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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Amarjit Singh
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH (Conducted Through Virtual Court) Before: Shri Amarjit Singh, Accountant Member And Ms. Madhumita Roy, Judicial Member ITA Nos. 1758 & 1759/Ahd/2018 Assessment Year 2013-14 & 2014-15
Gandhi Shrenik Kantilal, The ITO, 5-947, Opp. Jain Derasar, Ward-2, Luhari Kuva, Vs Godhara Godhra-389001 (Respondent) PAN: ADYPG8346E (Appellant)
Revenue by: Shri Purushottam Kumar, Sr. D.R. Assessee by: Shri Balkrishna Thakkar, A.R.
Date of hearing : 05-10-2021 Date of pronouncement : 27-10-2021 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
These two appeals filed by assessee for A.Y. 2013-14 & 2014-15, arise from order of the CIT(A)-4, Vadodara dated 31-05-2018, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”. 2. The assessee has raised following grounds of appeal:- “1. The grounds of appeal mentioned hereunder are without prejudice to each other. 2. The assessment order under appeal is bad in law and deserves to be quashed. 3. Grounds of appeals as enumerated as below; Sl. No. Particulars against which appeal Amount (Rs.) Ground of Appeal preferred.
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1 Disallowance of Salary to 2,69,784/- Based on the findings of specified persons Ld. CIT(A) in the preceding year Ld. A.O. without giving due consideration to the facts and submissions at assessment stage disallowed Rs. 2,69,784/-. Every assessment is independent. The said disallowance of expenses is bad in law and deserves to be quashed. 2 Disallowance of payment of Rent 2,88,000/- Based on the finding of to specified persons Ld. CIT(A) in the preceding year Ld. A.O. without giving due consideration to the facts and submission at assessment stage disallowed Rs. 2,88,000/-. Every assessment is independent. The said disallowance of expenses is bad in law and deserves to be quashed. Total Rs. 5,57,784/-
Looking to the opportunity for representing the defense your appellant preferred an appeal.”
The fact in brief is that return of income declaring income of Rs. 65,370/- was filed on 11th October, 2013. The case was subject to scrutiny assessment and notice u/s. 143(2) of the Act was issued on 2nd Sep, 2014. The assessment u/s. 143(3) of the act was finalized on 4th Jan, 2016 determining the total income at Rs. 7,10,744/-. The facts pertaining to the
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issues contested in the grounds of appeal of the assessee are discussed while adjudicating these grounds of appeal as follows:-
Ground No. 1 ( Disallowance of salary to specified person Rs. 2,69,784/-) 4. During the course of assessment, the Assessing Officer has asked the assessee to justify the salary paid to persons specified u/s. 40A(2)(b) of the act in respect of Shri Harshit Gandhi, Paras Gandhi, Rajshreeben Gandhi to whom the assessee had paid salary of Rs. 3,09,684/-, Rs. 3,39,600/-, Rs. 1,60,500/- respectively during the year under consideration. The assessee has given detailed submission reproduced by the Assessing Officer at page no. 4 and 5 of the assessment order wherein assessee has explained the details of the contribution of each employee and justification for payment of salaries. However, the Assessing Officer has not accepted the submission of the assessee and restricted the salary amount of these employees on the basis of disallowance made in the previous year and restricted the salary amount as shown under:- Name of the Relationship Nature of Salary paid Amount of specified person with the payment salary proposed assessee to be allowed
Harshit Gandhi Son Salary 309684 240000
Paras Gandhi Brother Salary 339600 240000
Rajshriben Gandhi Sister in law salary 160500 60000
Total 809784 540000
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Accordingly, an amount of Rs. 2,69,749/- was added to the total income of the assessee of the assessee.
Ground No. 2 (Disallowance of rent to specified person to Rs. 2,88,000/-) 5. During the course of assessment the Assessing Officer noticed that assessee has made payment of rent to related person specified u/s. 40A(2)(b) of the act. The assessee has given the detailed submission which has been reproduced by the Assessing Officer at page no. 7 & 8 of the assessment order. The assessee has explained the comparative prevailing rate and nature of rent and location of the premises etc on the basis of such rent were paid. The Assessing Officer has not accepted the submission of the assessee and stated that in the previous year also similar disallowance has been made, therefore, the Assessing Officer has restricted the payment of rent to the specified person as shown against each name as per table given below:- Name of the specified Relationship Nature of Amount paid Amount of person with the payment in AY 2013- rent assessee 14 proposed to be allowed
Paras Gandhi Brother Rent 144000 84000
Purnima Gandhi Sister Rent 24000 18000
Rajshri Gandhi Sister in Law Rent 132000 72000
Rasilaben Gandhi Wife Rent 132000 72000
Gandhi Consultancy Sister concern Rent on 2,22,000 120000 furniture & fixture
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Total 654000 366000
Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.
