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Facts
The assessee, a manufacturing firm, filed its return for AY 2013-14. The case was selected for scrutiny due to a mismatch in payments made to related parties. The AO disallowed the entire payment of Rs. 22,91,477/- made to related parties under Section 40A(2)(b) for failure to furnish supporting documents.
Held
The Tribunal held that the disallowance under Section 40A(2)(b) was not justified as the AO did not establish that the payments were excessive or unreasonable. The assessee provided explanations for payments towards interest, job charges, and salary. The interest paid at 15% was deemed not unreasonable in absence of a comparable benchmark.
Key Issues
Whether the disallowance of payments made to related parties under Section 40A(2)(b) is justified when the Assessing Officer has not established that the payments were excessive or unreasonable and has not provided a comparable benchmark.
Sections Cited
40A(2)(b), 133(6), 254(1)
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PER PAWAN SINGH, JUDICIAL MEMBER;
This appeal by assessee is directed against the order of Ld. CIT(A)/ADDL/JCIT(A)-1, Gurugram dated 04.02.2025 for assessment year (AY) 2014-15. The assessee has raised following grounds of appeal:
“The Additional Commissioner of Income-tax (Appeals)- 1, Gurugram (hereinafter referred to as the Addl. CIT(A) erred in upholding the action of the Income-tax Officer – 29(2)(5), Mumbai (hereinafter referred to as the Assessing Officer) in making a disallowance of Rs. 22,91,477/- being aggregate of payments made to various related parties, covered by section 4(A)(2)(b) on the ground that the appellants failed to discharge primary onus as they could not furnish all the necessary documents to support the payment.
The appellants contended that on the facts and in the circumstances of the case and in law, the Addl. CIT(A) ought not to have upheld the action of the Assessing Officer in making the impugned disallowance inasmuch as he has not correctly appreciated the facts of the case in its entirety and hence, the impugned disallowance of Rs. 22,91,477/- is not warranted and as such, needs to be deleted.
The appellants crave leave to add to alter or amend the afore stated ground of appeal”.
Brief facts of the case are that assessee is a partnership firm engaged in manufacturing activities, filed its return of income for A.Y. 2013-14 on 28.11.2024 declaring income of Rs. 19,64,050/-. The case was selected for scrutiny on account of mismatch on account of payment made to related parties reported in audit report. During assessment, the assessee was asked to explain the fact. The assessing officer also sent notice under section 133(6) to certain related parties as recorded in para 7 of assessment order. The assessing officer recorded that he sent notice to Suresh Ramniklal Mehta, Scanrech Precision Laser, Shantaben Ramniklal Mehta, Shailash Mansukhlal Doshi, Paresh Jaysuklal Vejani and Chetn Jaysukhlal Vejani. The notices were either returned back or party failed to provide any information. The assessing officer in absence of such information treated the entire payment as excessive and added under section 40(A)(2)(b). Aggrieved by the additions in the assessment order, the assessee filed appeal before ld. CIT(A).
Before ld. CIT(A), the assessee furnished complete reconciliation of payment made to all such related parties. The assessee stated that assessing officer disallowed entire related party payments. The assessee is regular filing return of income. Books are audited. The assessee disclosed all the payments made to related parties in the annexure to the audit report. The assessee made TDS on payment made to such related parties. Copies of return of income of such related parties were also furnished. The assessee also furnished the details of payment and the services rendered in a tabulated form. Such detail is scanned on page no. 7 of order of ld. CIT(A). The ld. CIT(A) on considering the submission of assessee held that the assessee furnished copy of ITR of these parties but no documents were filed to justify the payments made to such parties. The assessee failed to justify that payment is not excessive as per market rate. Copy of accounts of related parties to whom interest paid is not furnished. The assessee claimed to have paid salary to Suresh Mehta but not explained the services rendered by him. There is no justification of other payment. Further aggrieved the assessee has filed present appeal.
I have heard the submissions of learned authorised representative (ld. AR) of the assessee and the learned Senior Departmental Representative (ld. DR) for the revenue. The ld. AR of the assessee submits that disallowance under section 40A(2)(b) can be made only if the conditions are satisfied that assessee incurred any expenditure, the expenditure is made to a person referring clause b of section 40A(2) and the assessing officer is of the opinion that expenditure is excessive or unreasonable having regards to the fair market value of goods, services or facilities for which such payment is made.
