such expenses were not debited to the profit and loss account is factually incorrect, as the same have been duly accounted for and disclosed in the notes to accounts under the head "other expenses" and "related party transactions". It was further submitted that similar disclosures have also been made in the financial statements of the group entity incurring such expenditure. 12. With regard to the observation that the expenses were incurred by another entity, it was....
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....s business. The learned DR invited our attention to the relevant paragraphs of the assessment order, wherein the Assessing Officer has elaborately discussed the reasons for disallowance. It was contended that the expenditure in question was not directly incurred by the assessee but was merely allocated by a group entity without demonstrating a clear and direct nexus with the assessee's business activities. It was further submitted that the allocation of common expenses across group entities on an estimated or proportionate basis, without precise identification and supporting evidence of actual services rendered to the assessee, does not satisfy the requirement of section 37(1) of the Act. The learned DR emphasised that the assessee has not discharged its onus of substantiating the nature of services, their necessity, and the basis of quantification of such allocation. 18. In rejoinder to the submissions of the learned AR, the learned DR submitted that the reliance placed by the assessee on the assessment orders for A.Ys. 2013-14 and 2014-15 is misplaced. It was contended that in those years, the cases were selected for scrutiny under CASS for limited issues and there is no discu....
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....at the expenditure was sham, fictitious, inflated, capital in nature, personal in nature, or hit by any specific statutory prohibition. There is also no finding that the payment was not genuine or that the underlying arrangement was a make-believe device. Once the existence of the group service arrangement and the allocation of common expenditure thereunder is not doubted as a matter of fact, the deductibility of the assessee's share of expenditure has to be examined on ordinary commercial principles under section 37(1) of the Act. 24. The assessee has specifically placed on record that the common cost allocation was not merely a notional journal adjustment dehors the books, but was actually debited to its statement of profit and loss and appropriately disclosed in the notes to the financial statements under "other expenses" and "transactions with related parties". The financial statements filed before us further states that corresponding disclosure has also been made in the books of the service entity, namely Regus Business Centre Pvt. Ltd. Thus, the very first premise adopted by the Assessing Officer that the expenditure was neither incurred nor debited in the profit and loss ....
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.... method in the peculiar line of business carried on by the assessee and the group. The assessee is engaged in providing workplace solutions. Its receipts are functionally linked with the number and utilization of workstations and related facilities. Therefore, allocation of common support costs with reference to workstations cannot be said to be irrational or arbitrary. On the contrary, it bears a direct business nexus with the very manner in which the assessee carries on its operations. The Assessing Officer has stated that, where precise allocation is not possible, expenditure may be allocated with reference to turnover and administrative expenses on the basis of area or average business done. Once the Assessing Officer himself accepts, in principle, that common expenditure can be allocated on a reasonable basis, then disallowance of the entire expenditure merely because he was of the view that another allocation key may have been preferable is self-contradictory. At the highest, if the adopted basis was found to be demonstrably unreasonable, some focused examination or reworking could perhaps have been contemplated. But a complete disallowance of the entire amount, without dispr....
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....t allowable, is unexceptionable as a principle. However, on facts, the assessee has sufficiently shown that the support services in question were integrally connected with its business operations. Finance, taxation, HR, marketing and IT support are not alien or extraneous functions. They are normal incidentals of business administration and undeniably facilitate the carrying on of the assessee's core business. Therefore, the conclusion of the lower authorities that the expenditure had no nexus with the assessee's business does not follow from the material on record. 31. We may also deal with the contention of the learned DR that the assessment orders for A.Ys. 2013-14 and 2014-15 do not discuss this issue in detail because those years were selected under CASS and, therefore, no reliance can be placed thereon. In our considered view, the learned DR is right to the limited extent that mere absence of disallowance in subsequent years, without detailed discussion, cannot by itself conclude the controversy nor can it operate as res judicata. However, that does not advance the Revenue's case materially because our conclusion in favour of the assessee is not being rested solely on such....