During the course of appellate proceedings before us at the outset the ld. counsel contended that identical issue on similar fact in the case of the assessee itself has been adjudicated by the ITAT Ahmedabad for assessment year 2011-12 and assessment year 2012-13 vide ITA Nos. 2872 & 2873/Ahd/2015 vide order dated 01-01-2019.
Without reiterating the facts as cited above, with the assistance of the ld. representatives, we have gone through the decision of ITAT in the case of assessee itself as referred above vide ITA Nos. 2872 & 2873/Ahd/2015 in the case of Shrenik kumar Kantilal Gandhi vs. ITO supra. The relevant operative part of the para on the issue of the ITAT order is reproduced as under:- “8. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the disallowance made by the AO for the salary paid by the assessee to the specified persons. The assessee during the year has paid the salary to the specified persons amounting to Rs. 8,36,760/- only. However, the AO found that the salary paid to the specified persons was excessive and unreasonable. Accordingly, he made the disallowance of Rs. 4,16,000/- under the provisions of section 40A(2) of the Act. 8.1 However, on appeal, the learned CIT (A) reduced the disallowance to Rs. 2,96,000/- only. 8.2 The controversy before us arises for our adjudication whether the assessee in the given facts and circumstances made payment of salaries to the specified persons excessive and unreasonable. At this juncture, we find important to refer the provisions of section 40A(2)(a)of the Act which reads as under:
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“(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person 56 referred to in clause (b) of this sub-section, and the 57[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 therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.” 8.3 A plain reading of the above provisions reveals that the disallowance under section 40A(2) can be madeonly when the AO is of the opinion that the payment made to the specified persons is excessive or unreasonable in comparison to the fair market value. In the case before us, the AO has not made any comparison of the salary paid by the assessee to the specified persons with the fair market value of such services. As such the AO has made the disallowance without making any comparison of the salary paid by the assessee with the fair market value. 8.4 We also note that almost similar salary was allowed by the assessee in the immediately preceding assessment year. In the year under consideration, the salary has slightly increased in comparison to the earlier year salary. Thus it is clear that the AO before making the disallowance of the salary has not considered the salary paid to these persons in the immediately preceding assessment year. 8.5 We find that the Hon’ble Delhi high court in the case of Commissioner of Income-tax Vs. Modi Revlon (P.) Ltd. reported in 26 taxmann.com 133 deleted the addition made by the AO under section 40A(2) of the Act without making any comparison to the fair market value. The relevant extract of the order is reproduced below: "25. This Court notices that in order to determine whether the payment is not sustainable, the AO has to first return a finding that the payment made is excessive, under Section 40- A (2) of the Income Tax Act. If it is found to be so, then the AO has to determine what constitutes the fair market value of the services rendered and disallow the difference between what is claimed and what is such value determined (as fair market value).” 8.6 The allegation of the AO that the assessee has not recruited the employee from the outside is the baseless observation. It is because the AO cannot enter into the shoe of the assessee and direct him for the recruitment of the staff of his business. The assessee is the best person to understand and decide his affairs of the business. Thus no disallowance can be made under section 40A(2) of the Act on the basis that the assessee has not recruited the person from outside. 8.7 We also note that there was no specific defect pointed out by the inspector in his report suggesting that the salary expenses incurred by the assessee were not allowable under the provisions of section 40A(2) of the Act. Similarly, the disallowance cannot be made of the salary expenses merely on the ground that there was no salary and attendance register maintained by the assessee. There was no mention of the services rendered by these specified persons to the assessee. Thus we can infer that there was no defect or flaw in the services provided by the specified persons to the assessee. 8.8 The salary paid to the persons in the case before us is representing indirect expenses which are fixed in nature. As such these expenses have to be incurred on a timely basis irrespective of the volume of the business of the assessee. Thus the reduction in the sales and net profit cannot be the basis of holding that salary paid to the specified persons was excessive and unreasonable. 8.9 We also note that the nature of the business of the assessee is trading and broking in the securities. It is the fact that the share market business is very much volatile and fluctuating. Thus nothing can be predicted for the profit or loss from such business. Therefore, the disallowance of
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salary expenses cannot be made in the event of a reduction in the business and profit of the assessee. 8.10 We also note that the assessee had explained the profile of all the specified persons before the learned CIT (A) and no defect of whatsoever was pointed out by him during the appellate proceedings. 8.11 In view of the above we are inclined to hold that the disallowance made by the AO was based only on the surmise and conjecture, without bringing any tangible material to justify that the salary was paid excessive and unreasonable. 8.12 Therefore, we reverse the order of authorities below. Accordingly we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed.”
