Income Tax Authorities cannot determine how much expenditure should have been incurred for the purpose of business: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench held that, income tax authorities cannot determine how much expenditure should have been incurred for the purpose of business.

The appellant, Serco India Pvt. Ltd., a subsidiary of Serco Group PLC, UK, operates as a captive service center providing IT and IT-enabled services to its parent company. The initial assessment revealed a declared loss of Rs. 5,68,34,642/-.

However, subsequent assessments resulted in additional charges, including a Rs. 11,73,19,373/- addition related to the difference between opening and closing balances of sundry creditors and an ad-hoc disallowance of Rs. 4,43,77,875/-.

The company appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], challenging the additions made during assessment. The CIT(A) not only confirmed the addition related to sundry creditors but also increased the disallowance of expenses to Rs. 10,18,44,938/-. The company contended that this decision was unjustified, emphasizing that the CIT(A) failed to consider crucial documents presented during the appellate proceedings.

It was argued that the Ld. CIT(A) were not justified in making disallowance out of “other expenses” on the grounds that the assessee did not furnish any evidence regarding genuineness of these expenses.

The Assessee was represented by Suraj Bhan Nain, Advocate & Mahfuzur Rahman, CA whereas  T. James Singson, CIT-DR represented the Revenue.

The assessee submitted that proceedings before the Ld. CIT(A), they have furnished details of other expenses along with Name, Address, and PAN of the Parties, Amount paid, TDS deducted, copies of Form No . 16A, copy of Engagement Letter, copy of Lease Deed, copy of Contracts and also copy of bank statement highlighting the payments on various dates to these parties demonstrating that the expenses incurred on various items under the head ‘Other expenses, and submitted a copy of account of the assessee company as appearing in the books of DLF Cyber City Developers Limited and sample copy of invoices raised by M/s DLF Cyber City Developers Limited and M/s Rentworks India Private Limited.

The tribunal bench of  Judicial Member Astha Chandra and Accountant Member Dr. B. R. R. Kumar observed that an organization incurs both operating and non-operating expenses for conducting business. Importantly, non-allocable expenses, such as those incurred for exploring new business opportunities, cannot be arbitrarily disallowed.

The tribunal stated that Income Tax Authorities should refrain from determining the quantum of expenditure required for business operations, respecting the business judgment of the entity.

The expenses debited to the Profit & Loss Account were deemed genuine and incurred exclusively for the purpose of business. Non-allocable expenses, including those for exploring new business avenues, were considered legitimate and necessary for overall business operations.

The tribunal highlighted that trade payables were nominal, indicating the genuineness of sundry creditors, and thus, held that the impugned addition under Section 68 was unwarranted.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates