COMMISSIONER OF INCOME TAX-II vs. PROPRIETOR KAMAL KISHOR LATH M/S KAMAL CORPORATION

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ITA/13/2010HC Madhya PradeshMPHC02008990201024 November 20112 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal held that no disallowance could be made under Section 40-A(2) of the Income Tax Act, 1961, in respect of payments made to the sister concern. The reasoning was that the proprietor of the sister concern, who is the mother of the assessee, had paid due taxes at the same rate as the assessee. Therefore, there was no avoidance of tax involved. The Tribunal relied on the judgments of the Bombay High Court in CIT v. Indo-Saudi Services (Travel) (P) Limited [2008] 219 CTR 562 and the Rajasthan High Court in CIT v. Udaipur Distillery Company Limited [2009] 316 ITR 426 (Raj), as well as Circular 6-P dated 6th July, 1968. The High Court, in its considered view, found no error in the Tribunal's holding and dismissed the appeal.

What were the facts?

The appeal is filed by the Revenue against the order dated 13/19.11.2009 passed by the Income Tax Appellate Tribunal (ITAT), Indore Bench, for the assessment year 2004-05. The ITAT had deleted an addition made by the Assessing Officer (AO) regarding disallowance of payments for folding/checking and mending charges made to the assessee's sister concern, M/s. Pawan Enterprises. The AO had disallowed these expenses as they exceeded the previous year's expenses and were disproportionate to the increase in turnover. The CIT(A) and the Tribunal noted that the proprietor of M/s. Pawan Enterprises, who is the mother of the assessee, had paid taxes at the same rate as the assessee and concluded there was no tax avoidance.

What were the issues?

1. Whether the Tribunal erred in law and on facts in deleting the addition made by the Assessing Officer on account of disallowance of folding/checking and mending charges paid to the sister concern, M/s. Pawan Enterprises, by holding that Section 40-A(2) of the Income Tax Act, 1961, was not applicable as there was no tax avoidance. Assessee's Contention: The judgment does not record any specific contentions made by the assessee. The ITAT's decision, as narrated in the facts, suggests that the assessee likely argued that the payments were genuine business expenses and that the proprietor of the sister concern had paid due taxes, negating any intent to evade tax. Revenue's Contention: The Revenue likely contended that the disallowance was justified under Section 40-A(2) of the Income Tax Act, 1961, due to the payments being excessive and disproportionate to the turnover increase, and made to a related party (sister concern).

Which sections of the Income-tax Act were involved?

Section 40-A(2),Section 260-A

AI-generated summary — verify with the full judgment below

Income Tax Appeal No.13/2010 24.11.2011 Shri R.L. Jain, learned senior counsel with Ms. Veena Mandlik, learned counsel for the appellant. Heard on the question of admission. This appeal under Section 260-A of the Income Tax Act, 1961 is filed against the order dated 13/19.11.2009 passed by the Income Tax Appellate Tribunal Indore Bench (for short, the Tribunal) in Income Tax Appeal No.709/IND/2007 in regard to the assessment year 2004-05. In regard to the deletion of addition made by the Assessing Officer disallowing payment on account of folding/checking and mending charges made to the respondent's sister concern M/s. Pawan Enterprises in excess of the expenses of the previous year and disproportionate to the increase in turnover, the CIT (Appeal) and the Tribunal had taken note of the fact that the proprietor of the said concern M/s. Pawan Enterprises, who is mother of respondent-assessee had paid due taxes at the same rate as the assessee would have paid and held that there was no avoidance of tax, and therefore, provisions of Section 40-A (2) of the Income Tax Act could not have been applied. In support of this proposition of law, the Tribunal placed reliance on the judgment of High Court of Bombay in the case of CIT v. Indo-Saudi Services (Travel) (P) Limited [2008] 219 CTR 562 and the decision of Rajasthan High Court in the case of CIT v. Udaipur Distillery Company Limited [2009] 316 ITR 426 (Raj) as also the circular 6-P dated 6th July, 1968. Having regard to the aforesaid judgments and the circular, in our considered view, the Tribunal has committed no error in holding that since no attempt to evade tax was involved; hence, no 2 dis-allowances could be made under Section 40-A (2) of the Income Tax Act in respect of payment made to the sister concern. In the circumstances, the appeal fails and is hereby dismissed.

(Shantanu Kemkar) (Prakash Shrivastava) Judge

Judge rcp

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