On the issue of payment of rent, the operative para of the ITAT is reproduced as under:- “13.1 We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the rent expenses claimed by the assessee in respect of certain premises and hiring of computers &infrastructure facilities available at such premises. The AO was of the view that the rent has been paid to the specified persons as provided under section 40(A)(2)(b) of the Act. As such there was no requirement in the business of the assessee for taking so many premises and computers &infrastructure facilities on rent. Thus the AO disallowed the sum of Rs. 2,10,000/- out of total rent expenses claimed by the assessee of Rs. 6,60,000/-. 14. The view taken by the AO was subsequently confirmed by the learned CIT (A). 14.1 Now the controversy before us arises whether the assessee has claimed bogus expenses under the garb of rent paid to the persons as specified under section 40A(2)(b) of the Act. At the outset we note that the AO has made the disallowance of the rent expenses partly, meaning thereby, the AO has accepted part of the rent expenses as genuine. There was no basis provided by the AO for accepting part of the rent expenses as genuine and part of the rent expenses as excessive. 14.2 The provisions of section 40(A)(2) of the Act requires the AO to establish that the rent paid by the assessee is excessive and unreasonable keeping in view the prevailing market rate. But the AO has not brought any iota of evidence suggesting that the assessee has paid excessive and unreasonable rent in comparison to the fair market rate. 14.3 The payment made to the specified persons cannot be disallowed without bringing any tangible material to prove that the rent has been paid excessively. 14.4 We find that the ITAT Mumbai in the case of Nat Steel Equipment (P.) Ltd. Vs. Nat Steel Equipment (P.) Ltd. reported in 95 taxmann.com 159 deleted the addition made by the AO under section 40A(2) of the Act without bringing any material. The relevant extract of the order is reproduced below: “We are of the considered view that the lower authorities had carried out the disallowance under Sec. 40A(2)(a) on an adhoc basis viz. 30% of the payments made to the related parties and made a disallowance of Rs. 38,87,705/- without placing on record any material which could prove to the hilt that the payments were excessive or unreasonable, having regard to the fair market value of the services for which the same
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were made or keeping in view the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee therefrom. Be that as it may, we are of the considered view that in the absence of satisfaction of the basic condition for invoking of Sec. 40A(2)(a) by both of the lower authorities, the disallowance of 30% of the related party expenses i.e Rs. 38,87,705/- made under Se. 40A(2)(a) cannot be sustained”. 14.5 In view of the above we hold that the AO has made the disallowance on his surmise and conjecture without bringing any evidence on record. Accordingly, we are not impressed with the finding of lower authorities in the given facts and circumstances. Accordingly, we set aside the order of learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.”
Considering the decision of the ITAT as referred above, there is nothing before us on hand to differ from the issue raised in the case cited (supra) so as to take a different view on this issue. Therefore, since the issue is on hand have squarely covered following the principle of consistency, we find merit in the submission of the assessee and allow both the grounds of appeals of the assessee.
ITA No. 1759/Ahd/2018 A.Y. 2014-15 Ground Nos. 1 and 2 of ITA No. 1759/Ahd/2018 9. As the facts and issue involved in ground nos. 1 & 2 of appeal vide ITA No. 1759/Ahd/2018 Assessment Year 2014-15 are similar as in ITA No. 1758/Ahd/2018 Assessment Year 2013-14, therefore, after applying the decision adjudicated vide ITA No. 1758/Ahd/2018 as supra in this order, both the grounds of this appeal of the assessee are allowed.
Ground No. 3 (Long term capital gain of Rs. 2,10,161) 10. During the course of assessment, the Assessing Officer noticed that assessee has claimed long term gain of Rs. 2,01,261/-. On query, the assessee explained that shares were purchased for the investment purposes,
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therefore, long term capital gain was claimed on the sale of those shares. The Assessing Officer has not accepted the submission of the assessee stating that that assessee has not shown the sold share in the balance sheet as investment and treated the same as business income.
The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the same fact as reported by the Assessing Officer.
During the course of appellate proceedings before us, the ld. counsel has submitted that Assessing Officer has not verified the details submitted by the assessee explaining that sold shares were bonus shares which were received in April, 2006, therefore, the same were not reflected in the balance sheet as investment. On the other hand, ld. Departmental Representative has supported the order of lower authorities.
