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Portman Advisory Private Limited (Formerly known as Portman Real Estate India Private Limited) Versus The Dy. CIT-3 (2) , Mumbai

2016 (7) TMI 910 - ITAT MUMBAI

Disallowance of business expenditure - ratio of personnel cost - nexus between the expenditure incurred and the business of the assessee - only objection of both the authorities is that the assessee was suffering loss but had paid higher salary to its employees - why was the assessee not reducing his expenses proportionately when in was earning lesser income - Held that:- There is a basic and fundamental flaw in the approach of the AO and the FAA. They have tried to step in to the proverbial sho .....

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th of them have ignored the principle of commercial expediency. Phrase commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. AO has no role to decide the ‘Laxman-Rekha’ of ‘preservation, protection or advancement of his business interest. ’ - Reasonableness of an expenditure cannot and should not be the deciding factor while allowing .....

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edi-AR s ORDER Per Rajendra, AM Challenging the order, dt. 16. 06. 2014 of CIT(A)-4, Mumbai, the assessee had filed the present appeal. Assessee-company, engaged in the business of providing consultancy and advisory related services to project management services in India, filed its return of income 30. 09. 2010, declaring total income at ₹ 2, 22, 59, 801/-. The Assessing Officer(AO)completed the assessment order u/s. 143(3)of the Act, on 13. 02. 2013, determining its income at ₹ 1. .....

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se in salary. Explanation, given by the assessee, was not accepted by the AO, as it had increased the salary to its employees in spite of the fact that there was no increase in the income during the year and also in the subsequent years. He further held that no nexus had been established between the expenditure incurred and the business of the assesse, that the consultancy income earned by the assessee during the year was ₹ 5, 82, 652/-, that the employees of the company had not made any e .....

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nus, leave travel allowance and medical allowances. It provided the breakup of salary cost of the employees paid to key managerial personnel and executives for the year under consideration, that the assessee company was incorporated in April 2008, that during the 1st year of contract it secured a contract to provide consultancy services to an Indian company, that the FY. 2008-09 was the year of global meltdown, that the project to be undertaken by the Indian company did not materialise and was a .....

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to be decided from the point of view of the businessman and not of the AO, that in any consultancy business the only resourse were the employees, that the salary expenditure was incurred wholly and exclusively for the purpose of business and to earn revenue. After considering the submission of the assessee, he held that out of ₹ 1. 53 crores, expense of ₹ 1. 25 crores had been debited under the head salary, bonus etc. and was paid to Rahul Anand, that excessive expenditure was incur .....

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me earned, that no nexus had been established between the expenditure incurred and the business of the assessee , that the excessive expenditure could not be said to have been incurred or laid out wholly and exclusively for the purpose of assessee's business, that the assessee had enhanced the remuneration paid to its key managerial personnel/directors by giving an unreasonable increase without gaining anything on account of profit in the business, that it had been incurring losses year afte .....

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B). The Departmental Representative (DR) supported the order of the FAA. 5. We have heard the rival submissions and perused the material before us. We find that the assessee had debited ₹ 1, 53, 88, 845/- in the FY. 2009-10 in comparison to ₹ 95, 22, 499/- in the FY. 2008-09, under the head Personnel cost, that out of the said expenses of ₹ 1, 53, 88, 845/-, expenses of ₹ 1, 24, 39, 835/- had been debited under the head salary, bonus and other allowances and paid, that th .....

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er consideration. The only objection of both the authorities is that the assessee was suffering loss but had paid higher salary to its employees. It is not the case of the AO that payment was not made or that the person whom the payment was made were non-existent. Thus, the genuineness of the payment or the recipients is not in doubt. Their objection is about the justification of incurring the expenditure-i. e. why was the assessee not reducing his expenses proportionately when in was earning le .....

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e employee are not hit by the provisions of section 40A of the Act, so, the FAA was not justified in questioning the reasonableness of the expenditure. Both of them have ignored the principle of commercial expediency. Phrase commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. AO has no role to decide the Laxman-Rekha of preservation, p .....

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ent but whether it was of commercial expediency. As long as the payment is made for the purposes of the business and not by way of penalty for infraction of any law, the payment would be allowable as a deduction. The commercial expediency of a businessman s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure. Such decisions are to be taken from a business point of view and have to be respected by the authorities, regar .....

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