TaxTMI 
TaxTMI 
2026 (7) TMI 397
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....tion 37(1) of the Income-tax Act, 1961. 1.2 The CIT(A) erred both in law and on facts The CIT(A) erred both in law and on facts by adjudicating the issue based on submissions made by the appellant during appellate proceedings with additional evidences about the employee benefit expenses which were not produced before the AO and was not remanded under Rule 46A of Income Tax Rules, 1962 for verification, thereby violating the mandatory provisions of Rule 46A. 1.3 The CIT(A) erred in misapplying judicial precedents that may restrict examination of reasonableness but do not bar verification of genuineness and ignoring that the onus lies on the appellant to substantiate the claims u/s. 37 by sufficient evidences. 1.4 The CIT(A) further erred in ignoring the abnormal increase in such expenses despite a decline in business revenue, thereby overlooking possible inflation of expenses. The order of the CIT(A) is therefore perverse and unsustainable both on facts and in law." 2. Grounds of appeal in respect of Transfer Pricing Adjustment 2.1 Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in rejecting the benc....
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....e didn't produce any satisfactory explanation regarding increase in 'employee benefits expenses, when compared to decrease in total 'revenue from operations, the AO disallowed a sum of Rs. 8,04,95,000/- being difference between 'employee benefits expenses' of the current financial year and 'employee benefits expenses' of the previous financial year. 5. The assessee vide its reply dated 27.12.2023 informed the AO that the company preferred to file an appeal before the Ld.CIT(A) instead of filing objections before the Dispute Resolution Panel (DRP). Accordingly, the AO passed the final assessement order u/s. 143(3) r.w.s.144C(3) r.w.s.144B of the Act on 28.12.2023 and determined total income at Rs. 3,37,99,006/- by making addition towards TP adjustment of Rs. 13,02,752/- and disallowing 'employee benefits expenses' of Rs. 8,04,95,000/-. 6. Being aggrieved by the assessment order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee challenged the additions made by the AO towards disallowance of 'employee benefits expenses' of Rs. 8,04,95,000/- and submitted that the AO was completely erred in disallowing 'employee benefits expenses' only on ....
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....95,000/-. 8. In so far as TP adjustment of Rs. 13,02,752/- made by the AO on the basis of TP adjustment suggested by the TPO in respect of interest payment on NCDs, the Ld.CIT(A) by following the decision of the ITAT Hyderabad Special Bench in the case of Hyderabad Infratech (P.) Ltd. v. DCIT reported in [2025] 171 taxmann.com 385 (Hyderabad - Trib.) (SB) deleted the addition made by the AO by holding that, if NCDs denominated in Indian currency, then for the purpose of benchmarking interest payment on NCDs, PLR is appropriate, instead of EBLR rate considered by the TPO. Therefore, directed the AO/TPO to delete addition towards TP adjustment of Rs. 13,02,752/-. 9. Aggrieved, the Revenue is in appeal before the Tribunal. 10. The first issue that came up for our consideration from Ground Nos.1 to 1.4 of the Revenue's appeal is deletion of addition made by the AO towards disallowance 'employee benefits expenses' of Rs. 8,04,95,000/-. 11. The Ld.CIT-DR, Shri Pavan Kumar Beerla submitted that the Ld.CIT(A) erred in deleting the disallowance without appreciating the fact that the assessee failed to substantiate the genuineness and business expediency of the expenditure as req....
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.... below the tax paid by individual employees and therefore, the allegation of the AO is that it is a colorable device to reduce the profit is incorrect. Further, the assessee also filed relevant acknowledgment of minutes of board meeting to prove the payment of KMPs for rendering services and also considering the importance of the services to the company. The Ld.CIT(A) after considering the relevant facts has rightly deleted the addition made by the AO. Therefore, he submitted that the order of the Ld.CIT(A) should be upheld and ground taken by the Revenue should be rejected. 13. We have heard both the parties, perused the materials available on record and had gone through orders of the authorities below. We also carefully considered the reasons given by the AO to disallow 'employee benefits expenses' of Rs. 8,04,95,000/-. Admittedly, the AO disallowed 'employee benefits expenses' on the ground that there is a steep increase in the expenses whereas there was a reduction in 'revenue from operations' and the assessee couldn't explain the rationale behind enhanced 'employee benefits expenses' and when compared earlier financial year. The AO was compared the expenditure incurred by t....
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....usively business or profession of the assessee. In the present case, it was not the case of the AO that the expenditure incurred by the assessee was not for the purpose of business of the assessee and further it is personal expenditure in nature and capital expenditure in nature. Therefore, in our considered view, the ground taken by the Revenue u/s. 37(1) of the Act fails. 15. Further, the AO had also not doubted the genuineness of expenditure which is evident from the observation of the AO. The AO has disallowed 'employee benefits expenses' only on the basis of increase in 'employee benefits expenses' and decrease in 'revenue from operations'. The AO compared the 'revenue from operations' against expenditure incurred under the head 'employee benefits expenses' and observed that there is decrease in 'revenue from operations', and increase in 'employee benefits expenses' and the same was not substantiated by the assessee. We find that right from the stage of assessment to appellate proceedings, the assessee claimed that it has paid remuneration to KMPs for rendering services and also considered the importance of their services to the company. The assessee has also filed relevant....
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....t is clear that the assessee has justified payment to higher remuneration to employees which resulted in increase in 'employee benefits expenses' for the year under consideration when compared to earlier financial year. Since there is no nexus between 'revenue from operations' and 'employee benefits expenses', in our considered view, the AO ought not to have disallowed the difference amount as unreasonable or excessive. The Ld.CIT(A) after considering relevant facts has rightly deleted the addition made by the AO. Further, although, the Revenue has taken a ground under Rule 46A and violation of principles of natural justice, but in our considered view going by the evidences considered by the Ld.CIT(A) including Form 16 and minutes of board meeting, the above two documents can't be considered as additional evidences so as to apply Rule 46A, because right from the assessement stage the assessee claims to have filed Form 16A and further in so far as minutes of the board meeting, it is only an additional documents which describe the payment of remuneration to employees and therefore, in our considered view, ground taken by the Revenue in light of Rule 46 is also devoid of merits and ca....