Salary Reimbursements for Deployed Government Staff Qualify as Deductible Business Expenditure

Salary Reimbursements for Deployed Government Staff Qualify as Deductible Business Expenditure

The Issue

Whether the Haryana Urban Development Authority (HUDA) is entitled to claim a deduction for salaries paid to employees of the Department of Urban Estates (DUE). The Revenue challenged this, arguing that since DUE is a separate State Government department under different administrative control, these payments should not be treated as HUDA’s business expenditure.

The Facts

• The Claim: During Assessment Year 2018-19, HUDA claimed a deduction of ₹7,01,24,201 toward the salary and contingent expenses of DUE staff working at HUDA’s headquarters.

• The Disallowance: The Assessing Officer (AO) disallowed the amount, strictly viewing DUE and HUDA as separate legal/administrative entities.

• Historical Context: In 1977, several functions of the Urban Estate Department were transferred to HUDA. It was agreed that HUDA would bear the salary and administrative costs of the staff continuing to perform those functions.

• Precedent: The CIT (Appeals) deleted the addition by relying on the ITAT Chandigarh’s previous orders in HUDA’s own cases ranging from AY 2004-05 to 2015-16.

The Decision

The ITAT Chandigarh Bench (Vice President Raj Pal Yadav) dismissed the Revenue’s appeal, reaffirming the following principles:

1. Functional Utility: The Tribunal noted that although the staff technically belong to a separate government department, they work “fully and wholly” for HUDA. Their work is a direct result of the transfer of functions from the State to the Authority.

2. Commercial Expediency: The Court applied the “Business Purpose” test. If these employees were not provided by the DUE, HUDA would be forced to hire outside manpower at a similar or higher cost to perform the same essential duties.

3. Consistency in Assessment: The Tribunal highlighted that HUDA has been bearing these expenses for decades, and the Income Tax Department had consistently accepted them as allowable office and administrative expenditures in prior years.

4. No Non-Business Element: The Revenue failed to prove that the expenditure was non-genuine or incurred for purposes unrelated to HUDA’s operational activities.

5. Outcome: Following the principle of Judicial Consistency, the Tribunal upheld the CIT(A)’s order. In favour of assessee.

Key Takeaways for Statutory Bodies & Corporations

• Substance Over Form: When one entity utilizes the staff of another (secondment), the reimbursement of salary costs is a valid business deduction for the user entity, provided the staff is working exclusively for its business objectives.

• Rule of Consistency: While the principle of res judicata (a matter already judged) does not strictly apply to tax law, the “Rule of Consistency” dictates that if a specific arrangement has been accepted for years, the Department cannot change its stand without a significant change in facts or law.

• Documentation: To safeguard such deductions, entities should maintain the original Government Orders (GOs) or Memorandums of Understanding (MoUs) that outline the transfer of functions and the liability for staff costs.