First fair market value is to be determined, unless this bench mark is set there is no question of resorting to disallowance under section 40A(2). Unless there is categorical finding to fair market, the assessee has an opportunity of being about such fair market value and only the excess of such bench mark can be held to be excessive or unreasonable. And if, such bench mark is not set by assessing officer, no disallowance can be made. The assessing officer has not brought any material on record to show excess payment made, has not set any bench mark to make any comparison with rate charged by others and thus, not satisfied the pre-requisite of making disallowance under section 40A(2)(b). To support his submission, the ld. AR of the assessee relied upon the Circular of Central Board of Direct Tax (CBDT) No. 6 dated 06.07.1968. At the time of submission, the ld. AR of the assessee furnished the fair typed copy of details of all payments along with nature of payment, amount, relation and remark about the nature of payment (which was filed before ld CIT(A).
The ld. AR submits that he has explained the details which is scanned by ld. CIT(A) in his order. The ld. AR while explaining all the payments would submit that majority of payments is made on account of interest or on purchases and some of the amounts were allowed in subsequent years. The ld. AR also relied upon the decision of: UCO Bank 237 ITR 889 (SC) Paper Products Ltd. 247 ITR 128 (SC) Indian Oil Corp. Ltd. 267 ITR 272 (SC) Best Plastics (P) Ltd. 295 ITR 256 (SC)
On the other hand, the learned Senior Departmental Representative (ld. Sr.
DR) for the revenue submits that assessing officer issued notice under section 133(6) which was not responded by any of the related parties, thus, the assessing officer was justified in making additions under section 40(A)(2) of the Act.
I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also deliberated on various case laws relied by ld. AR of the assessee. I find that assessing officer made disallowance simply by taking view that notice under section 133(6) were issued to related parties and they failed to respond such notices or notices were returned back. The assessing officer disallowed entire amount of Rs. 22,92,517/- paid to all seven (7) parties. I find that impugned payments were made to various parties either on account of interest, against labour, purchases or on account of salary. The assessing officer has not given his finding that payments made to such parties are reasonable or excessive or no services were rendered by such parties. The ld. CIT(A) confirmed the action of assessing officer by taking view that assessee failed to furnish supporting document of their income tax return or copy of account of related parties.
Against the payment of salary to Suresh Mehta, the ld. CIT(A) held that services rendered by him is not explained. I find that ld. CIT(A) also scanned relevant part of ITR of assessee in para 4.2.1of his order, wherein relevant details is not furnished. However, I find that before ld CIT(A), the ld. AR of the assessee after explaining the nature of various payments and relation with the partners of assessee explained that payments were made either on account of interest or labour charges or purchases. On perusal of such details, I find that during the relevant financial year, the assessee has paid interest to Bhavana K Dhami, Chetan Vejani, Paresh Vejani, Shraddha Enterprises (Shantaben Ramniklal Mehta) & Shailesh Doshi. Interest has been paid @ 15% per annum. Similar interest payment was made in previous and subsequent year. I find that payment of interest @ 15% is not unreasonable in absence of comparable bench mark available on record. Therefore, all such payment of interest is not excessive or unreasonable. The assessee has made payment for job charges and purchases. The lower authorities have not disputed the purchases or services of labour availed from such party, therefore, in absence of adverse material, disallowance is not justified. Last payment is made to Suresh Mehta on account of salary. The assessee explained that he is looking after day to day activities of the firm. Similar payment was allowed in subsequent years. I find that Suresh Mehta is paid only Rs. 1,80,000/- in a year as an employee. In subsequent years, similar payment of Rs. 2.00 is allowed. Thus, considering the fact that such details were available during the first appellate authority and no specific queries was made by ld. CIT(A), therefore, I do not find any justification in disallowing the payment under the garb of section 40A(2)(b) without holding that payments or expenditure is excessive or unreasonable. The assessing officer has not examined the nature of work or services availed from such parties and made disallowance simply on the basis of non-responsive of notice under section 133(6). There is no fact on record whether non-compliance by such parties was confronted of assessee or in record above. The ld. CIT(A) also upheld the addition without seeking further explanation on various details from the assessee or bringing any adverse material to prove the payment as excessive or unreasonable. Therefore, the entire disallowance made by ld. Assessing Officer and confirmed by ld. CIT(A) is deleted.
In the result, the appeal of the assesseeis allowed.