COMMISSIONER OF INCOME TAX III vs. ASHOK J PATEL

O/TAXAP/1064/2013 CAV JUDGEMNT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1064 of 2013 With TAX APPEAL NO. 1065 of 2013

FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE M.R. SHAH Sd/- and HONOURABLE MR.JUSTICE R.P.DHOLARIA Sd/- =========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? NO 2 To be referred to the Reporter or not ? NO 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ================================================================ COMMISSIONER OF INCOME TAX III....Appellant(s) Versus ASHOK J PATEL....Opponent(s) ================================================================ Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA

Date : 02/12/2013 ORAL JUDGEMNT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) Page 1 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT 1.00. As common question of law and facts arise in both these appeals and are as such against the impugned judgement and order passed by the Income Tax Appellate Tribunal (hereinafter referred to as “the ITAT”) with respect to the same assessee but with respect to the different Assessment Year, both these appeals are heard, decided and disposed of by this Common Judgement and order. 2.00. Tax Appeal No.1064 of 2013 :- Feeling aggrieved and dissatisfied with the impugned order dated 10/5/2013 passed by the tribunal in ITA No.335/Ahd/2010 and Cross Objections No.95/Ahd/2010 for A.Y. 2006-07, revenue has preferred the present Tax Appeal No.1064 of 2013 to consider the following substantial questions of law : “(i) Whether on facts and in the circumstances of the case, Tribunal was right in law in deleting the disallowance of Rs.14,97,668/- u/s. 40(A)(2b) of the I.T. Act out of the total payment of the bus rent, by not appreciating that the assessee failed to failed to back its claim by any conclusive evidence and further failed to produce any comparative prices to justify payments made to the related concerns? (ii) Whether Tribunal has erred in law in deleting disallowance of Rs.93,25,426/- made u/s. 40(a)(ia) of the I.T. Act, by holding that amendment carried out by Finance Act, 2010 can be held to be retrospective from the assessment year 2005-06 inspite of then fact that the amendment brought out by Finance Act, 2010 is not curative in nature and therefore not retrospective?” 3.00. Tax Appeal No.1065 of 2013 :- Feeling aggrieved and dissatisfied with the impugned order dated 10/5/2013 passed by the tribunal in ITA Page 2 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT No.334/Ahd/2010 for A.Y. 2005-06, revenue has preferred the present Tax Appeal No.1065 of 2013 to consider the following substantial questions of law : “(i) Whether on facts and in the circumstances of the case, ITAT was right in law in deleting the disallowance of Rs.15,49,163/- u/s. 40(A)(2b) of the I.T. Act out of the total payment of the bus rent, by not appreciating the fact that the assessee failed to failed to back its claim by any conclusive evidence and further failed to produce any comparative prices to justify payments made to the related concerns? (ii) Whether ITAT has erred in law by not appreciating the fact that the assessee failed to reconcile the different in payments as per tax audit report to that, submitted during the assessment proceedings and also ignoring the fact that assessee failed to produce any comparative prices to justify payments made to the related concerns?” 4.00. For the sake of convenience facts of Tax Appeal No.1065 of 2013 are narrated as under :- 4.01. The assessee, who is doing business in the name and style of M/s.Ashok Travels and is dealing in travels business on contract basis, filed return of income for A.Y. declaring total income at Rs.9,73,150/- along with the tax audit report. Thereafter the case was selected for scrutiny and statutory notices under section 143(2) and under section 143(1) of the I.T. Act along with detailed questionnaire were issued. The assessee claimed disallowance of payments made under section 40A(2)(b) towards higher charges during the year under consideration : Sr. No. Name of Persons Amount (Rs.) 1 Shri Dilip J. Patel 1,32,36,843 Page 3 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT 2 Shri Madhuben J. Patel 93,64,504 3 Shri Priteshbhai C. Patel 83,81,920 Total 3,09,83,267 As above payments were made for motor bus rent to relatives, the assessee was asked to furnish reasonableness of the payments made and why payments made should not be considered in excess. Summary of the show cause notice issued was as under : “During the year under consideration it has observed that you have made payment to persons specified u/s 40A(2)(b) of the Act amounting to Rs.3,09,83,267/-. The same has also been confirmed in you tax audit report filed by you. The break up of the same is as under : Sr. No Name of Person Amount (Rs.) as per tax audit report Amount (Rs.) as per your submission dated 10/7/2007. 1 Shri Dilip J. Patel 1,32,36,843/- 93,24,450/- 2 Smt. Madhuben J. Patel 93,64,504/- 61,13,271/- 3 Shri Pritesh C. Patel 83,81,920/- 46,10,734/- Total 3,09,83,267/- 2,00,48,455/- Vide order sheet dated 16/5/2007 you were asked to furnish justification in respect of payments to persons u/s. 40A(2)(b) of the Act. You have vide letter dated 10/7/2007 submitted that the payments are made from A.Y. 1997-98 and is neither excessive nor unreasonable hence section 40A(2)(b) is not applicable. Hence it is clear that no proper explanation is forwarded nor any comparative chart for rate comparison is given. Further also furnish the explanation for the difference in the Page 4 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT figures of tax audit and you submission. Hence you are therefore asked to show cause as to why 5% of the above payments made to persons specified u/s. 40A(2) (b) of the Act should not be added back to your total income considering the same as unreasonable and excessive in respect of fair market value.” 