Heard both the sides and perused the material on record. During the course of appellate proceedings before ld. CIT(A), the assessee has specifically submitted in his submission that he has invested in the shares of Infosys in 1990. Subsequently, the Infosys declared bonus shares and capital gain was earned on the sale of bonus shares. In this regard, the assessee has also placed copies of contract note, demat statement, statement of holding of Infosys shares in the paper book. After perusal of the detail filed by the assessee, it is clear that Assessing Officer has not taken into consideration the relevant submission along with copies of document filed by the assessee in support of his claim of long term capital gain on the sale
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of impugned shares. Therefore, we restore this issue to the file of the Assessing Officer for deciding de-novo after verification of the detail filed upon affording adequate opportunity to the assessee. Therefore, this ground of appeal of the assessee is allowed for statistical purposes.
Ground No. 4 (Disallowance of bad debt of 3,31,070/-) 14. During the course of assessment, the Assessing Officer noticed that assessee has claimed bad debt of Rs. 3,31,070/- and stated Motila Oswal has debited the bad debt in assessee’s account. In this regard, the Assessing Officer stated that assessee was a sub-broker of Motilal Oswal of Godra and his source of income was only brokerage received from M/s. Motilal Oswal. The Assessing Officer was of the view that since the assessee has not offered the corresponding income in its books, therefore, claim of bad debt is not allowable. Accordingly, the Assessing Officer has disallowed the claim of bad debt.
The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee reiterating the facts as stated by the Assessing Officer.
During the course of appellate proceedings before us, the ld. counsel submitted that assessee has given nomenclature as bad debt, but in fact, it was trading loss which was recovered by the principal from the assessee. He has further submitted that as per the agreement between the principal Motilal Oswal and the agent (assessee) in case of non-recovery of outstanding from 25 clients, the same will be recovered from the sub-broker. The ld. counsel
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has also placed the copy of accounts of all the parties whose debt have been adjusted by the principal from the brokerage amount. On the other hand, the ld. Departmental Representative has supported the order of lower authorities.
Heard both the sides and perused the material on record. Without reiterating the fact as cited above during the course of assessment, the Assessing Officer observed that Motilal Oswal has debited the bad debt in assessee’s account. He was of the view that bad debt of the impugned broker should not be borne by the assessee. Therefore, the same was disallowed. During the course of appellate proceedings before us, the ld. counsel explained that actually it was a trading loss because of non-payment of contract amount by the parties in respect of share transaction entered into by sub-broker. As per the agreement in case of non-recovery from such parties, the same will be recovered from the sub-broker. In this regard, the assessee has placed copy of debit not of Motilal Investment Services, statement of bad debt written off, copy of customer account from books of the assessee etc. After perusal of the aforesaid facts and material filed by the assessee, we are of the view that the issue of trading loss instead of bad debt as claimed by the assessee is required to be examined from the submission made by the assessee, therefore, we restore this issue to the file of Assessing Officer for deciding de-novo after examination/verification of the details to be furnished by the assessee in the set aside proceedings upon affording adequate opportunity to the assessee. Accordingly, this ground of appeal of the assessee is allowed for statistical purposes.
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Ground No. 5 ( Addition of unexplained capital of Rs. 1,40,000/-) 18. During the course of assessment, the Assessing Officer noticed that there was addition to the capital account of the assessee to the amount of Rs. 1,40,000/-. On query, the assessee claimed that the same was out of the withdrawal made by the assessee in the three preceding years. However, the assessee failed to substantiate his claim with relevant supporting evidences, therefore, the Assessing Officer has added the same as unexplained to the total income of the assessee.
The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.
During the course of appellate proceedings before us, the assessee has reiterating the same submission that source of introduction of capital of Rs. 1,40,000/- was out of withdrawal made in the past three years. On the other hand, the ld. Departmental Representative has supported the order of lower authorities.
Heard both the sides and perused the material on record. The assessee has claimed that the source of addition to the capital account was out of withdrawal made in the past three years. However, the assessee has not furnished any relevant supporting evidences before the lower authorities. On this issue, we find that even during the course of appellate proceedings before us, the assessee has only furnished the copy of balance sheet of the assessee without any relevant supporting evidences to demonstrate that the source of addition to the capital account of Rs. 1,40,000/- was actually out of
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the explained withdrawal. Therefore, we do not find any infirmity in the decision of ld. CIT(A) on this issue. Accordingly, this ground of appeal of the assessee is dismissed.
In the result, appeal ITA 1758/Ahd/2018 is allowed and appeal ITA 1759/Ahd/2018 is partly allowed for statistical purposes.
Order pronounced in the open court on 27-10-2021
Sd/- Sd/- (MADHUMITA ROY) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 27/10/2021 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद