While providing relief to Lifestyle International, the Income Tax Appellate Tribunal (ITAT), Bangalore Bench deleted the disallowance on professional fee.
The assessee, Lifestyle International has made payment to its associate enterprises, namely, RNA Resources Group Limited as professional fees. For the assessment year 2008-2009, the amount paid was to the tune of Rs.76,66,432. For the assessment year 2010-2011 the amount paid as professional fees for stores set up (post set up) was Rs.63,09,804.
The professional fees, it is claimed, is in the nature of consultancy and were towards setting up of new stores and running the same after its set up. It is also stated that professional fees paid for setting up stores were capitalized in the books of account of the assessee and depreciation was claimed accordingly. As regards professional fees for post set up of stores (for running the store by RNA), the same is claimed by the assessee as revenue expenditure. For rendering of professional services, a consultancy agreement was executed between the assessee and RNA.
The Assessing Officer for assessment years 2008-2009 and 2010-2011 disallowed the professional fees paid by the assessee to RNA by stating various reasons.
Firstly, the payments made to RNA were unreasonable and excessive and without legitimate need of business.
Secondly, the assessee has a full-fledged management team with expertise needed to execute such operations and there was no such necessity to procure services of RNA.
Thirdly, according to AO, the employee cost incurred and legal and professional charges paid during the year added to its overall conclusion of it being unreasonable and excessive.
Lastly, alternatively, for disallowance under section 37 of the Act, the AO concluded the payments to be not incurred exclusively for the purpose of business.
The assessee preferred an appeal to the first appellate authority. The CIT(A) after analyzing the facts and legal position, directed the AO to delete the disallowance.
The coram of B.R.Baskaran and George George K clarified that once it is established that there was nexus between the expenditure and the purpose of business, the revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. It is a settled position in law that no businessman can be compelled to maximise his profits.
The Tribunal while dismissing the appeal of the revenue held that the AO has erred in invoking the provisions of section 40A(2) of the Income Tax Act to disallow the claim of expense as excessive and not legitimate to the business needs.
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