ITAT Mumbai Upholds Deletion Of ₹11.11 Crore Disallowance On Related-Party Business Expenses

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) on 7 May upheld deletion of a disallowance of Rs. 11.11 crore towards business development and business promotion expenses paid by a pharmaceutical company to related parties.

A Bench of Judicial Member Pawan Singh and Accountant Member Makarand Vasant Mahadeokar dismissed the Revenue's appeal against Riverside Industries Private Limited for Assessment Year 2017-18, holding that it could not adopt an inconsistent stand when it had accepted similar expenses and agreements in subsequent assessment years on identical facts.

It observed that the “AO/revenue cannot be allowed to take inconsistent view on similar set of facts in different assessment years,”

The Assessing Officer (AO) had disallowed business development expenses of Rs. 6.11 crore and business promotion expenses of Rs. 5 crore after concluding that the related parties receiving the payments neither maintained independent business establishments nor produced evidence of actual services rendered. The Officer also noted that the recipients had declared income under the presumptive taxation scheme under Section 44AD of the Income Tax Act, which permits eligible small businesses to declare income at a prescribed percentage of turnover without maintaining detailed books of account.

Further, the AO held that the company had not produced correspondence or contractual material establishing the precise nature of services rendered against the payments and consequently disallowed the entire expenditure. The officer also disallowed depreciation claims on two motor vehicles on the ground that the cars were not registered in the company's name and that the company had failed to establish business use.

Before the Commissioner of Income Tax (Appeals), the taxpayer produced memoranda of understanding entered into with parties providing business development and promotion services. The appellate authority admitted the documents as additional evidence under Rule 46A of the Income Tax Rules after calling for a remand report from the AO.

The Tribunal noted that the taxpayer had furnished complete details, including income tax returns of the service providers, ledger accounts, qualifications, nature of services and modus operandi. It observed that the AO “has not pointed out any deficiency in the details except doubting on assumption and surmises and without bringing any evidence on record.”

The Bench further noted that in subsequent assessment years, including reassessment proceedings for Assessment Year 2020-21, the department accepted similar expenses supported by the same MOUs without making any disallowance.

Referring to the nature of the business, the Tribunal observed that the taxpayer was a closely held pharmaceutical company whose directors and related parties belonged to the same family, and that the company's turnover had “drastically increased from first year to subsequent assessment years.”

On the depreciation claim, the Tribunal upheld the relief granted by the Commissioner (Appeals), noting that the vehicles formed part of the fixed asset schedule in the audited books and were used for business purposes.

Accordingly, the ITAT dismissed the Revenue's appeal.