Disallowance u/s 40(A)(2)(b) – Onus is on Assessing Officer to made comparable study
In a recent judgment, ITAT has deleted disallowance u/s 40(A)(2)(b) towards payments to related parties and held that onus is on Assessing Officer to made comparable study to show unreasonableness
ABCAUS Case Law Citation:
ABCAUS 3937 (2024) (04) ITAT
Important Case Laws relied upon:
IKEA Trading (India) Pvt. Ltd. Vs. DCIT [2021] 123 taxmann.com 129
CIT Vs. Gujarat Gas Financial Services Ltd. [2015] 60 taxmann.com 483
CIT Vs. Ashok J. Patel reported in [2014] 43 taxmann.com 227
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance under Section 40A(2)(b) of the Income Tax Act, 1961 (the Act).
The appellant assessee was Private Limited Company engaged in the manufacture. For the relevant Assessment Year, the return of income was taken up for scrutiny assessment and completed by making various disallowances including disallowance u/s towards payment of job work charges paid to a related party concern.
On analyzes of the quantity-wise rates charged by the related party / sister concern for the production of specific items, the Assessing Officer (AO) found different rates were charged for the same products at different times.
Therefore, a detailed show cause notice was issued as to why not disallow excess payment made to the sister concern invoking provisions of Section 40A(2)(b) of the Act.
In reply the assessee justified the increase by stating that on verification of the job work charges billed, it was much lesser than the cost incurred for doing job work. In view of the same, charges were revised from subsequent date and if the revision in the job work charges would not have been done on a later date, the sister concern would have incurred huge losses.
The AO was of the view that the explanation offered by the assessee was not backed by any cogent credible evidence other than a self-created cost analysis, which is nothing but an afterthought. The plea that lower rate was leading to losses to the sister concern was not acceptable. According to the AO, the entire exercise was collusive and to reduce the tax liability by inflating expenses by the assessee.
Therefore, the AO made the addition inter alia by invoking provision of section 40A(2)(b) of the Act. The AO had not verified any comparable rates in the same trade to arrive at excessive payment made to sister concern, but just compared the rates of the sister concern alone at different period only.’
The Tribunal observed that CIT(A) confirmed the addition on the ground that the above increase was almost 300% of the rate charged during the earlier period, which was to reduce the tax liability by inflating expenses by the assessee. Both the Lower Authorities have not made any verification about the comparable job work rates of similar nature in the trade for the past or in the future period.
The Tribunal opined that the Authorities failed to prove the onus of unreasonableness claimed by the assessee. In a similar circumstances, the jurisdictional High Court had deleted the additions made by the Assessing Officer observing that it was for Assessing Officer to assess fair market price and give comparative instances – Since Assessing Officer had not done same, addition made by him was deleted – Whether since onus was on Assessing Officer and Assessing Officer had failed to discharge said onus, disallowance was unsustainable in law.
It was further observed that the Co-ordinate Bench held that where Assessing Officer had not brought any comparable case to demonstrate that payments made by assessee to directors were excessive or unreasonable, following CBDT Circular No. 6-P, dated 06.07.1968 which states that no disallowance is to be made under section 40A(2) of the Act in respect of payments made to relatives and sister concerns where there is no attempt to evade tax.
It was further noted that similarly the Jurisdictional High Court held that when the Revenue could not establish assessee evaded payment of tax, then invocation of section 40A(2) was not valid. It was observed that assessee company as well as parent company, were to tax at maximum marginal rate and, therefore, it could not be said that service charge was paid at unreasonable rate to evade tax – Whether since revenue could not point out that assessee evaded payment of tax, invocation of section 40A(2) was not valid.
The Tribunal following the judicial precedents and in view of the fact that the Lower Authorities failed to make comparative study of the job work charges with any third party, held that AO was not correct in making disallowance u/s 40A(2)(b) of the Act.
Accordingly, the disallowance was deleted.
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