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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: HON’BLE KUL BHARAT & HON’BLE MANISH BORAD, ACCOUNTANT
the orders of Ld. Commissioner of Income Tax-I (in short ‘Ld. CIT], Indore dated 27.05.2019 which is arising out of the order u/s Atul Polychem 143(3) of the Income Tax Act 1961(In short the ‘Act’) dated 18.09.2017 framed by ACIT-1(1), Indore.
Assessee has raised following grounds of appeal:-
1. That on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in sustaining the order passed by AO u/s. 143(3) without appreciating guidelines/ direction issued by CBDT for completion of cases of Limited scrutiny selected through CASS module. The action of Ld. CIT (A) is illegal, unjustified, arbitrary and against the facts of the case.
2. That on the fact and in the circumstance of the case and in law, Ld. CIT (A) erred in confirming the action of Ld AO. in making addition of Rs.680000/ - by unauthorized expansion of scope of limited scrutiny. The action of Ld CIT (A) is violation of mandatory jurisdictional condition as stipulated under . the guideline / instruction issued by CBDT in relation to completion of cases of limited scrutiny through CASS module.
Without prejudice to Ground No. 1 & 2 , on the facts and in the 3. circumstance of the case and in law, the Ld. CIT (A) has erred in holding that the AO has not travelled beyond their jurisdiction while making assessment in Limited Scrutiny case by initiating inquiries on new issues without complying with mandatory requirement of the relevant CBDT instruction
The Appellant craves, leave to add, alter amend and/ or modify any ground of appeal on or at the time of hearing.
Brief facts of the case as culled out from the records are that the assessee is a partnership firm engaged in the business of manufacturing and trading of oils and all type of resin. e return of income filed on 24.09.2015 declaring income at Rs.1,58,04,390/-.
Case selected in limited scrutiny through CASS followed by serving of notice u/s 143(2) of the Act. The reasons for limited scrutiny included, payment to relative persons mismatched. Ld. A.O examined the payments made to relatives u/s 40A(2)(b) of the Act specifically with regard to salary paid to Smt. Kashmira Ben A Patel and Smt. Puneeta Pragnesh Patel at Rs.4,40,000/- each. Ld. A.O completed the assessment restricting the salary to Rs.1,00,000/- each thereby disallowing Rs.6,80,000/- as excessive salary paid to relatives under the provisions of Section 40A(2)(b) of the Act. Income assessee at Rs.1,64,84,390/-. Aggrieved assessee preferred appeal before Ld. CIT(A) wherein the assessee raised the grounds on merits challenging the disallowance and also challenging the jurisdiction of the Ld.A.O made the addition for the reasons not identified by him. However Ld. CIT(A) dismissed both the grounds. Now the assessee is in appeal before the Tribunal.
Ld. Counsel for the assessee submitted that the reasons provided in the limited scrutiny were towards custom duty payment mismatch, sales turn over mismatch and payment to related person mismatch. However the Ld. A.O without taking necessary permission for conducting scrutiny exceeded its jurisdiction and made the addition u/s 40A(2)(b) of the Act. On merits, Ld. Counsel for the assessee submitted that both the persons receiving salary were having sufficient educational back ground and the payment made for salary is not excessive.
Per contra Ld. Departmental Representative vehemently argued supporting the orders of both the lower authorities.
We have heard rival contentions and perused the records placed before us. Through this appeal assessee has challenged firstly wrong assumption of jurisdiction by the Ld. A.O going beyond the area of limited scrutiny and secondly has challenged the disallowance of Rs.6,80,000/- made u/s 40A(2)(b) of the Act.
As regards the legal ground is concerned one of the reasons for selecting the case for limited scrutiny is the “payment to related Atul Polychem person mismatch”. Assessee is statutorily required to get its accounts audited u/s 44AB of the Act. In the Annexure 3CD to Form 3CB of the Act read with section 44AD of the Act one of the point to be examined by the auditor is with regard to the payment made to related parties and in case excessive amount is paid the same needs to be reported. Post audit u/s 44AB of the Act when the assessee files the return there is a specific column in the Income Tax Return form, where the assessee has to report any such disallowance u/s 40A(2)(b) of the Act. Before us neither the audit report is placed nor copy of Income Tax Return form is produced.
Even in the assessment order the Ld. A.O has not made any observation in this regard. There are no specific guidelines before us which could show that under limited scrutiny what needs to be examined by Ld. A.O for the reasons “payment to related persons mismatch”. In absence of these details which have not been provided by either the parties, the legal ground raised by the assessee deserves to be dismissed.
As regards the ground raised on merits we observe that Rs.4,40,000/- each were paid as salary to Smt. Kashmira Ben A Atul Polychem Patel and Smt. Puneeta Pragnesh Patel who are the wives of the partners of the firm. The Ld. A.O on his own notion and considering the legitimate needs of the business restricted the claim of the salary to Rs.1,00,000/- each to both the partners which shows that the Ld.A.O has made “an adhoc disallowance”. Both the parties receiving the salary are educated and as claimed by the Ld. Counsel for the assessee they have sufficient expertise to perform the duties given to them. The disallowance u/s 40A(2)(a) of the Act is made with regard to the payment made to relatives defined under section 40A(2)(a) of the Act. Section 40A(2)(a) of the Act reads as follows:-
(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub- section, and the Assessing] Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him there from, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction:
From perusal of the above provisions we find that the disallowance of expenses paid to the relatives can be made by the Atul Polychem Ld. A.O if he is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market of the goods, services or facilities for which the payment is made or the legitimate needs of the business or professional of the assessee or the benefit derived by accruing there from are considered to be excessive or unreasonable.
In the instant case the Ld. A.O failed to bring on record the fair market value of the alleged services to be provided by the employees and also failed to show the basis of computing Rs.1,00,000/- as the legitimate salary for the work to be performed.
Ld. A.O has not made any efforts in this regard and without making any enquiry about the fair market value of the services or the experience of the employees or the comparison of similar type of salary paid for the work performed by other employees of the concern has just resorted to make disallowance which in our view is uncalled for. Ld. Departmental Representative could not show that whether the alleged payments were not paid through account payee cheque or they were not disclosed in the regular return of income of the payee.
In these given facts and circumstances of the case we find no justification in the order of Ld. A.O for making the adhoc disallowance of Rs.6,80,000/-. We accordingly set aside the finding of Ld. CIT(A) and delete the disallowance of Rs.6,80,000/- made by the Ld. A.O u/s 40A(2)(b) of the Act.
In the result appeal of the assessee is partly allowed.
Order was pronounced in the open court on 16.02.2021