4.02. The assessee submitted its reply vide reply dated 29/11/2007. The assessee submitted that payments are made by cheques and TDS is also deducted at source. It was submitted that payments are reasonable and based on commercial consideration. The assessee also submitted that rates are normal rate of transportation prevailing at that time and such payments were made solely on business consideration. 4.03. The AO was not satisfied with the reply given by the assessee and made addition of Rs.15,49,163/- to the total income of the assessee by disallowing 5% of the total payment made by observing that the assessee has not produced any comparative market prices and no documents have been produced before him to prove reasonableness of the payment. The AO also observed that the assessee has not submitted any details to substantiate the payment made to persons specified under section 40A(2)(b) of the I.T. Act. The AO also disallowed total higher charges amounting to Rs.68,83,091/- under section 40(a)(ia) of the I.T Act by observing that payments of the said TDS though deducted by the assessee, the same was not deposited with the department within a specified time. However, deposited before the due date of filing of the return and therefore, directed to make addition of the aforesaid amount in the total income of the assessee in the relevant year. Page 5 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT 4.04. Feeling aggrieved and dissatisfied with the assessment order making disallowance of Rs.15,49,163/- with respect to payments made under section 40A(2)(b) of the I.T. Act and disallowance of Rs.68,83,309/- under section 40(a)(ia) and other disallowance, the assessee preferred appeal before the learned CIT(A) and vide order dated 30/11/2009, the learned CIT(A) partly allowed the said appeal and deleted disallowance of payments of Rs.15,49,163/- made under section 40A(2)(b) of the I.T. Act, however, confirmed disallowance of Rs.68,83,309/- under section 40(a)(ia) of the I.T. Act. 4.05. Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) in deleting disallowance of Rs.15,49,163/- with respect to payments made under section 40A(2)(b) of the I.T. Act, revenue preferred appeal before the tribunal being ITA No.334 of 2010. The assessee preferred Cross Objections in the said appeal against the order passed by the CITA confirming disallowance of Rs.14,97,668/- made under section 40A(2)(b) of the Act. 4.06. By the impugned judgement and order, the learned tribunal has dismissed the appeal preferred by the revenue and allowed the Cross Objections preferred by the assessee and directed to delete disallowance of Rs.14,97,668/- made under section 40A(2)(b) of the I.T. Act. 4.07. Feeling aggrieved and dissatisfied with the impugned judgement and order passed by the appellate tribunal passed in ITA No.334 of 2010, appellant has preferred Page 6 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT the Tax Appeal No.1065 of 2013. 5.00. Facts of Tax Appeal No.1065 of 2013 are as under:- Similarly, disallowance of Rs.14,97,668/- was made by the AO u/s. 40(A)(2b) of the I.T. Act out of the total payment of the bus rent with respect to A.Y. 2006-07, which came to be deleted by the learned CIT(A) and the same has been upheld by the learned ITAT by the impugned judgement and order. Feeling aggrieved and dissatisfied with the impugned order passed by the learned ITAT in confirming the order passed by the learned CIT(A) in deleting the disallowance of of Rs.14,97,668/- made by the AO under section 40A(2)(b) of the Act, out of the total payment of bus rent, the revenue has preferred the present Tax Appeal No.1064 of 2013, with the aforesaid proposed question of law. 6.00. Heard Mr.K.M. Parikh, learned counsel appearing on behalf of the revenue and perused the impugned common judgement and order passed by the learned tribunal. 7.00. Mr.K.M. Parikh, learned counsel appearing on behalf of the revenue has vehemently submitted that the learned tribunal has materially erred in deleting disallowance of Rs.15,49,160/- made under section 40A(2)(b) of the Act out of total payment of the bus rent (for A.Y. 2005-06 and deleting disallowance of Rs.14,97,668 under section 40A(2)(b) of the Act out of total payment of bus rent (A.Y. 2006-07). It is submitted by Mr.Parikh, learned counsel appearing on behalf Page 7 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT of the revenue that the learned tribunal has materially erred in shifting the onus upon the department / Assessing Officer to prove that the expenditure in respect of his payment made and of which disallowance is claimed, is excessive or unreasonable having regard to the fair market value. It is submitted that the impugned judgement and order passed by the learned ITAT is just contrary to the provisions of section 40A(2)(b) of the I.T. Act. 7.01. Mr.K.M. Parikh, learned counsel appearing on behalf of the revenue has vehemently submitted that the learned tribunal has misconstrued the provisions of section 40(a)(ia) of the Act and has erred in holding that the AO has to ascertain the fair market price of such goods, service or facility and then make disallowance of amount which is in excess of fair market value of such goods, service or facility. It is submitted that therefore, the learned ITAT has committed an error in deleting disallowance made under section 40A(2)(b) of the I.T. Act out of total payment of bus rent and has not appreciated the fact that the assessee failed to produce any classified evidence and further failed to produce any comparative price to justify the payment made to the related source. 