Disallowance u/s 40A(2)(b) merely for common Directors not sustainable. Invoking the section necessarily implies that such expenses are otherwise allowable – ITAT
ABCAUS Case Law Citation:
ABCAUS 2653 (2018) (11) ITAT
Important Case Laws Cited/relied upon:
CIT vs. Enviro Control Associate Pvt. Ltd. 43 taxman.com 291
The appellant assessee company haf filed the instant Appeal against the Order of the CIT(A) in confirming the addition made by the Assessing Officer (AO) u/s 40A(2)(b) of the Income Tax Act, 1961 (the Act) on account of payment of sums to related party having common Directors.
The assessee was a Private Limited company engaged in 100% govt. supply. The case of the assessee was selected under scrutiny through CASs and the statutory notice u/s. 143(2) of the Act was issued. Further notice u/s 142(1) of the Act alongwith detailed questionnaire was also issued to the assessee.
In compliance to these notices, the assessee appeared from time to time and filed necessary details/ explanations as called for from time to time.
Thereafter, assessment was completed vide order passed u/s 143(3) of the Act by making the impugned addition on account of enhanced net profit rate and by making a further disallowance u/s. 40A(2)(b) of the Act.
Against the assessment order, the assessee appealed before the CIT(A), who vide his impugned order dismissed the appeal of the assessee.
The assessee submitted that the issue in dispute was squarely covered in favour of the assessee in its own case decided by the Coordinate Bench of the Tribunal for the preceding assessment year Hence, he requested to follow the aforesaid decision in the present case and addition in dispute may be deleted.
The Tribunal noted that the Coordinate Bench of the Tribunal for the preceding assessment year had dealt with the same issue.
The Coordinate Bench had observed that the Revenue authorities after invoking such provision should have shown that how the payment made by the assessee was excessive or unreasonable compared to the market rates.
The Coordinate Bench had found that the claim of the assessee that both the recipient as well as the payee company were assessed to tax at same rate and, therefore, payment was not unreasonable rates to evade taxes, was supported from the decision of the Hon’ble Gujarat High Court.
The Coordinate Bench had held that for making a disallowance under section 40A(2) of the Act, the onus to prove un reasonableness and then to derive that the payment is excessive is on Assessing Officer. Merely saying that there were common Directors etc. and further raising doubts merely on the details of the services, the disallowance cannot be sustained.
The Coordinate Bench had observed that as the Assessing Officer had disallowed the payment invoking the section 40A(2)(b), it could not be said that no services had been rendered by the assessee. In that case the whole disallowance should have been made under section 37(1) of the Act. When the Assessing officer invokes the provisions of section 40A(2)(b) it necessary implies that such expenses are otherwise allowable, but because of certain payment to related parties the disallowance is made.
The Tribunal opined that the issue in dispute was squarely covered by the decision of the Coordinate Bench in assessee’s own case in the preceding assessment year. Accordingly, the Tribunal deleted the addition and allowed the ground raised by the assessee.