Tax Authorities cannot step into shoes of businessmen to determine business purpose expenditure

Serco India Pvt. Ltd. Vs ACIT (ITAT Delhi)

Conclusion: Income tax authorities could not step into the shoes of businessmen to determine how much expenditure should have been incurred for the purpose of business.  as an organization incurred both operating expenses as well as non-operating expenses for running the business and there were certain expenses which were not allocable to a particular activity.

Held: Assessee-company was a subsidiary of Serco Group PLC, UK and was established as a captive service center with an objective to provide IT and IT enabled services to Serco Group. It filed its return of income declaring loss of Rs. 5,68,34,642/-which was processed u/s 143(1). The assessment was completed u/s 143(3) wherein addition u/s 68 of Rs. 11,73,19,373/- was made on account of difference between the opening balance and closing balance of sundry creditors, and ad-hoc disallowance of Rs. 4,43,77,875/- was also made on account of 20% of net ‘other expenses’ of Rs. 22,18,89,377/-debited in profit & loss account. Assessee company preferred an appeal before CIT(A), who had decided the appeal wherein CIT(A) had confirmed the addition u/s 68 of Rs. 11,73,19,373/- and enhanced the disallowance out of expenses at Rs. 10,18,44,938/- as against disallowance of Rs. 4,43,77,875/-made by AO. Assessee contended that CIT(A) was not justified in making disallowance of total non-operating and non-allocated expenses of Rs. 10,18,44,938/-without properly considering the documents furnished during appellate proceedings before him. It was maintaining regular books of accounts Transfer Pricing Report was also accepted by the TPO, the Arm’s Length Price (ALP) declared by assessee observing in order that ‘no adverse inference was drawn in respect of the International and Specified Domestic Transactions undertaken by assessee during the F.Y. 2012­13. Thus, the expenses debited to Profit & Loss Account were genuine expenses incurred wholly and exclusively for the purpose of business. It was held that  an organization incurred both operating expenses as well as non-operating expenses for running the business. There were certain expenses which were not allocable to a particular activity. Non-allocable expenses even for a management consultancy providing company were costs that could not be directly attributed to specific projects or client engagements and therefore could not be allocated on a project-by-project basis. These expenses were more general in nature and were incurred to support the overall operations of the company rather than any particular client work. CIT(A) was not justified in allowing only ‘operating expenses’ allocable to the segment of rendering management consultancy services and direct expenses on sub-letting and disallowing all the non-operating and non-allocable expenses incurred by assessee company. CIT(A) was not justified in disallowing non-operating non-allocated expenses and expenses incurred for exploring new business in the line of Maintenance and Operations of Transportation by assessee. Assessee had incurred expenses for preparing technical and financial bids for obtaining contracts for Maintenance and Operation of BRT buses in Indore. Further, assessee had also participated in bid for Maintenance and Operation of Chennai Metro Rail. Assessee was successful in getting one contract during the year related to Indore BRT Bus Operations and Maintenance of 50 buses for an initial period of six years. It was also a trite law that Income Tax Authorities could not step into the shoes of the businessmen to determine as to how much expenditure should have been incurred for the purpose of business. CIT(A) was not justified in disallowing total non-operating and non-allocable personnel expenses of Rs. 4,85,98,973/-. It wa also evident from the fact that trade payables as on 31.03.2015 were of Rs. 33,85,497/- only, as shown in the Audited Balance Sheet of the assessee company for F.Y. 2014­15 which was nominal (PB Volume-2 Page 852). This fact also established that the sundry creditors (trade payables) were subsequently paid and were genuine. Hence, no addition was called for u/s 68 of Rs. 11,73,19,373/- on account of unexplained increase in sundry creditors in the books of account during the previous year. Therefore, the disallowance of Rs. 10,18,44,938/- out of the expenses and addition u/s 68 of Rs. 11,73,19,373/- made on account of difference in opening balance and closing balance of sundry creditors was hereby deleted.