8.00. That the assessee who is in the business of transportation claimed disallowance with respect to motor bus rent paid to various persons for transportation contracts. The AO was of the view that the assessee has failed to produce any comparative market price and that the nature of work carried out by the aforesaid persons is general in nature. The AO disallowed Rs.15,49,163/- for AY 2005-06 and Page 8 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT Rs.14,97,668/- for AY 2006-07 out of the total payment of bus rent under section 40A(2)(b). With respect to AY 2006-07 AO also made disallowance of Rs.93,25,426 made under section 40(a)(ia) of the Act by holding that the amendment carried out by Finance Act, 2010 can be held to be retrospective from AY 2005-06. Now, so far as the disallowance made under section 40A(2)(b) of the Act on the ground of motor bus rent is concerned, it appears that the AO disallowed 5% of the total payments towards motor bus rent by observing that the assessee has failed to reconcile the difference in payments as per tax audit report and as submitted during the assessment proceedings and had also not produced any comparative prices. The learned CIT(A) deleted the said disallowances by observing that the AO has not made out any case for excessive or unreasonable payments to the related purpose towards the motor bus rent. The learned CIT(A) also observed that no comparative prices for similar transport services was cited by the AO and therefore, was not justified in making ad-hoc disallowance of 5% under section 40A(2)(b) of the Act and therefore, the CIT(A) as such rightly deleted the disallowances made under section 40A(2)(b) of the Act. Considering the provisions of Section 40A(2)(b) of the Act and the Evidence Act, if the AO was of the opinion that the payment for which disallowance is claimed, is excessive or unreasonable. In that case, it was for the AO to assess fair market price and give comparative instances for payment for similar transport service. In absence of such comparative cases brought on record, as rightly observed by the ITAT it was not open for the AO to make disallowance under section 40A(2)(b) of the Act. Page 9 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT While deleting disallowance made by the AO under section 40A(2)(b) of the Act, the learned ITAT has observed and held in para 7 as under :- “7. It is plain on principle that, so far as disallowance under Section 40A(2) for payment being excessive or unreasonable can only be made when the payment is made to the “specified persons” under clause 40A(2)(b) and “the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, services or facilities for which the payment is made”. The opinion of the Assessing Officer for the expenditure being excessive or unreasonable is to be formed vis-a-vis fair market price of such goods services or facilities. It is thus sine qua non for making a disallowance under section 40(A)(2) that the Assessing Officer has to ascertain the fair market price of such goods, services or facilities, and then make a ‘disallowance for the amount which is in excess of fair market value of such goods, services or facilities. Unless there is a categorical finding about the ‘fair market value’ and the assessee has an opportunity to be heard on Assessing Officer’s finding about such ‘fair market value’, there cannot be an occasion to make a disallowance under section 40A(2). The very scheme of Section 40A(2) does not envisage an adhoc disallowance as has been made in the present case. For this short reason alone, the impugned deletion of disallowance must stand confirmed. There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer, had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the AO has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. Page 10 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT A tax auditor is an independent professional and any errors in his report cannot be put to assessee’s disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.” We are in complete agreement with the view taken by the ITAT and the observations made by the learned ITAT while deleting disallowances made by the AO under section 40A(2) (b) of the Act on motor bus rent. No error has been committed by the learned ITAT which calls for interference of this Court. No question of law much less any substantial question of law arises. 8.01. Now, so far as the question No.2 in Tax Appeal No.1064 of 2013 for AY 2006-07 i.e. disallowance of Rs.93,25,426 made under section 40(a)(ia) of the Act i.e. with respect to retrospective operation of the amendment in Section 40(a)(ia) by Finance Act, 2010 is concerned, the said question is squarely covered against the revenue by decision of the Division Bench of this Court in Tax Appeal No.412 of 2013 and allied matters. The Division Bench of this Court in Tax Appeal No.412 of 2013 and allied matters, has held that the amendment in section 40(a)(ia) of the Act by Finance Act, 2010 would apply retrospectively. 8.02. Mr. Parikh, learned counsel appearing on behalf of the revenue has fairly conceded that the aforesaid issue is squarely covered against the revenue by the Division Bench of this Court in Tax Appeal No.412 of 2013 and allied matters. 8.03. Now, so far as disallowance made under section Page 11 of 12

O/TAXAP/1064/2013 CAV JUDGEMNT 40(a)(ia) with respect to AY 2005-06 is concerned, it appears that as such the assessee preferred appeal and claimed that the said expenditure be allowed in the next assessment year which has been accepted by the learned ITAT. Therefore, as such the question with respect to disallowance under section 40(a)(ia) would not arise in Tax Appeal No.1065 of 2013 for AY 2005-06. 9.00. In view of the above and for the reasons stated above, both these appeals fail and they deserve to be dismissed and are accordingly dismissed. Sd/- (M.R.SHAH, J.) Sd/- (R.P.DHOLARIA,J.) Rafik. Page 12 of 12