Direct Tax Judgement No 1

01.01.2024

Sub: Related Party Transactions u/s 40(A)(2)(b) r.w.s Section 37 of the Income Tax Act 1961.

Synopsis

Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of (Supervisory and risk management charges) – Assessment year 2011-12 – Assessee was an insurance broker – It claimed deduction towards supervisory and risk management charges paid to its sister concerns – Assessing Officer disallowed same on ground that aforementioned amount vis-à-vis prospective clients- It was noted that in earlier years, Assessing Officer allowed deduction towards supervisory and risk management charges Whether since Assessing Officer had treated said charges as revenue receipt in hands of sister concerns, however, made addition to assessee’s income, same transaction could not be treated differently in hands of payer i.e. assessee – Held, yes – Whether fact that expenses were incurred for prospective clients should be good enough for assessee to claim deduction qua same, as every expense does not necessarily translate into corresponding income – Held, yes – Whether, therefore, impugned disallowance of expenses made by Assessing Officer was unjustified – Held, Yes.

Facts:

1. The assessee was in the insurance brokerage business concerning both life and non-life products offered by various insurance companies.
2. The assessee claimed certain amount as expenses against brokerage income. The Assessing Officer disallowed the same on the grounds that afore mentioned amount vis-à-vis prospective clients.
3. On appeal, the Commissioner (Appeals) deleted the addition.
4. On further appeal, the Tribunal also upheld the order of the Commissioner (Appeals).
5. On revenue’s appeal to the High Court:
   • The record shows that the respondent/assessee is in the insurance brokerage business concerning both life and non-life products offered by various insurance companies.
   • The respondent/assessee is said to have incurred, according to the stand taken before the AO, the aforementioned amount vis-à-vis prospective clients.
   • Concededly the said amount was paid by the respondent/assessee to its sister concerns.
   • It is not disputed that the appellant/revenue has treated the amounts received by the respondent/assesses sister concerns as revenue receipts. Furthermore, it is also not in dispute that the rate of tax levied on the amounts received by the respondent/assessee’s sister concerns is the same as that which the respondent/ assessee is subjected to.
   • It appears (something which is not in dispute) that in the preceding AY i.e., AY 2010-11, the AO did not flag the deduction claimed by the respondent/assessee against the expenses incurred towards supervisory and risk management charges.
   • Though in AY 2013-14, the AO had raised an objection, and, accordingly, made a suitable addition which was, ultimately, deleted by the CIT(A).
   • Having regard to the facts obtaining in the case, the argument advanced by the revenue that the amounts expended by the respondent/assessee towards supervisory and risk management charges were not linked to its business, is untenable.
   • The submission of revenue is founded on the rationale that while the said expenses were incurred for prospective clients it did not result in the respondent/assessee earning a matching income
   • This argument is flawed. The fact that the expenses were incurred for prospective clients should be good enough for the respondent/assessee to claim deduction qua the same, as every expense does not necessarily translate into corresponding income.
   • *In any event, since, as noticed above, the appellant/revenue has treated the amount expended by the respondent/assessee as revenue receipt in the hands of its sister concerns the same transaction cannot be treated differently in the hands of payer i.e., respondent/ assessee. (Para 18)
   • Besides, as noted above, in AY 2010-11, the AO had allowed deduction vis-à-vis amounts expended towards supervisory and risk management charges. [Para 19]
   • Likewise, the CIT(A), in AY 2013-14, as noticed above, had deleted the addition made by the AO. [Para 20]
   • Thus, having regard to the overall circumstances, there is no need to interfere with the impugned order since no substantial question of law arises for consideration. [Para 21]

Ref: Principal Commissioner of Income-tax-7 v. Trinity Insurance Brokers (P.) Ltd. [2023] 157 taxmann.com 701 (Delhi HC) (IT APPEAL 624 OF 2023) DT 16.11.2023