ITAT Mumbai Allows Group Cost Allocation Deduction; Holds Centralised Service Charges Deductible Under Section 37(1)

Key Facts and Tribunal Findings

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, allowed the appeal of Regus South Mumbai Business Centre Pvt. Ltd. for Assessment Year 2012–13, deleting disallowance of ₹21.06 lakh towards cost allocation charges paid to a group entity.

The assessee, engaged in providing workplace solutions, had claimed deduction of expenses allocated by its group company, Regus Business Centre Pvt. Ltd., towards centralised services including HR, finance, taxation, marketing and IT support. These costs were allocated based on number of workstations under an inter-company agreement.

The Assessing Officer disallowed the entire expenditure on the ground that it was not directly incurred by the assessee and lacked a clear nexus with its business. The Commissioner (Appeals) upheld the disallowance, observing that proportionate allocation of group expenses without precise identification did not satisfy the requirement of expenditure being wholly and exclusively for business purposes.

The Tribunal rejected the approach of the lower authorities. It held that the existence of a centralised service arrangement and cost allocation mechanism was not disputed, and no material was brought on record to show that the expenditure was non-genuine, excessive, or unrelated to business.

The Tribunal observed that in modern business structures, centralised support functions are a matter of commercial expediency and that costs incurred by one entity and allocated to beneficiary entities on a reasonable basis cannot be disallowed merely for not being directly incurred.

It further held that allocation based on workstations was a rational and business-linked method in the assessee’s line of activity. The Tribunal also noted that the disallowance was based on generalised observations without disproving the assessee’s evidence or business nexus.

Accordingly, the Tribunal held the expenditure to be allowable under Section 37(1) and directed deletion of the disallowance.